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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-K/A (Amendment No.1)
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 000-24677 BindView Development Corporation (Exact name of registrant as specified in its charter)
 Texas(State or other jurisdiction of
incorporation or organization)
    
    76-0306721(I.R.S. Employer
Identification No.)5151 San Felipe, 25th Floor, Houston, TX(Address of principal executive offices)
    
    77056(Zip Code)
 (713) 561-4000(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, no par value per share
    
    NASDAQ National Market
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes £ No R Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. R Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes £ No R The aggregate market value of the common stock held by non-affiliates of the registrant on
June 30, 2003, the last business day of the registrants most recently completed second quarter,
(assuming all officers and directors are affiliates and based on the last sale price on the NASDAQ
Stock Exchange as of such date) was approximately $64 million. The number of shares of the registrants common stock, no par value per share, outstanding as
of March 26, 2004 was 47,481,005. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrants 2004 Annual Meeting of Stockholders
are incorporated by reference into Part III.




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EXPLANATORY NOTE BindView Development Corporation, Inc. (BindView or the Company) is filing this Amendment
No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which was
originally filed on March 30, 2004 (the Form 10-K), to restate the consolidated financial
statements and related footnote disclosures to correct an
overstatement of revenues in our Latin
America operations. As more fully described in Note 16 to the
consolidated financial statements, revenues for the fourth quarter of 2003 were overstated
by $173,000 as a result of a product return, which certain Company
personnel in Latin America knew to have occurred
within the contractually allowable return period, but which they did not report to the Companys
accounting department. Individuals who the Company believes were
culpably involved in these transactions are no longer employed by the
Company. The Company has terminated relationships with resellers that
it believes may have been culpably involved in these transactions. In
addition to these actions, the Company has revised Part II Item 9A to include
information about the impact of the restatement on its internal controls. This Amendment No. 1
amends only the portions of the Form 10-K listed in the next paragraph below; the remainder of the
Form 10-K is substantively unchanged and is reproduced in this Amendment No. 1 for convenient
reference. This Amendment No. 1 does not reflect events occurring after the original filing date
of the Form 10-K, except as otherwise indicated. This Amendment No. 1 contains changes to the following disclosures:  
    
    Part II  Item 6. Selected Financial Data
    
    Part II  Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    Part II  Item 9A. Controls and Procedures
    
    Part III  Item 15. Exhibits and Financial Statement Schedule 2




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BINDVIEW DEVELOPMENT CORPORATION TABLE OF CONTENTS PART I.1.
    
    Business
    
    42.
    
    Properties
    
    93.
    
    Legal Proceedings
    
    94.
    
    Submission of Matters to a Vote of Security Holders
    
    9PART II.5.
    
    Market for
Registrants Common Stock and Related Stockholders Matters
    
    96.
    
    Selected Financial Data
    
    107.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    117A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    268.
    
    Financial Statements and Supplementary Data
    
    279.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    279A.
    
    Controls and Procedures
    
    27PART III.10.
    
    Directors and Executive Officers of the Registrant
    
    2911.
    
    Executive Compensation
    
    2912.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    2913.
    
    Certain Relationships and Related Transactions
    
    2914.
    
    Principal Accounting Fees and Services
    
    29PART IV.15.
    
    Exhibits and Financial Statement Schedule
    
    30Signatures
    
    53Exhibit Index
    
    54Consent of PricewaterhouseCoopers LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  3




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PART I 
 Item 1.Business Special Note Regarding Forward-Looking Statements This Report includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other
than statements of historical facts included in this Report, including, without limitation,
statements regarding our future financial position, business strategy, planned products, products
under development, markets, budgets and plans and objectives of management for future operations,
are forward-looking statements. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you those expectations will prove to
have been correct. Important factors that could cause actual results to differ materially from our
expectations are disclosed in statements set forth under Cautionary Statements and elsewhere in
this Report, including, without limitation, in conjunction with the forward-looking statements
included in this Report. All subsequent written or oral forward-looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in their entirety by the Cautionary
Statements and such other statements. References to the Company, BindView, we, us, and
our refer to BindView Development Corporation and, where appropriate, its subsidiaries. General BindView was founded in May 1990 as a Texas corporation and conducted business as The LAN
Support Group, Inc. until 1995. We completed our initial public offering (IPO) in July 1998 and a
secondary offering in December 1998. To increase the depth and breadth of our solutions, we
acquired CuraSoft, Inc. (December 1998), Netect, Ltd. (March 1999), and Entevo Corporation
(February 2000), following our IPO. To date, BindView has shipped more than 20 million software
licenses to approximately 5,000 companies worldwide, spanning all major business segments and the
public sector. BindView Development Corporation is a leading provider of software for proactively managing
business policy, IT security, and computer network directory information. Our solutions help
customers to centralize and automate policy compliance, vulnerability management, and directory
administration functions across the enterprise. BindView solutions combine (1) a broad-based
knowledge of the customer IT environment with (2) specific process implementation around an IT risk
management lifecycle and (3) our policy/vulnerability/ directory technology to help customers
safeguard their computer systems, applications and networks from internal and external threats and
vulnerabilities. These threats and vulnerabilities emanate from myriad sources throughout the customer IT environment (i.e., hackers, employees, rogue users and systems,
misconfigured and unpatched systems, etc.). Financial Information About Industry Segments Our global business is principally in a single industry segment, as described above under the
heading General. For a discussion of our financial information in this segment, see Note 13 of
our Consolidated Financial Statements included elsewhere in this Report. Narrative Description of Business Market Organizations have become highly dependent on their IT infrastructures to conduct business. At
the same time, however, increased dependence on IT systems also means increased risk to business
operations as unplanned downtime or the unavailability of IT systems for any reason leads to
greater business disruptions and, as a consequence, greater business losses. As a business risk, IT service interruptions may occur for any number of reasons. More and
more frequently, such interruptions result from vulnerability breaches and denial-of-service
attacks caused by insidious outsiders, mischievous or destructive insiders, misconfigured or
unauthorized systems, and so forth. In addition, organizations also face issues related to
information theft, privacy protection and corporate governance, many of which are now (or soon will
be) mandated for audit and compliance by federal, state and local governments and industry
associations. Compliance requirements can be found in, for example, the Sarbanes-Oxley Act (SOX),
the Graham-Leach-Bliley Act (GLBA), the Health Insurance Portability and Accountability Act
(HIPAA), California Senate Bill 1386, Basel II, etc. 4




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Products and Technology BindView builds, licenses, and provides technical support for three main software-technology
suites, in the areas of policy compliance, vulnerability management, and directory administration
and migration. Each suite includes multiple software products. Typically, different products from
each suite are combined to meet a customers specific business needs. Policy Compliance Products Introduced mid-2002, BindViews policy-compliance products deliver industry best practices to
help customers satisfy the general control requirements of regulatory frameworks such as SOX,
GLBA, HIPAA, etc., as well as IT auditing frameworks such as ISO 17799 CIS Level-1, and CobiT. Our
products help organizations to centralize and automate the creation and distribution of security
policies across the enterprise and to check that all employees have access to and are aware of such
policies. Organizations can measure user awareness of security policies and document when employees
have read and accepted those policies, providing important documentation for legal and regulatory
audits. Using industry-accepted benchmarks, organizations can measure their IT systems to help
ensure that the IT infrastructure meets self-prescribed, government, or industry standards.
Products in this suite include:  BindView Policy Operations Center
BindView Compliance Center
BindView Configuration Advisor
BindView Decision Support Center Vulnerability Management Products With its vulnerability-management suite, BindView helps organizations to proactively
audit, access and secure their multi-platform environments from internal and external attacks,
including finding and fixing security holes before they can be exploited. Our software provides
in-depth assessment and evaluation of systems, applications and networks; it also provides
capabilities for remediating portions of the IT infrastructure that are found to be outside of
acceptable IT or operational compliance parameters. Our vulnerability-management products can query
and gather data across very large server and user populations, and provide extensive results
reporting on the status of the network. Numerous out-of-the-box queries and reports are available
to detect vulnerabilities within the network and to alert administrators to effect corrective
actions before system downtime or performance problems occur. Products in this suite include:  bv-Control for Windows® 2000x and Active Directory®
bv-Control for UNIX®
bv-Control for NetWare®
bv-Control for NDS® eDirectory
bv-Control for OS/400
bv-Control for Microsoft® Exchange
bv-Control for Microsoft® SQL Server
bv-Control for Internet Security
bv-Control for Web Services
bv-Control for Check Point FireWall-1
bv-Control for SAP® Systems
bv-Control for Desktops
BindView NETinventory
BindView Smart Plug-In for HP OpenView
BindView Management Pack for Microsoft Operations Manager
BindView Patch Deployment In 2001, 2002, and 2003, our vulnerability-management products accounted for approximately
88%, 83%, and 80%, respectively, of our consolidated revenues. Directory Administration & Migration Products With its directory administration and migration suite, BindView helps organizations to
significantly lower the cost of deploying and managing users and their access rights across the IT
infrastructure. The software suite promotes compliance with IT and 5




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operational policies for
directory and password management, roles-based administration of users, migration between operating
systems, and migration between email systems. Our software helps organizations to centralize and
automate the day-to-day tasks associated with provisioning user and machine accounts, and managing
roles-based access controls across the network. Additionally, products in this suite assist
organizations in efficiently migrating between or to latest versions of Microsoft and Novell
operating systems and directory structures. Product scalability enables support across very large
distributed server and user populations, with secure built-in workflow facilities for repetitive tasks
such as account creation, account maintenance, manager approvals and so forth. Products in this
suite also provide capabilities for user self-service functions such
as password reset. A single
management console manages multiple directories and domains, and includes a find-and-fix query
facility. Products in this suite include:  bv-Admin for Windows®
bv-Admin for Windows® Migration
bv-Admin for Novell NDS®
bv-Admin for Novell® Migration
bv-Admin for Microsoft® Exchange
bv-Admin for Microsoft® Exchange Migration
bv-Admin for .Net® Web Services
bv-Admin for Group Policy Objects In 2001, 2002, and 2003, our directory administration and migration products accounted for
approximately 10%, 13%, and 13%, respectively, of our consolidated revenues. Backlog We normally do not operate with a backlog because we ship our products shortly after orders
are received. Competition Currently, our products compete with products from a variety of organizations including but
not necessarily limited to providers of the following:  
    
    security analysis and audit products;
    
    Windows NT management and migration tools;
    
    network security scanning technology;
    
    security-policy products and services;
    
    shareware/freeware software products that perform some of the same functions as our software;
    
    enterprise resource planning application add-ons for SAP security administration and
vulnerability assessment;
    
    LAN desktop management suites; and
    
    stand-alone inventory and asset management products. Some examples of specific companies with whom we compete in particular markets or submarkets
are: Aelita Corporation (whose proposed acquisition by Quest Software was publicly announced in
January 2004); BearingPoint; ConfigureSoft, Inc.; CSI International; Ecora Corporation;
Hewlett-Packard Company; Intel Corporation; Intrusion.Com; ISS Group, Inc.; Microsoft Corporation; NetIQ Corporation; Network
Associates Inc.; PoliVec, Inc.; Quest Software; Symantec Inc.; and Tally Systems Corporation. In addition, companies such as Novell and Microsoft also offer native tools with their
products that provide a basic set of management tools. While the native tools currently offered by
these companies provide assistance in certain administrative tasks for their own respective
platforms, we believe that they do not help IT administrators or security professionals cope, to
the same extent that our products do, with the day-to-day management tasks with which they are
challenged or address the higher level processes 6




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associated with policy creation and management.
Our software solutions can be scaled to the largest of the heterogeneous environments. We believe
we are in a unique position to help address the growing demand for cross-platform security and
administration solutions in these installations. Sales and Marketing We sell our products through direct sales forces (field and telesales) and through value-added
resellers (VARs), distributors, and original equipment manufacturers (OEMs). In addition, we
have strategic marketing relationships with certain professional service organizations and software
vendors that provide us with increased visibility, as well as sales leads. Sales cycles typically
range from three months for departmental sales and up to twelve months or more for large,
enterprise-wide deployments. Sales Force Direct Sales Force.Our direct sales force focuses on enterprise and large-market customers,
generally Fortune 1000-class public and private companies and large governmental agencies. Direct
sales representatives are in communication with our largest opportunities, using our staff of
software engineers to help customers with the technical aspects of our software. We have direct
sales representatives in North America and in Frankfurt, Germany; Berkshire, England; and Sao
Paolo, Brazil, as well as a representative office in Mexico City, Mexico. Telesales Force.Our telesales organization, which is based in Houston, concentrates on
emerging and middle-market customers by utilizing our staff of software engineers, as well as
telephone and Internet communications for product demonstrations and product sales. When necessary,
members of our telesales force also travel to customer locations. VARs and Distributors We have established indirect distribution channels through relationships with VARs and
distributors in the United States, Europe, Latin America, and the Pacific Rim, with the highest
concentration of such relationships being located in European markets. Our international VARs and distributors typically perform selected marketing, sales, and
technical support functions in their country or region. Each one might distribute directly to the
customer, via other resellers, or through a mixture of both channels. Channel Programs To support our sales organization and channel partners, we have devoted significant resources
to building a series of channel alliances and marketing programs. Currently, we have developed
relationships with companies including Microsoft Corporation; Computer Sciences Corporation;
Hewlett-Packard Company; and IBM Corporation. We are a Microsoft Solutions Provider and hold
Windows 2000 Certified and Microsoft Gold Partner status for several of our products. We also
collaborate with certain accounting firms to increase awareness of network security issues. We also market our products through certain service organizations that help customers install,
manage, and secure large multi-platform networks (Microsoft, NetWare and Unix). Such organizations
include certain large systems integrators, outsourcing companies, and certain security auditing
groups within accounting firms. Some of these companies sell our products directly to their
end-users, while others license the products from us and include these products in their standard
toolkits used at their clients sites. In addition, our marketing efforts have resulted in our participation in a number of programs
such as seminars, industry trade shows, vendor executive briefings, analyst and press tours,
advertising and public relations efforts. Customer Support and Professional Services We believe high-quality customer support and professional services are requirements for
continued growth and increased sales of our products. We have made a significant investment in our
support and services organization in the past and plan to continue to do so in the future. Customer
support personnel provide technical support by telephone, e-mail and fax, and maintain our Web site
and bulletin boards to complement these services. Product upgrades and enhancements are provided at
no extra charge to our maintenance customers as part of their maintenance subscriptions. 7




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Our professional services group provides fee-based product training, consulting, and
implementation services to help customers maximize the benefits of our products. In addition, we
periodically offer training to our channel partners and employees. Company-Sponsored Research & Development Activities We have been and continue to be an innovator and leader in the development of IT
administration and security management solutions. We believe a technically skilled, quality
oriented and highly productive software development organization is key to the continued success of
new product offerings. Our software development staff is also responsible for enhancing our
existing products and expanding our product line. We expect we will continue to invest substantial
resources in product development expenditures. Tables showing financial data, including our
expenditures on research and development activities are set forth in Item 6, Selected Financial
Data, and in Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations  Results of Operations  Operating Costs and Expenses. Employees As of December 31, 2003, we employed approximately 524 full-time employees worldwide. We are
not subject to any collective bargaining agreement. Patents, Trademarks, and Copyrights We protect our software and other intellectual-property assets under copyright law, trademark
law, trade-secret law, and patent law, as applicable. We have obtained U.S. federal trademark
registrations for certain trademarks and U.S. copyright registrations for certain works of
authorship. For additional details, see the discussion of Proprietary Rights in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations  Cautionary
Statements, contained elsewhere in this Report. The existence of legal protection for our software
and related assets under intellectual-property law helps to dissuade unauthorized persons from
using our technology without our permission. Seasonality See the discussion of Seasonality in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Seasonal Fluctuations, contained elsewhere in this
Report. Future Intentions We intend to continue focusing on proactive security management software and services to help
customers secure, automate, and lower costs of managing their IT infrastructures. We anticipate
that our future product directions will focus on the security-policy life cycle, i.e., on
improving our customers ability to develop, implement, and manage security policy. This likely
will include expanding the number of platforms supported by our vulnerability management and
directory administration products; selectively expanding the features and functionality of those
products; increasing the scope and capabilities of our new policy-compliance offerings; and
possibly developing or acquiring other products relating to security management. We will focus
especially on developing and/or acquiring products we believe we can sell to our existing markets,
and/or that we believe will leverage our existing technologies and core competencies. Available Information The public may read and copy any materials filed with the SEC at the SECs Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. As an electronic filer,
BindViews reports, proxy and information statements, and other information is available at the
SECs Internet site, http://www.sec.gov. BindViews internet address is http://www.bindview.com. BindViews filings with the Securities
and Exchange Commission (SEC), including its Annual Report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, are accessible free of charge at
http://www.bindview.com as soon as reasonably practicable after the company electronically files
such material with, or furnishes it to the SEC. 8




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Item 2.Properties All offices we occupy are leased. Our corporate headquarters, which house our principal
administrative, sales and marketing, support, and research and development operations, are located
in Houston, Texas. We or our international subsidiaries currently have office space for sales
personnel in Frankfurt, Germany; Berkshire, England; Sao Paolo, Brazil; and a representative office
in Mexico City, Mexico. We also have additional research and development offices in Pune, India. We
believe suitable additional or alternative space will be available on commercially reasonable
terms, if needed. 
 Item 3.Legal Proceedings From time to time we are a plaintiff or defendant in various lawsuits and claims arising in
the normal course of business. There are no pending (or, to our knowledge, threatened) lawsuits or
claims whose outcomes, individually or in the aggregate, are likely to have a material adverse
effect on our balance sheet, results of operations, cash flows or business. 
 Item 4.Submission of Matters to a Vote of Security Holders None. 
 PART II 
 Item 5.Market For Registrants Common Equity and Related Stockholder Matters Market for Common Stock Our common stock is traded on The NASDAQ National Market under the symbol BVEW. As of March 26, 2004, the last sales price per share of the Companys common stock, as
reported by The NASDAQ National Market, was $3.60. The following table presents the quarterly range of high and low closing prices for our common
stock from January 1, 2002 through December 31, 2003, as reported by The NASDAQ National Market. High
    
    Low2002First Quarter
    
    $
    2.94
    
    
    $
    1.88Second Quarter
    
    
    2.17
    
    
    
    0.98Third Quarter
    
    
    1.07
    
    
    
    0.79Fourth Quarter
    
    
    1.45
    
    
    
    0.752003First Quarter
    
    
    1.51
    
    
    
    1.14Second Quarter
    
    
    2.09
    
    
    
    1.10Third Quarter
    
    
    2.99
    
    
    
    2.00Fourth Quarter
    
    
    3.90
    
    
    
    2.13
 Holders On March 26, 2004, there were 47,481,005 outstanding shares of our common stock held by
approximately 304 holders of record. This does not include individual owners whose shares are held
by a clearing agency, such as a broker or bank. Dividend Policy We have not declared or paid any cash dividends on our capital stock in the two most recent
fiscal years and do not expect to do so in the foreseeable future. We anticipate all future
earnings generated from operations will be retained to develop and expand our business. Any future decision to pay cash dividends will
depend upon our growth, profitability, financial condition and other factors the Board of Directors
may deem relevant. 9




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Item 6.Selected Financial Data The selected historical consolidated financial data was derived from the Companys
Consolidated Financial Statements, which have been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and the Companys
Consolidated Financial Statements and Notes thereto included elsewhere herein. In 1999 and 2000,
BindView completed mergers with Netect, Ltd. (Netect) and Entevo Corporation (Entevo) that were
accounted for as pooling of interests, and accordingly, the selected financial data of BindView has
been restated to include the accounts of Netect and Entevo for all periods prior to the mergers.
The selected financial data for 2003 has been restated to conform to the financial statements
included in this Annual Report on Form 10-K/A, Amendment No. 1. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands, except per share amounts)Statement of Operations Data:
    
    (As Restated)Revenues:Licenses
    
    $
    35,357
    
    
    $
    37,238
    
    
    $
    42,532
    
    
    $
    58,931
    
    
    $
    53,200Services
    
    
    32,315
    
    
    
    29,740
    
    
    
    28,356
    
    
    
    27,125
    
    
    
    18,53967,672
    
    
    
    66,978
    
    
    
    70,888
    
    
    
    86,056
    
    
    
    71,739Cost of revenues:Licenses
    
    
    527
    
    
    
    500
    
    
    
    1,059
    
    
    
    2,410
    
    
    
    1,497Services
    
    
    6,954
    
    
    
    5,782
    
    
    
    6,407
    
    
    
    4,049
    
    
    
    2,3577,481
    
    
    
    6,282
    
    
    
    7,466
    
    
    
    6,459
    
    
    
    3,854Gross profit
    
    
    60,191
    
    
    
    60,696
    
    
    
    63,422
    
    
    
    79,597
    
    
    
    67,885Operating costs and expenses:Sales and marketing
    
    
    36,040
    
    
    
    37,242
    
    
    
    49,079
    
    
    
    44,746
    
    
    
    34,974Research and development
    
    
    18,423
    
    
    
    19,219
    
    
    
    22,668
    
    
    
    26,500
    
    
    
    19,298General and administrative
    
    
    7,750
    
    
    
    7,932
    
    
    
    14,600
    
    
    
    9,780
    
    
    
    7,294Transaction and restructuring
    
    
    2,184
    
    
    
    3,002
    
    
    
    6,594
    
    
    
    6,357
    
    
    
    2,524Asset impairment
    
    
    
    
    
    
    276
    
    
    
    1,979
    
    
    
    1,284
    
    
    
    Acquisition related earnout
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200Operating income (loss)
    
    
    (4,206
    )
    
    
    (6,975
    )
    
    
    (31,498
    )
    
    
    (9,070
    )
    
    
    2,595Other income (expense), net
    
    
    447
    
    
    
    2,104
    
    
    
    (2,859
    )
    
    
    4,443
    
    
    
    3,263Income (loss) before income taxes
    
    
    (3,759
    )
    
    
    (4,871
    )
    
    
    (34,357
    )
    
    
    (4,627
    )
    
    
    5,858Provision (benefit) for income taxes
    
    
    50
    
    
    
    19,562
    
    
    
    (10,211
    )
    
    
    (783
    )
    
    
    6,299Net loss
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )
    
    $
    (3,844
    )
    
    $
    (441
    )Loss per common share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.49
    )
    
    $
    (0.47
    )
    
    $
    (0.07
    )
    
    $
    (0.01
    )Shares used in computing loss per common share  basic and diluted
    
    
    46,714
    
    
    
    50,319
    
    
    
    51,438
    
    
    
    51,810
    
    
    
    48,095
 December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Balance Sheet Data:
    
    (As Restated)Working capital
    
    $
    28,472
    
    
    $
    26,309
    
    
    $
    33,450
    
    
    $
    64,483
    
    
    $
    73,785Total assets
    
    
    63,007
    
    
    
    63,556
    
    
    
    88,121
    
    
    
    113,034
    
    
    
    113,242Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Shareholders equity
    
    
    33,970
    
    
    
    35,426
    
    
    
    63,809
    
    
    
    92,261
    
    
    
    93,056
 10




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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Companys
Consolidated Financial Statements and Notes thereto included elsewhere herein. Special Note:
Certain statements set forth below constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. See Business  Special Note Regarding Forward-Looking Statements contained elsewhere
herein. In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin America resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004 with the
investigation substantially complete, the Audit Committee concluded that the Company had
inappropriately recognized approximately $1.0 million in revenues, involving six transactions in
Latin America. The Companys reported revenues were overstated
by $173,000 in the
fourth quarter of 2003; $131,000 in the first quarter of 2004; and
$698,000 in the second quarter
of 2004.
As a result of the overstatement of revenues, the Audit Committee
concluded the Company would restate its financial
statements for the year ended December 31, 2003 and the first
two quarters of 2004, and also concluded that previously issued
financial statements for those periods should no longer be relied upon. These conclusions were set forth in the Form 8-K dated December
6, 2004. The Audit Committee investigation was completed on December 8, 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product return,
which certain Company personnel in Latin America knew to have occurred within the contractually
allowable return period, but which they did not report to the Companys accounting department. If
this return had been reported in a timely manner to the Companys accounting department, revenues
from this transaction would not have been recognized in the fourth quarter of 2003. Certain
personnel in Latin America who knew of the product return also made inaccurate representations as
to the status of the receivable in response to the on-going collection efforts of the Companys
accounting department. Consequently, the effects of the restatement have been reflected in the discussion of Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Amendment No. 1 to
the Form 10-K. This Amendment No. 1 to the Form 10-K does not reflect any other events occurring
after the original filing of the Form 10-K. Overview See the discussion above under Item 1, General, for an overview of our business. Critical Accounting
Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to select accounting policies and to make estimates and assumptions
that affect the amounts reported in our Consolidated Financial Statements and Notes thereto. Actual
results could differ from those estimates and assumptions. We believe the following critical
accounting policies affect our more significant estimates and assumptions used in the preparation
of our Consolidated Financial Statements and Notes thereto. Revenue Recognition We follow American Institute of Certified Public Accountants (AICPA) Statement of Position
97-2, Software Revenue Recognition (SOP 97-2) and Statement of Position 98-9, Modification of
SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions (SOP 98-9), with
respect to revenue recognition. We license our software products primarily under perpetual
licenses. We recognize revenues under these arrangements once the following criteria are met: (i) a
written purchase order, license agreement or contract has been executed; (ii) software, or a
software license authorization code in situations where the customer previously received evaluation
software, has been delivered to the customer; (iii) license agreements with no significant vendor
obligations or customer acceptance rights outstanding have been issued to the customer; (iv) the
license fee is fixed and determinable and collection of the fee is probable; and (v)
vendor-specific objective evidence exists to allocate the total fee. Vendor-specific objective
evidence is based on the price generally charged when an element is sold separately or at the
renewal rate for maintenance agreements in subsequent years. In situations where vendor-specific
objective evidence does not exist, and all other revenue recognition criteria have been met,
revenue is recognized ratably over the term of the agreement. We do not develop new products under
contractual arrangements with customers and do not substantially modify our products and their
functionality for specific customers and therefore do not use contract accounting in determining
our revenue recognition. In rare situations when installation is essential to the functionality of
the software, revenue is deferred until completion of the installation. Certain of these items may
require the application of judgment when evaluating specific business arrangements in a changing
environment against our normal business practices. We do not provide price protection in our customer agreements and generally do not provide
conditions of acceptance in sales agreements. If conditions of acceptance exist, we defer revenue
recognition until such acceptance clauses lapse. If a right of return is granted on a sales
transaction, it is generally for a period of 10 days and related return experience has been
nominal. In situations where we grant a 10-day right of return period, revenue recognition is not
precluded. In the few situations where return rights exceed 10 days, revenue recognition is deferred
as appropriate. We have experienced de minimis warranty claims. We provide customary software
warranties indicating the software will conform to published specifications, does not include
viruses, back doors, etc., and does not infringe third-party intellectual property rights. To date,
we have experienced di minimus warranty claims. 11




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When we make sales through distributors, value-added resellers (VARs), and original
equipment manufacturers (OEMs), we recognize revenue after all revenue recognition criteria set
forth above are met and after execution of a written purchase order, license agreement or contract
with either the reseller or end user . We perform ongoing credit evaluations and assessments of the
financial viability of our customers, including distributors, VARs and OEMs, as we deem necessary
in determining whether or not revenue recognition is appropriate. Our service revenues are comprised primarily of maintenance revenue, with much smaller
components of revenue from training and consulting services. Maintenance revenue represented
approximately 86%, 88% and 92% of total service revenue in 2003, 2002 and 2001, respectively.
Customers generally elect to purchase a one to three year maintenance agreement in conjunction with
their licensing of our products, which is renewable, at the customers discretion, upon expiration
of the original maintenance contract. Maintenance revenues are recognized ratably over the contract term. Training and consulting
service revenues are recognized when the training or consulting activities are performed, generally
within a few weeks of product installation by the customer. Services, other than maintenance, are
of a short-term nature and are not provided under multi-year contracts. Deferred revenue is comprised primarily of maintenance revenue and revenue from training and
consulting services. The portion of maintenance contract revenues that have not yet been recognized
as revenues are reported as deferred revenue in the accompanying consolidated balance sheet.
Deferred maintenance revenue which has not been collected is not recognized. Alternative accounting methods are not available for us to select from, however, certain
changes in our transaction structures could significantly affect our accounting and minor changes
could result in the use of subscription accounting, whereby all revenue related to a transaction
would be recognized ratably over an extended time. Stock Options We follow Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees,
(APB 25) in accounting for our employee stock options, which generally provides that no
compensation expense is recognized when options are granted with an exercise price equal to fair
market value on the date of grant. We use this method in order to enhance the comparability of our
financial statements because it has been used by the majority of technology companies. An
alternative accounting policy available under GAAP would be to recognize stock compensation expense
based upon the fair value method, which would result in our recognizing significant compensation
expense each period. The FASB has indicated its intention to require use of the fair value method
beginning in 2005. Legislation has recently been introduced to limit the effect of this change. Income Taxes We follow the liability method of accounting for income taxes. Under this method, we determine
deferred income tax assets and liabilities based on differences between the financial statement and
income tax bases of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. We may also provide valuation allowances based upon
subjective evaluations of facts, circumstances and expectations, which may change over the course
of time and may result in significant changes in our tax provision. Accounts Receivable and Provision for Doubtful Accounts We provide an allowance for doubtful accounts when collection is considered doubtful. We
perform ongoing credit evaluations of our customers as we deem appropriate, review our collection
efforts, and analyze our payment experience with specific customers, in order to determine whether
or not collection is doubtful. There may be a significant fluctuation in our provision for doubtful
accounts to the extent facts and circumstances change and to our subjective evaluation of the
facts, circumstances and expectations change. Restructuring Charges Restructuring costs are based on our best estimates utilizing information available at the
time we commit to the restructuring plans. We perform ongoing evaluations of our assumptions and
estimates utilized in determining costs associated with our restructuring plans. Historically, we
have made cost estimates of lease terminations, leasehold abandonments, involuntary employee
separations, asset impairments and third party professional fees incurred in connection with
restructuring plans. There may be a significant fluctuation in our estimated restructuring costs to
the extent our subjective evaluation of the facts, circumstances and expectations 12




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change. We have
made adjustments to our assumptions historically as a result of the deteriorating sublease
commercial real estate markets in which we have abandoned leaseholds. In the fourth quarter of
2003, we revised our estimate of the carrying costs of our abandoned lease space and took a $1.6
million restructuring charge. This charge reflected a $1.9 million payment made to our landlord in
December 2003 to cancel our lease on two of the three abandoned floors (the maximum cancelable
under the lease agreement) and an increase in our accrual for estimated carrying costs (i.e.,
estimated future lease expense less estimated sublease income over the remaining term of the
leases) associated with the remaining excess floor and other excess office space held by the
Company. The estimated carrying costs of the abandoned lease space were determined with the
assistance of our leasing agent and were based on an assessment of applicable commercial real
estate markets. The principal variables in estimating the carrying costs are the length of time
required to sublease the space, the sublease rate and expense for inducements (e.g., rent
abatement, tenant improvement allowance) that may be offered to a prospective sublease tenant. The
accrual at December 31, 2003, for carrying costs of the abandoned lease space totaled $2.0 million.
While we believe this accrual is adequate, it is subject to adjustment as conditions change. We
will continue to evaluate the adequacy of the accrual and will make the necessary changes to the
accrual as conditions warrant. Results of Operations Year Ended December 31, 2003 Compared with the Year Ended December 31, 2002 Revenues.Revenues for 2003 were $67.7 million compared with $67.0 million in 2002. The
year-over-year increase related to a $2.6 million increase in services revenues, partially offset
by a $1.9 million decrease in license revenues. License revenues for 2003 were $35.4 million, or 52
percent of total revenues, down from $37.2 million, or 56 percent of total revenues, in 2002. The
decline in license revenues primarily related to a $1.7 million decrease in license revenues from
our products for Novell-based platforms. The decline in license revenues from our Novell-related
products reflected the maturity, and our high penetration, of the Novell market. We expect revenues
from our Novell-related products will continue to decline in the future and as a result these
revenues will become a smaller percent of our overall revenues. We also expect that the decline in
our Novell-related revenues will be offset by growth in revenues from our other product platforms.
Services revenues for 2003 were $32.3 million, or 48 percent of total revenues, up from $29.7
million, or 44 percent of total revenues, in 2002. The increase in services revenues was primarily
due to an increase in our installed customer base and a higher focus on consulting services. We
expect our service revenues to increase in the future as a result of our increased install base. During 2003, revenues from our products for Microsoft-based platforms totaled $46.1 million,
an increase of 5 percent over 2002. Revenues from these products accounted for approximately 68
percent of total revenues in 2003, up from 65 percent of total revenues for 2002. License revenues
for our Microsoft-related products for 2003 were $28.6 million compared with $29.5 million in 2002.
Service revenues for our Microsoft-related products in 2003 were $17.4 million compared with $14.4
million in 2002. We expect revenues from our products and services for Microsoft-based platforms
will continue to grow as a percentage of total revenues. Revenues from our products for Novell-based platforms for the current year were $11.6 million,
or 17 percent of total revenues, compared with $15.1 million in 2002, or 23 percent of total
revenues. Revenues from these products have continued their decline over the past year, reflecting
both the maturity and our penetration of the Novell market. Licenses revenues for Novell-based
platforms for 2003 were $3.3 million compared with $5.0 million in 2002. Service revenues for
Novell-based platforms in 2003 were $8.2 million compared with $10.1 million in 2002. While we
expect our Novell revenues will continue to decline in the future, we expect the revenue decline
will be modest relative to the declines over the past two years and expect the decline will be
offset by higher revenues from our products and services for other platforms. Sales of our security focused bv-Control product line accounted for approximately 83 percent
of our license revenue in both 2003 and 2002. Sales of our system administration focused bv-Admin
product line accounted for approximately 17 percent of our license revenue in both 2003 and 2002. No customer accounted for more than 10 percent of our revenues in 2003 and 2002. Revenues
recognized from sales to customers outside North America, primarily in Europe, accounted for
approximately 13 percent of total revenues in 2003 compared with 11 percent in 2002. Gross Profit.Gross profit for 2003 was $60.2 million, compared with $60.7 million for 2002.
The decline in gross profit resulted from the year-over-year decrease in license revenues and the
slight decline in gross margin. The gross margin for 2003 was 88.9 percent, compared with 90.6
percent for 2002. The decline in gross margin reflected a shift in business mix toward services
revenues, which have a lower gross margin than license revenues. Because resources used to provide
services are not segregated by product line, the costs of revenues (shipping, technical support,
professional services) are not tracked and segregated by revenue stream and 13




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consequently we do not measure gross profit by product platform (i.e., Microsoft, Novell, etc). We believe there is no
material difference in the gross margin by product line. Gross profit generated from license revenue for 2003 was $34.8 million, compared with $36.7
million for 2002. The gross margin from license revenue for 2003 was 98.5 percent, compared with
98.7 percent for 2002. The modest decline in gross margin was primarily the result of the decrease
in license revenues in 2003. Gross profit from services revenue for 2003 was $25.4 million, compared with $24.0 million for
2002. Gross margin from services revenue for 2003 was 78.5 percent compared with 80.6 percent for
2002. The decline in gross margin reflected higher personnel costs associated with our
technical-support and professional-services units. Operating Costs and Expenses.Operating costs and expenses for 2003 totaled $64.4 million,
down from $67.7 million for 2002. These costs include restructuring and asset impairment charges of
$2.2 million in 2003 and $3.3 million in 2002, related to restructuring plans to improve operating
efficiency, improve sales and marketing effectiveness, and accelerate our return to profitability.
Excluding these charges from both years, our operating costs and expenses were $2.2 million lower
in 2003 than the preceding year. Sales and marketing expenses for 2003 were $36.0 million (53.3 percent of revenues), down from
$37.2 million (55.6 percent of revenues) for 2002, primarily related to actions we took to improve
sales efficiency and marketing effectiveness. Because of declining revenues and a weak economic
outlook, we completed a major corporate reorganization and implemented a number of cost cutting
measures to improve operating efficiency, accelerate our return to profitability and generate positive cash flows from operating
activities. These actions included a downsizing of the sales and marketing departments, which
included the closing or downsizing of a number of our foreign sales offices and a reduction in the
size of our enterprise sales force, which was focused exclusively on large enterprise transactions.
We also redirected our marketing efforts on enhancing our product marketing capabilities and
improving our sales opportunity generation capabilities. As a result of these efforts and expected
future revenue growth, we expect sales and marketing expenses as a percentage of revenues to be
lower in 2004 as a result of our initiatives to date to improve operating leverage and sales and
marketing effectiveness and anticipated revenue growth. Research
and development expenses for 2003 were $18.4 million (27.3 percent of revenues), down
from $19.2 million (28.7 percent of revenues) in 2002. The year-over-year decrease in R&D expenses
primarily related to the closing or downsizing of our development offices in Boston, Massachusetts
and Arlington, Virginia and transferring those activities to our lower-cost development centers in
Houston, Texas and Pune, India. We also transferred development responsibilities for certain of our
legacy products from Houston, Texas to Pune, India and expect to continue leveraging that
development center in the future. As a result of these initiatives and anticipated revenue growth,
we expect future research and development expenses to decrease as a percentage of revenues. General and administrative expenses for 2003 were $7.8 million (11.5 percent of revenues),
down from $7.9 million (11.8 percent of revenues) for 2002. We expect future general and
administrative expenses to decrease as a percentage of revenues due to anticipated revenue growth. Restructuring costs were $2.2 million in 2003, $3.0 million in 2002 and $6.6 million in 2001.
Restructuring costs in 2003 consisted of a $1.6 million increase in the accrual for carrying costs
of abandoned lease space (which were accrued as part of our restructuring plans in 2001 and 2002)
and a $0.6 million charge related to our sales and marketing reorganization plan (the 2003
Restructuring Plan). The $1.6 million increase in the accrual reflected our decision to (i) cancel
our lease on two of the three abandoned floors (the maximum cancelable under the lease agreement),
which resulted in a $1.9 million payment to our landlord in December and (ii) an assessment of the
estimated remaining carrying costs (i.e., estimated future lease expense, less estimated sublease
income over the remaining term of the leases) associated with the remaining excess floor in Houston
and our other excess office space. The cancellation of two floors resulted in an upward adjustment
to our 2001 Restructuring Plan accrual of $0.9 million, which was partially offset with a reduction
to deferred rent expense associated with the canceled space of approximately $0.4 million. The
assessment of the carrying costs with the remaining excess floor in Houston resulted in an upward
adjustment to the 2002 Restructuring Plan of $1.1 million. Restructuring costs in 2002 consisted of
a $1.9 million charge for our 2002 Restructuring Plan and a $1.1 million increase to our accrual
for the 2001 Restructuring Plan. The $1.1 million adjustment was the result of an increase in the
estimated carrying costs for our two floors abandoned as part of the 2001 Restructuring Plan. The estimated carrying costs of the remaining abandoned lease space were determined with the
assistance of our leasing agent and were based on an assessment of applicable commercial real
estate markets. The principal reason for the change in estimate was the continued deterioration of
the sublease market for commercial real estate in Houston, Texas that occurred since the original 14




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determinations were made. The change in estimates primarily related to: (i) a lowering of the
expected sublease rate to reflect the drop in rates (with minimal expected escalation over the
remaining lease term), (ii) lengthening the time to sublease the abandoned lease space either
initially or after the existing sublease expires and (iii) an increase in expense for inducements
(e.g., rent abatement, tenant improvement allowances, etc.) that potentially would be offered to
prospective tenants of the space. In January 2003, we approved a sales and marketing reorganization plan (the 2003
Restructuring Plan). The cost of this plan totaled approximately $0.6 million and consisted
primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in
workforce of approximately 4 percent), (ii) closing our Netherlands sales office, and (iii)
reserves for leasehold abandonment. The 2003 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Restructuring
    
    
    
    
    
    RemainingRestructuring
    
    Charge
    
    Cash
    
    AccrualCharges
    
    Adjustments
    
    Expenditures
    
    12/31/2003Employee severance
    
    $
    442
    
    
    $
    (6
    )
    
    $
    (436
    )
    
    $
    Lease commitments
    
    
    27
    
    
    
    (14
    )
    
    
    (13
    )
    
    
    Office closure costs
    
    
    80
    
    
    
    
    
    
    
    (80
    )
    
    
    $
    549
    
    
    $
    (20
    )
    
    $
    (529
    )
    
    $
    
 All actions under the 2003 Restructuring Plan were completed by December 31, 2003. The 2003
Restructuring Plan resulted in an estimated reduction in annual operating expenses of approximately
$1.4 million. In July 2002, we approved a restructuring plan to improve operating efficiency and improve
sales and marketing productivity (the 2002 Restructuring Plan). The cost of this plan totaled
approximately $1.9 million and consisted primarily of (i) involuntary employee separation for
approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing our
Boston development center and certain European sales offices, (iii) reserves for leasehold
abandonment, and (iv) various non-personnel related cuts. The costs of the plan were based on our
best estimate utilizing information available at the time. The 2002 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Remaining
    
    Restructuring
    
    
    
    
    
    RemainingAccrual
    
    Charge
    
    Cash
    
    Accrual12/31/2002
    
    Adjustments
    
    Expenditures
    
    12/31/2003Employee severance
    
    $
    238
    
    
    $
    
    
    
    $
    (238
    )
    
    $
    Lease commitments
    
    
    944
    
    
    
    1,089
    
    
    
    (495
    )
    
    
    1,538$
    1,182
    
    
    $
    1,089
    
    
    $
    (733
    )
    
    $
    1,538
 The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 is comprised of the
estimated carrying costs for our remaining excess space in Houston, Texas. As discussed in detail
above, the restructuring charge adjustments during 2003 were based on our assessment of the
remaining carrying costs of the remaining excess lease space. Additional adjustments to this
balance could be required in future periods based on the economic outlook of the real estate market
in Houston, Texas. The 2002 Restructuring Plan resulted in an estimated reduction in annual
operating expenses of approximately $2.9 million. In connection with the 2002 Restructuring Plan, we also determined that certain leasehold
improvements related to the downsized or closed offices were impaired and recognized an asset
impairment of $0.3 million. In 2001, we completed a corporate reorganization and implemented a number of cost-cutting
measures to improve operating efficiency and to accelerate our return to profitability (the 2001
Restructuring Plan). The cost of this plan totaled approximately $6.6 million and consisted
primarily of: (i) involuntary employee separation expenses for approximately 160 employees (a
reduction in workforce of approximately 21 percent), (ii) downsizing or closing of our Boston and
Arlington development centers and certain of our European sales offices, (iii) reserves for
leasehold abandonment, and (iv) various non-personnel related costs. The restructuring costs
included a $1.2 million charge related to asset impairments of leasehold improvements, equipment
and other assets of the closed or downsized offices. 15




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The 2001 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Remaining
    
    Restructuring
    
    
    
    
    
    RemainingAccrual
    
    Charge
    
    Cash
    
    Accrual12/31/2002
    
    Adjustments
    
    Expenditures
    
    12/31/2003Lease commitments
    
    $
    1,384
    
    
    $
    941
    
    
    $
    (1,872
    )
    
    $
    453
 The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs until
the cancellation is effective in September of 2004. As discussed in detail above, the restructuring
charge adjustments during 2003 were the result of the lease cancellation for our two floors
abandoned as part of the 2001 Restructuring Plan. The 2001 Restructuring Plan resulted in an
estimated reduction in annual operating expenses of approximately $11.8 million. We also recorded asset impairment charges totaling $7.0 million during 2001 consisting of: (i)
a write off of a $5.0 million equity investment in a UK-based software distribution and consulting
firm and (ii) an asset impairment charge of $2.0 million consisting of $1.5 million for software
and computer equipment and a $0.5 million impairment of certain intangible assets. The investment
in the UK-based software firm was originally made during the second quarter of 2000 and consisted
of $5.0 million of redeemable preferred stock in the firm and $1.0 million of intangible assets,
primarily consisting of customer lists and non-compete agreements which were being amortized over
their useful lives ranging from one to three years. The write-off of the $5.0 million equity
investment, which is included in other income (expense) in our consolidated statement of operations
and comprehensive loss, was based on an independent appraisal of the current fair value of the
investment and managements assessment of the value that would be derived from the investment. The
intangible assets had a net book value of $0.5 million at the date of the impairment after we
incurred $0.2 million and $0.3 million in amortization expense for the years ending December 31,
2001 and 2000, respectively. The majority of the $1.5 million in software and computer equipment
impairment related to the acquisition of a financial management system that management had
determined would not be installed or utilized in the future. Other Income.Other income totaled $0.4 million in 2003 and $2.1 million in 2002. In 2003,
other income was primarily comprised of interest income of $0.4 million. In 2002, other income was
primarily comprised of (i) receipt of a $1.3 million insurance settlement of a business
interruption business claim made in 2002 and (ii) interest income of $0.7 million. Provision (Benefit) for Income Taxes.In 2003, we provided approximately $0.1 million in
taxes related to our foreign operations. In 2002, we provided a full valuation allowance against
deferred tax assets of $19.6 million in accordance with Financial Accounting Standard No. 109,
Accounting for Income Taxes. As in our prior assessments, we considered current and previous performance and other relevant factors
in determining the sufficiency of our valuation allowance. We gave substantially more weight to
objective factors, such as current and previous operating losses, than to our outlook for future
profitability. Until such time as a consistent pattern of sufficient profitability is established,
we will not recognize any tax benefit associated with our pre-tax accounting losses, nor will we
provide a full income tax provision on any future pre-tax accounting income. Net Loss.Due to the factors described above, net loss for 2003 was $3.8 million compared
with $24.4 million for 2002. Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001 Revenues.Revenues for 2002 were $67.0 million compared with $70.9 million in 2001. The
year-over-year decline related to a $5.3 million decrease in license revenues, partially offset by
a $1.4 million increase in services revenues. License revenues for 2002 were $37.2 million, or 56
percent of total revenues, down from $42.5 million in 2001. The decline in license revenues
primarily related to a $5.6 million decrease in license revenues from our products for Novell-based
platforms, partially offset by a $0.1 million increase in license revenues from our
Microsoft-related products. The decline in license revenues from our Novell-related products
reflected the maturity, and our high penetration, of the Novell market. We expect revenues from our
Novell- related products will continue to decline in the future and as a result these revenues will
become a smaller percent of our overall revenues. We also expect that the decline in our
Novell-related revenues will be offset by growth in revenues from our other product platforms.
Services revenues for 2002 were $29.7 million, or 44 percent of total revenues, up from $28.4
million in 2001. 16




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During 2002, revenues from our products for Microsoft-based platforms totaled $43.8 million,
an increase of 5 percent over 2001. Revenues from these products accounted for approximately 65
percent of total revenues in 2002, up from 59 percent of total revenues for 2001. License revenues
for Microsoft-related products for 2002 were $29.5 million compared with $29.4 million in 2001.
Service revenues for Microsoft-related products in 2002 were $14.4 million compared with $12.4
million in 2001. Revenues from our products for Novell-based platforms for the current year were $15.1 million,
or 23 percent of total revenues, compared with $21.6 million in 2001, or 30 percent of total
revenues. Revenues from these products have been declining over the past year, reflecting both the
maturity and our penetration of the Novell market. Licenses revenues for Novell-related products
for 2002 were $5.0 million compared with $10.6 million in 2001. Service revenues for Novell-related
products in 2002 were $10.1 million compared with $11.0 million in 2001. Sales of our security focused bv-Control product line accounted for approximately 83 percent
of our license revenue in 2002 compared with 90 percent in 2001. Sales of our system administration
focused bv-Admin product line accounted for approximately 17 percent of our license revenue in 2002
compared with 10 percent in 2001. No customer accounted for more than 10 percent of our revenues in 2002 and 2001. Revenues
recognized from sales to customers outside North America, primarily in Europe, accounted for
approximately 11 percent of total revenues in 2002 compared with 13 percent in 2001. Gross Profit.Gross profit for 2002 was $60.7 million, compared with $63.4 million for 2001.
The decline in gross profit reflected the decrease in license revenues, partially offset by a
slight improvement in gross margin. The gross margin for 2002 was 90.6 percent, compared with 89.5
percent for 2001. The expansion in gross margin reflected lower costs of producing and delivering
our products to customers and improvements in efficiencies in the delivery of our services. Because
resources used to provide services are not segregated by product line, the costs of revenues
(shipping, technical support, professional services) are not tracked and segregated by revenue
stream and consequently we do not measure gross profit by product platform (i.e., Microsoft,
Novell, etc). We believe there is no material difference in the gross margin by product line. Gross profit generated from license revenue for 2002 was $36.7 million, compared with $41.5
million for 2001. The gross margin from license revenue for 2002 was 98.7 percent, compared with
97.5 percent for 2001. The modest improvement in gross margin reflected lower costs of producing
and shipping our products to customers. Gross profit from services revenue for 2002 was $24.0 million, compared with $21.9 million for
2001. Gross margin from services revenue for 2002 was 80.6 percent compared with 77.4 percent for
2001. The expansion in gross margin reflected the improvement in operating leverage of our
technical support and professional services units as a result of headcount reductions related to
our restructuring efforts. Operating Costs and Expenses.Operating costs and expenses for 2002 totaled $67.7 million,
down from $94.9 million for 2001. These costs include restructuring and asset impairment charges of
$3.3 million in 2002 and $8.6 million in 2001. These charges related to restructuring plans to
improve operating efficiency, improve sales and marketing effectiveness and accelerate our return
to profitability. Excluding these charges, our operating costs and expenses were $22.0 million
lower in 2002 than the preceding year. Sales
and marketing expenses for 2002 were $37.2 million
(55.6 percent of revenues), down from
$49.1 million (69.2 percent of revenues) for 2001, primarily related to actions we took to improve
sales efficiency and marketing effectiveness. Because of declining revenues and a weak economic
outlook, we completed in 2001 a major corporate reorganization and implemented a number of cost
cutting measures to improve operating efficiency, accelerate our return to profitability and
generate positive cash flows from operating activities. These actions included a downsizing of the
sales and marketing departments, which included the closing or downsizing of a number of our
foreign sales offices and a reduction in the size of our enterprise sales force, which was focused
exclusively on large enterprise transactions. We also redirected our marketing efforts on enhancing
our product marketing capabilities and improving our sales opportunity generation capabilities. Research and development expenses for 2002 were $19.2 million (28.7 percent of revenues), down
from $22.7 million (32.0 percent of revenues) in 2001. The year-over-year decrease in R&D expenses
and the reduction in the expense margin primarily related to the closing or downsizing of our
development offices in Boston, Massachusetts and Arlington, Virginia and transferring those
activities to our lower-cost development centers in Houston, Texas and Pune, India. We also
transferred development responsibilities 17




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for certain of our legacy products from Houston, Texas to
Pune, India and expect to continue leveraging that development center in the future. General and administrative expenses for 2002 were $7.9 million (11.8 percent of revenues),
down from $14.6 million (20.6 percent of revenues) for 2001. This decrease primarily related to:
(i) a $2 million reduction in expenses as a result of our restructuring initiatives in 2001, (ii) a
decline of approximately $0.5 million in third party consulting fees (which were in incurred in
2001) to reposition and change our go to market strategy, (iii) a $0.9 million decline in sales tax
expense (which were higher in 2001) as a result of increased state tax compliance costs incurred in
connection with our expanding geographic operations, and (iv) a $2.8 million decline in bad debt
expense (2001 had included a significant increase in the allowance following an assessment made by
our new financial management). As previously disclosed, during the second quarter of 2001, we
recorded a provision for bad debt expense of $2.8 million. This provision was the result of an
assessment made on the adequacy of the allowance for bad debts after hiring new financial and
accounting management (new Chief Financial Officer and new Corporate Controller). Subsequent to the
end of 2000 and prior to the hiring of new management, (during which time we did not have a CFO),
we experienced an increase in our past due accounts and a deterioration in our accounts receivable
aging and days sales outstanding, which was due, in part, to a less-than-desired focus on
receivable collections, the economic downturn, and the reduction and other changes in sales
personnel, particularly in our foreign operations. The changes in sales personnel, particularly
with respect to foreign operations, related to our focus on reducing our net operating loss by
eliminating or downsizing underperforming operations. The changes in sales personnel impaired our
collection efforts of certain of the significant past due accounts. New management conducted a specific account review of all significant past due accounts, a
review of our business processes and accounting policies, and an evaluation of the adequacy of the
estimates related to our allowance for doubtful accounts. We evaluated the impact on outstanding
receivables and the increased risk of collection resulting from changes in the sales force
deployment, which consisted primarily of reductions in headcount in underperforming international
territories and the elimination of specific US sales personnel and the worsening economic
environment. As a result of the reductions in international territories and the reduced presence in
such locations, we perceived increased risk related to the collection of certain foreign
outstanding receivables and provided for such receivables accordingly. The $2.8 million provision
consisted of approximately $2.0 million related to foreign accounts receivable and approximately
$0.8 million related to domestic accounts receivable. We implemented enhanced collection processes
and did not experience recurring collectibility issues in 2002. Restructuring costs were $3.0 million in 2002 and $6.6 million in 2001 (See detailed
discussion above on these restructuring charges). Separate from the restructuring charge, we also
recognized in 2001 an asset impairment charge of $2.0 million, relating to a $1.5 million write-off
of software and computer equipment and a $0.5 million impairment of certain intangible assets. The
majority of the software and computer equipment write-off related to software purchased for
internal use that will not be installed or utilized in the future. The intangible assets consisted
primarily of customer lists and non-compete agreements acquired in 2000 that were deemed to have no
future value. Other Income (Expense).Other income (expense) totaled $2.1 million in 2002 and $(2.9)
million in 2001. In 2002, other income (expense) was primarily comprised of (i) receipt of a $1.3
million insurance settlement of a business interruption business claim made in 2001 and (ii)
interest income of $0.7 million. In 2001, other income (expense) was primarily comprised of (i) a
write-off of a $5.0 million equity investment in a UK-based software distribution and consulting
firm and (ii) interest income of $2.1 million. The write-off of the $5.0 million equity investment
was based on an independent appraisal of the current fair value of the investment and managements
assessment of the value that would be derived from a future sale. This software distribution and
consulting firm has filed for bankruptcy in the UK in 2002. The year-over-year decrease in interest
income was due to lower interest rates and lower investment balances in 2002. Provision (Benefit) for Income Taxes.In 2002, we provided a full valuation allowance against
deferred tax assets of $19.6 million in accordance with Financial Accounting Standard No. 109,
Accounting for Income Taxes. As in our prior assessments, we considered current and previous
performance and other relevant factors in determining the sufficiency of our valuation allowance.
Objective factors, such as current and previous operating losses, were given substantially more
weight than our outlook for future profitability. Until such time as a consistent pattern of
sufficient profitability is established, no tax benefit will be recognized associated with our
pre-tax accounting losses and a full income tax provision will not be provided on any future
pre-tax accounting income. Net Loss.Due to the factors described above, net loss for 2002 was $24.4 million compared
with $24.1 million for 2001. 18




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Recent Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin (ARB) No. 51 (FIN 46). This interpretation clarifies the application of ARB No. 51,
Consolidated Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. In December 2003, the FASB revised FIN 46 and extended the effective date for variable
interests created on or before January 31, 2003, to the first quarter of 2004. FIN 46 significantly
changes the criteria used in determining whether entities are consolidated within financial
statements. We expect that the adoption of FIN 46 will not have a material impact on our results of
operations, financial position, and cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149). This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). This
statement is effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. In addition, all provisions of this statement should
be applied prospectively. The provisions of this statement that relate to SFAS 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. The adoption of SFAS
No. 149 had no impact on our financial condition, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). This statement establishes standards
for the classification and measurement of certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. These effective dates are not applicable to the provisions of
paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable noncontrolling interests,
as the FASB has delayed these provisions indefinitely. The adoption of SFAS 150 had no impact on
our financial condition, results of operations or cash flows. 19




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Liquidity and Capital Resources Our capital requirements have principally related to working capital needs and capital
expenditures. These requirements have been met through a combination of issuances of securities and
internally generated funds. We had cash, cash equivalents and short-term investments of $35.4 million at December 31, 2003
compared with $37.8 million at December 31, 2002. The year-over-year decline included a one-time
payment of $1.9 million in December 2003 to cancel our lease on approximately two-thirds of our
excess office space in Houston. Other changes netted to a decrease of approximately $0.5 million. Cash flows (used in) provided by operating activities were $(1.7) million in 2003 and $1.6
million in 2002. The decline in cash flows from operating activities was primarily related to the
$3.1 million increase in accounts receivable balance resulting from the higher level of sales
occurring in the fourth quarter of 2003 as compared with the fourth quarter of 2002. Cash flows (used in) provided by investing activities were $(2.3) million in 2003 and $0.2
million in 2002. The decrease in cash generated from investing activities related to no proceeds
generated from the maturity of investments in 2003 compared to $3.2 million in 2002. Capital
expenditures were $2.3 million in 2003 compared with $3.1 million in 2002. The $0.8 million decline
in capital expenditures was due to higher costs incurred during 2002 related to our sales force
management system. Cash flows provided by (used in) financing activities were $0.8 million in 2003 and $(4.8)
million in 2002. We received approximately $0.8 million in proceeds from the sale of common stock
to employees under our Employee Stock Purchase Plan and the exercises of employee stock options.
The major use of cash in financing activities in 2002 was for the repurchase of 5.7 million shares
of our common stock for $5.4 million. This use was partially offset by proceeds of $0.6 million
primarily from the sale of common stock under our Employee Stock Purchase Plan. Our expected principal cash requirements for 2004 are: (i) capital expenditures between $2.5
million and $3.0 million, primarily for computer and software equipment, (ii) to meet our working
capital requirements, and (iii) payment of accrued restructuring expenses of approximately $0.75
million. We believe that there is sufficient cash on hand to meet these cash requirements, as well
as our cash requirements for the foreseeable future. At December 31, 2003, we had no outstanding
debt and do not anticipate the need for third party financing during 2004. Contractual Commitments We conduct operations in leased facilities under operating leases expiring at various dates
through 2011. The remaining contractual obligations under these lease commitments were comprised of
the following as of December 31, 2003: Contractual Obligation
    
    Total
    
    2004
    
    2005 - 2007
    
    2008 - 2009
    
    2010 - 2011Operating leases
    
    $
    25,090
    
    
    $
    5,027
    
    
    $
    10,564
    
    
    $
    7,100
    
    
    $
    2,399Sub-leasing arrangements*
    
    
    (563
    )
    
    
    (563
    )
    
    
    
    
    
    
    
    
    
    
    $
    24,527
    
    
    $
    4,464
    
    
    $
    10,564
    
    
    $
    7,100
    
    
    $
    2,399
   *
    
    We have sub-leased portions of these facilities under operating leases. Anticipated cash
receipts from these executed sub-lease arrangements have been taken into account when deriving
expected cash outflow on operating lease commitments in the preceding table. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements, defined as any transaction, agreement or other
contractual arrangement to which an entity unconsolidated with the registrant is a party, under
which we have:  
    
    any obligation under a guarantee contract that has any of the characteristics identified
in paragraph 3 of FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(November 2002) (FIN 45), as may be modified or supplemented, and that is not excluded
from the initial recognition and measurement provisions of FIN 45 pursuant to paragraphs 6
or 7 of that Interpretation; 20




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
    
    a retained or contingent interest in assets transferred to an unconsolidated entity or
similar arrangement that serves as credit, liquidity or market risk support to such entity
for such assets;
    
    any obligation, including a contingent obligation, under a contract that would be
accounted for as a derivative instrument, except that it is both indexed to our own stock
and classified in stockholders equity in our statement of financial position, and therefore
excluded from the scope of FASB Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (June 1998), pursuant to
paragraph 11(a) of that Statement, as may be modified or supplemented; or
    
    any obligation, including a contingent obligation, arising out of a variable interest (as
referenced in FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(January 2003), as may be modified or supplemented) in an unconsolidated entity that is held
by us or is material to us, where such entity provides financing, liquidity, market risk or
credit risk support to us or engages in leasing, hedging or research and development
services with us. Proprietary Rights See the discussion below under the headings Cautionary Statements  Other Companies Might Try
to Misappropriate Our Technology and Cautionary Statements  We Might Be Accused of
Misappropriating a Third Partys Technology. Cautionary Statements In addition to the other information in this Report, the following factors in particular
(which are not necessarily in any particular order of importance) should be carefully considered
when you evaluate BindView and its business. There may be other risks and uncertainties not
presently known to us, or that we currently deem immaterial, which could also impair our business
operations. As discussed in more detail below, if one or more of the following risks actually
occur, it is possible our business, financial condition and operating results could be materially
adversely affected.  
    
    Demand for our products is uncertain in the current economy.
    
    Our product sales are significantly concentrated.
    
    We may face future competition from established companies entering our market, and/or
from consolidated companies.
    
    Regulatory-compliance costs are likely to increase.
    
    Our products could be rendered obsolete by operating-system and application-program
software vendors.
    
    Our product sales usually require long lead times.
    
    Our quarterly sales are significantly back-end loaded, which can lead to uncertainty
about meeting expectations and to lower sales prices.
    
    Our sales are somewhat seasonal.
    
    Our products may not be able to prevail in comparative evaluations against our competitors products.
    
    Ongoing refinements to our sales organization may result in transitional inefficiencies.
    
    We do not maintain a significant backlog.
    
    Our international sales are subject to certain additional risks.
    
    We are dependent upon continued growth of the market for Windows system software.
    
    We are likely to continue to be confronted by rapidly-changing markets. 21




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
    
    Our R&D efforts may not be sufficient to keep up with changing markets.
    
    Our software could contain errors that are hard to detect and costly to fix.
    
    We could be subject to liability claims if our software has errors.
    
    We rely on certain third-party relationships, and our business could be hurt if those
relationships were to be impaired.
    
    We license certain third-party software for inclusion in our product, and such software
may not always be available for our use.
    
    Our increasing use of development resources in other countries may present risks.
    
    Our revenue bases may change with the market.
    
    We are affected by the migration rate to Windows 2000.
    
    Other companies might try to misappropriate our technology.
    
    We might be accused of misappropriating a third partys technology.
    
    Our cost structure is fixed to a certain extent, which may limit our ability to reduce
costs if sales decrease.
    
    We may be required to defer increasing amounts of revenue in the future.
    
    Our stock price has a history of volatility.
    
    Our corporate governance structure includes certain anti-takeover provisions.
    
    Our network and Web site may be targeted for intentional disruption.
    
    Natural disasters and other infrastructure problems may hurt our ability to operate. Demand for our products may be uncertain in the current economy.In 2001 the U.S. economy was
widely viewed as having entered a recession, which was exacerbated by the terrorist attacks of
September 11. It is unclear whether customers IT spending for products like ours will increase. Our product sales are significantly concentrated.A majority of our revenues are derived from
the sale of licenses and maintenance for our vulnerability-management software products. We
anticipate these products will account for a majority of our revenues for the foreseeable future.
If these products become uncompetitive for any reason, our business could be substantially damaged.
Although we currently plan to broaden our product line, we cannot be certain we will be able to
reduce our product concentration. We may face future competition from established companies entering our market, and/or from
consolidated companies.We expect competition in our market to increase significantly as current
competitors expand their product lines and services and as new companies enter the market. Many of
these existing and potential competitors are likely to enjoy substantial competitive advantages,
including greater resources that can be devoted to the development, promotion and sale of their
products; more established sales channels; greater software development experience; and greater
name recognition. In addition, we have noted what appears to be a trend of consolidation in our
market through mergers and acquisitions. For example, Symantec Corporation acquired Axent
Technologies and thereby began competing with us in one area of our market. Other examples from
recent years include Quest Softwares acquisition of FastLane Technologies Inc. and its announced
acquisition of Aelita Software, as well as NetIQ Corporations mergers with Mission Critical
Software and PentaSafe, Inc. This could result in the creation of new competitors and/or
enhancement of the competitive capabilities of existing competitors. If these present and future
competitors are successful, we are likely to lose market share and our revenue would likely
decline. 22




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Regulatory-compliance costs are likely to increase.In recent years, the U.S. Congress
enacted the Sarbanes-Oxley Act; moreover, the SEC, NASDAQ, and Financial Accounting Standards Board
have adopted (and continue to propose) implementing rules, regulations, and standards. These trends
are likely to increase our cost of complying with government regulations. Our products could be rendered obsolete by operating-system and application-program software
vendors.We believe vendors of operating-system and application-program software we support,
particularly Microsoft and Novell, could enhance their software to include functionality we provide
in our own software. Microsoft has a well-established track record of successfully entering and
competing in markets in which it becomes interested; in recent years, Microsoft has publicly
announced it intends to focus more intensely on computer- and Internet-related security issues. If
such other vendors were to offer greater functionality than they currently do, then even if our
software were clearly better, there would still be a substantial risk many customers would elect to
use good enough functionality in the operating-system or application-program software instead of
buying and/or continuing to pay maintenance fees for our software. If this risk were to come to
pass, our license and maintenance revenues could be seriously affected. Our product sales usually require long lead times.The sales cycles for our products are
typically long. The extended sales cycles are due to a variety of reasons, including but not
necessarily limited to the following. Our customers must complete their own internal evaluation and
budget-approval procedures. Because our software is used in network management, customers often
require that several people evaluate the software. Sometimes such people are in different
functional and geographic areas and may have different and perhaps conflicting requirements; this
can increase the time needed for customer evaluation. In addition, we have recently expanded our
product offerings and have been working to sell more enterprise-wide licenses involving multiple
BindView products; this likewise can increase the time required for customer review. Some customers
intentionally delay purchases for reasons such as budgetary constraints, concerns about the general
economy, or a desire to wait until new products are announced, either by us, by our competitors, or
by underlying infrastructure vendors such as Microsoft or Novell. Moreover, in recent years we have
experienced longer budget and purchasing review cycles from some of our customers. Our quarterly sales are significantly back-end loaded, which can lead to uncertainty about
meeting expectations and to lower sales prices.We generally record a significant portion of our
revenues near the end of each fiscal quarter, due in part to customer buying patterns. Many
companies negotiate large purchase agreements near the end of the quarter. We believe these
companies expect that by doing so, they can negotiate lower prices and better terms at a time when
publicly-traded vendors are conscious of the need to make their numbers for the quarter. In any
given quarter, such customer behavior can make it difficult for us to forecast our ability to meet
the expectations of investors and analysts. We may make some end-of-quarter sales at lower prices
than originally offered, which could have an adverse impact on our business. Our sales are somewhat seasonal.Our customers sometimes make significant license and
maintenance purchases at the end of the year, possibly because they have budget dollars left and
wish to spend those dollars rather than lose them. In addition, some of our sales compensation
policies are based on achievement of certain annual revenue goals. As a result, our fourth quarter
has historically tended to be the strongest in sales, which in turn has meant the following first
quarter is often weaker in sales. (Our first-quarter sales in any given fiscal year do not
necessarily indicate we will achieve higher sales in any subsequent quarter.) Our products may not be able to prevail in comparative evaluations against our competitors
products.Our customers often conduct beauty contests in which they evaluate not only our
products but those of our competitors. We believe our products usually fare very well in such
head-to-head contests, but the possibility always exists that we may lose any given such contest
for one or more reasons, some of which may be beyond our control. For example, if our product does
not have a certain functionality that is particularly important to a
customer, and if a competitors product does have such functionality, then we may not be able
to win that customers business. Ongoing refinements to our sales organization may result in transitional inefficiencies.We
are currently refining our sales organization and go to market strategy to increase our ability to
support enterprise-wide sales. Some of these refinements may require additional training for some
of our sales personnel, which can result in temporary inefficiencies as these personnel learn new
skills. We do not maintain a significant backlog.We normally do not operate with a backlog of
product orders because we ship our products shortly after orders are received, and our backlog of
services orders is not significant. Consequently, if new product orders were to dry up, we would
not be able to cushion the resulting lack of sales with backlog sales. Our international sales are subject to certain additional risks.If we are unable to recruit
or retain qualified sales personnel, distributors, or resellers, that inability could materially
and adversely affect our business. If we are unable to generate increased sales using our
international sales force, our costs will be higher without corresponding increases in revenue,
resulting in lower operating 23




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margins for our international operations. In addition, employment law
and policies vary among countries outside the United States, which may reduce our flexibility in
managing headcount and, in turn, managing personnel-related expenses. If we do not address the
risks associated with international sales in a cost-effective and timely manner, our international
sales growth will be limited, operating margins could be reduced and our business could be
materially adversely affected. Even if we are able to successfully expand our international
operations, we cannot be certain that we will be able to maintain or increase international market
demand for our products. We may be subject to foreign currency risks.To an increasing extent, our international
business likely will be conducted in foreign currencies, especially the euro. The exchange ratio of
foreign currencies for U.S. dollars has fluctuated in the past and is likely to do so in the
future, but we cannot predict the extent to which this will happen. Such fluctuations may lead to
our experiencing currency losses. We have not adopted a formal hedging program to protect us from
risks associated with foreign currency fluctuations. We are dependent upon continued growth of the market for Windows system software.We depend
upon the success of Microsofts Windows 2000 and Windows XP operating systems, and to a lesser
extent on the success of Novells NetWare operating system and of Microsofts Exchange software. In
particular, market acceptance of our products depends on the increasing complexity of these
software products and the advantages that our own software provides in managing those products.
There may be times when the growth of one or more of these software products flattens out or even
declines, especially if IT spending becomes, or stays, generally flat. To a certain extent, the
growth in the Windows system software products comes at the expense of the corresponding Novell
products, meaning that even if we gain customers on the Windows side, we may lose customers on the
Novell side. We are likely to continue to be confronted by rapidly-changing markets.The markets in which
we do business can often be subject to rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, changes in customer demands, the
emergence of new security threats, and evolving industry standards. Our products could be rendered
obsolete if new products based on new technologies are introduced or new industry standards emerge.
Our future success will depend in part on our ability to react to, and ideally to anticipate, these
changes. Our R&D efforts may not be sufficient to keep up with changing markets.To deal successfully
with market changes, we must periodically enhance our existing products, develop and introduce new
products, and sometimes discontinue an existing product. Our products are inherently complex; as a
result, our new products and product enhancements can require long development and testing periods.
When we undertake a project along these lines, we must make resource investments that often are
significant in scope. We may experience various delays and other difficulties in any given project;
if that happens, it increases the chances that a competitor might beat us to the market and thereby
achieve a potential first-to-market advantage; this in turn could hinder our efforts to persuade
customers to buy our products, which could damage our business. We have, on occasion, experienced
delays in our planned introduction of new or enhanced products and cannot be sure such delays will
not occur again. In short, we cannot be certain, as our market evolves, we will be able to
introduce new and/or updated products customers will want to buy or continue to use, or if we do,
that we will earn enough money to recoup or realize a return on our investments. Our software could contain errors that are hard to detect and costly to fix.Our software
products are complex and usually are installed and used in large computer networks having a wide
variety of equipment and networking configurations. We try to test our new products and product
enhancements thoroughly and to work with customers through our customer support services
organization to identify and correct errors (bugs). Even so, we might first become aware of a
particular error in a product or product enhancement only after we had released it for general
licensing availability. Depending on severity, such errors could cost us substantial time and money
to fix, possibly delaying our work on other new products or product enhancements. In addition, such
errors could damage our reputation, possibly hurting our ability to sell not only the product or
product enhancement in question but perhaps other products as well. Moreover, the operating-system
or applicable-program software with which our products operate could itself have bugs; this could
result in problems being incorrectly blamed on our software, which in turn could result in our
having to spend time and money addressing the problems even though they ultimately proved not to
have been of our making. We could be subject to liability claims if our software has errors.Conceivably, errors in
our software could lead to warranty claims and/or to product-liability claims. Such claims could
require us to spend significant time and money in litigation or to pay significant damages. Most of
our license agreements with customers contain provisions designed to limit our exposure to
potential claims, but it is possible that these provisions may not prove 100% effective in limiting
our liability. Any such claims, whether or not ultimately successful, could damage our reputation
and our business. We rely on certain third-party relationships, and our business could be hurt if those
relationships were to be impaired.We rely to a considerable extent on our relationships with
Microsoft and Novell; for example, we attempt to coordinate our product offerings 24




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with the future
releases of their operating systems. These companies may not notify us of feature enhancements
prior to new releases of their operating systems in the future. In particular, our relationship
with Novell has been strained in recent years, to the point that in 2003 Novell declined to renew
our premium-level membership status in the Novell DeveloperNet organization. If our relationship
with companies like Microsoft and Novell were to deteriorate, we might not be able to introduce new
products and product enhancements on a timely basis to capitalize on other companies new releases
and feature enhancements. This could result in portions of our installed base of customers not
being able to use our products effectively with these other companies new releases and feature
enhancements. That in turn could lead to one or more of our competitors, having better
relationships with these companies, pulling ahead of us in the marketplace. We license certain third-party software for inclusion in our products, and such software may
not always be available for our use.We license certain third-party software to perform certain
functions in certain of our own software products. So far we have been able to renew the required
licenses on terms we regard as satisfactory. It is possible that in the future we may not be able
to renew one or more of those licenses on acceptable terms. If that were to occur, we might be
forced to stop shipping the affected product(s) until we could find or build a replacement for the
third-party software; this could materially and adversely affect our operating results. Our increasing use of development resources in other countries may present risks.We are
increasing our use of software development personnel at our Indian subsidiary. Political
uncertainty in that region of the world, possibly including armed conflict, could interfere with
our operations there. The use by American companies of non-U.S. personnel in overseas operations
has been the subject of some negative publicity, especially in connection with the upcoming U.S.
presidential election. If federal or state laws were to be changed to restrict the use of non-U.S.
personnel by U.S. companies, or to (further) restrict the ability of state- and federal agencies to
purchase products with significant non-U.S. content, our business could be hurt. Our revenue bases may change with the market.The percentages of our revenues attributable to
software licenses for particular operating-system or application-software platforms can change from
time to time. A number of factors outside our control can cause these changes, including changing
market acceptance and penetration of the various operating-system and application-software
platforms we support and the relative mix of development and installation by VARs of application
software operating on such platforms. We are affected by the migration rate to Windows 2000, Windows XP, and Microsoft Exchange.
Our ability to sell licenses for some of our directory-migration products depends in part on the
rate at which customers elect to migrate their networks to Microsofts Windows 2000 or Windows XP
operating system or to Microsoft Exchange. Other companies might try to misappropriate our technology.We attempt to protect our
technology with a combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions. We license our software products primarily under
click-wrap licenses agreements. We believe, however, these measures afford only limited
protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information we regard as proprietary. We have
found historically that a few customers use our software for more than they have paid for,
representing a loss of revenue for us. Policing unauthorized use of our products is difficult and
we are unable to determine the extent to which piracy of our software products exists. In addition,
the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of
the United States, and we may be subject to unauthorized use of our products in those countries.
Any legal action that we may bring to protect proprietary information could be expensive and may
distract management from day-to-day operations. Our means of protecting our proprietary rights may
not be adequate to protect our products and technology from unauthorized copying. In addition,
competitors may be able to independently develop similar or superior technology. We might be accused of misappropriating a third partys technology.Litigation regarding
intellectual property rights is not uncommon in the software industry. We expect software product
developers will increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in different industry
segments overlaps. We are not aware that we are infringing any proprietary rights of third parties. From time to time, however, third
parties may claim we have infringed on their intellectual property rights. Any such claims, with or
without merit, could be time consuming to defend, could result in costly litigation, could divert
managements attention and resources, could cause product shipment delays, or could require us to
enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all. If a third party alleges we have infringed
its intellectual property rights, we may choose to litigate the claim and/or seek an appropriate
license from the third party. The mere fact a third party makes such an allegation could damage our
reputation and hurt our ability to sell our products, and we might have little or no practical
recourse even if the allegation is baseless. If someone were successfully to make a claim of
infringement against us, and if we could not or did not obtain a license or develop alternative
technology on a timely basis, our business could be materially adversely affected. 25




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Our cost structure is fixed to a certain extent, which may limit our ability to reduce costs
if sales decrease.We base our expenses to a significant extent on our estimates of future sales
revenues. As a result, many of our expenses are fixed in the short term. If our future sales do not
match our estimates, we might embark on certain cost cutting measures (which could include but are
not limited to employee reductions, office closings and product consolidations), but we might not
be able to cut costs quickly and effectively enough to prevent our business from being adversely
affected. We may be required to defer increasing amounts of revenue in the future.As our sales
transactions and product mix becomes more complex, revenue-recognition principles stated in SOP
97-2 or SOP 98-9 could require us to defer a significant portion of our transaction revenues and to
recognize the deferred revenue in future periods, rather than in the period in which the sales
transactions occurred. Our stock price has a history of volatility.There have been times when the market price of
our common stock has been highly volatile (like that of many other technology companies). We expect
our stock price will continue to fluctuate in the future. These fluctuations may be due to factors
specific to our company, to changes in analysts earnings estimates, to the relatively low volume
of trading in our common stock in recent months, or to factors affecting the computer industry or
the securities markets in general. We believe that quarter-to-quarter and year-to-year financial
comparisons are not necessarily meaningful indicators of our future operating results and should
not be relied on as an indication of future performance; nevertheless, if our quarterly and annual
operating results should fail to meet market expectations, the trading price of our common stock
could be negatively impacted. Our quarterly and annual operating results have varied substantially
in the past and may vary substantially in the future due to a number of factors described elsewhere
in this Report, which could lead to significant changes in our stock price. Our corporate governance structure includes certain anti-takeover provisions.Certain aspects
of our corporate governance structure, like that of many other technology companies, are typically
regarded as anti-takeover provisions. Such provisions likely would make it more difficult for a
third party to acquire control of our company, even if the change in control might be beneficial to
our stockholders. This could discourage potential takeover attempts and could hurt the market price
of our common stock. Our network and Web site may be targeted for intentional disruption.As a leading provider of
security-related software, we anticipate that, from time to time, our corporate computer network
and our Web site may be targeted for intentional disruption by black-hat hackers. We believe we
have taken sufficient precautions to prevent such disruption, but we cannot be certain we will
succeed in preventing all such disruption. If such disruption is successful, it could hurt our business activities; if successful disruption
becomes publicly known, it could also damage our reputation and that of our products and services. Natural disasters and other infrastructure problems may hurt our ability to operate.We rely
heavily on our telephone system, computer network, and data center infrastructure for internal
communications, communications with customers and partners, direct sales of our software products,
sales lead generation, and direct provision of fee-based services. Those systems may be vulnerable
to damage from human error, physical or electronic security breaches, power loss and other facility
failures, fire, flooding such as that resulting from Tropical Storm Alison in June 2001,
telecommunications failure, sabotage, terrorist attacks such as those of 9/11, vandalism and similar events. Despite precautions, a natural
disaster or other unanticipated problems could result in interruptions in our service or
significant damage. In addition, failure of any of our telecommunications providers to provide
consistent data communications capacity could result in interruptions in our services and thus in
our ability to provide service to our customers. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to a variety of risks associated with foreign currency exchange rate
fluctuations and changes in the market value of its investments. Special Note: Certain statements
set forth below constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. See
Business  Special Note Regarding Forward-Looking Statements contained elsewhere herein. Foreign Currency Exchange Rates We operate globally and the functional currency for most of our non-U.S. enterprises is the
local currency. For the years ended December 31, 2003, 2002 and 2001, approximately 13 percent, 11
percent and 13 percent of our consolidated revenues, respectively, were generated from customers
outside of North America, substantially all of which were billed and collected in foreign
currencies. Similarly, substantially all of the expenses of operating our foreign subsidiaries are
incurred in foreign currencies. As a result, our U.S. dollar earnings and net cash flows from
international operations may be adversely affected by changes in foreign currency exchange 26




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rates.
Based on our foreign currency exchange instruments outstanding at December 31, 2003, we estimate a
near-term change in foreign currency rates would not materially affect our financial position,
results of operations or net cash flows for the year ended December 31, 2004. We used a
value-at-risk (VAR) model to measure potential fair value losses due to foreign currency exchange
rate fluctuations. The VAR model estimates were made assuming normal market conditions and a 95
percent confidence level. The VAR model is a risk estimation tool, and as such, is not intended to
represent actual losses in fair value that we will incur. Interest Rate Risk We adhere to a conservative investment policy, whereby our principal concern is the
preservation of liquid funds while maximizing our yield on liquid assets. Cash, cash equivalents,
short-term investments and long-term investments (including restricted cash) approximated $39.9
million and $42.3 million at December 31, 2003 and 2002, respectively. Such amounts were invested
in different types of investment-grade securities with the intent of holding these securities to
maturity. Although our portfolio is subject to fluctuations in interest rates and market conditions, no gain or loss on any security would actually be recognized in
earnings unless the instrument was sold. We estimate that a near-term change in interest rates
would not materially affect our financial position, results of operations or net cash flows for the
year ended December 31, 2004. We used a VAR model to measure potential market risk on our
marketable securities due to interest rate fluctuations. The VAR model estimates were made assuming
normal market conditions and a 95 percent confidence level. The VAR model is a risk estimation
tool, and as such, is not intended to represent actual losses in fair value that we will incur. 
 Item 8.Financial Statements and Supplementary Data The financial statements and supplementary financial information required to be filed under
this Item are presented in Item 15 of this Annual Report on Form
10-K/A, Amendment No. 1. 
 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures The management of the Company, including the Chief Executive Officer and the Chief Financial
Officer, conducted an evaluation of the effectiveness of the Companys disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of December 31,
2003 (the Evaluation Date). Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and
procedures were effective in ensuring that all material information relating to the Company,
including its consolidated subsidiaries, required to be filed in this annual report have been made
known to them in a timely manner. However, as more fully described below in Revenue Recognition
Issues in BindViews Latin American Operations, management later determined that the Companys
disclosure controls and procedures were not effective as of December 31, 2003, because the Company
had a material weakness in revenue reporting for its Latin American operations. There
have been no significant changes made during the period covered by
this report in the Companys internal controls over financial reporting or in other factors that could
significantly affect internal controls over financial reporting. As discussed below, however, we
have implemented additional measures to improve our internal controls over financial reporting.
These measures took effect after the period covered by this report. Revenue Recognition Issues in BindViews Latin American Operations In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin American resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004, with the
investigation substantially complete, the Audit Committee concluded that due to errors with the
transactions described below, the Company would restate its financial statements for the year ended
December 31, 2003 and the first two quarters of 2004, and also concluded that previously issued
financial statements for those periods should no longer be relied upon. These conclusions were set
forth in the Form 8-K dated December 6, 2004, and were also discussed with the Companys independent registered public accounting firm. The Audit
Committee investigation was completed on December 8, 2004. 27




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The Companys previously issued financial statements for the periods referenced above have
been restated to correct for an overstatement of approximately $1.0 million in revenues, involving
six transactions in Latin America. As a result, the Companys reported revenues were overstated by
$173,000 in the fourth quarter of 2003; $131,000 in the first quarter
of 2004; and $698,000 in the
second quarter of 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product
return, which certain Company personnel in Latin America knew to have occurred within the
contractually allowable return period, but which they did not report to the Companys accounting
department. If this return had been reported in a timely manner to the Companys accounting
department, revenues from this transaction would not have been recognized in the fourth quarter of
2003. Certain personnel in Latin America who knew of the product return also made inaccurate
representations as to the status of the receivable in response to the on-going collection efforts of
the Companys accounting department. Revenues
for the first quarter of 2004 were overstated by $131,000. This was comprised of (i)
two separate transactions with a single reseller and an end-user customer for which professional
services revenues were overstated by $122,000; and
(ii) maintenance revenue of $9,000 on the
fourth quarter 2003 transaction referred to above. The overstatement of professional services revenues
resulted from the recording of revenues based on invalid contracts and statements of work that had
been submitted to the Companys accounting department by certain personnel in Latin America. These
documents, certain of which the Company believes were falsified prior to being submitted to its
accounting department, purported to show that the Company had entered into an arrangement with a
subsidiary of the reseller to provide services to the end-user customer on behalf of the Company. Revenues
for the second quarter of 2004 were overstated by $698,000, resulting from the
recording of three transactions based on invalid documents that had been submitted to the Companys
accounting department by certain personnel in its Latin American operations. These documents,
certain of which the Company believes were falsified prior to being submitted to its accounting department,
included contracts and professional services statements of work and time sheets that purported to
show that valid arrangements supporting the underlying transactions had been entered into with
third parties. Certain personnel in Latin America also made inaccurate representations as to
the status of these receivables in response to the on-going collection efforts of the Companys
accounting department. Individuals who the Company believes were culpably involved in these transactions are no
longer employed by the Company. The Company has terminated relationships with resellers that it
believes may have been culpably involved in these transactions. As a result of the investigation into the above matters, the Company has determined that it
has a material weakness with respect to the reporting of revenues from its Latin American
operations. In addition to the actions taken with respect to personnel and resellers, as mentioned
above, the Company has also designed and implemented new procedures to improve controls to better
ensure that revenues are recognized only on transactions that are based on valid arrangements,
which meet the Companys revenue recognition criteria. The significant enhancements to our
procedures and controls that have been implemented include:  
    
    We will obtain signed written representations from each sales and professional services
representative, manager, director and vice president prior to finalizing results for a quarterly or
annual period and prior to payment of sales commissions or any incentive-based compensation for that period. Generally speaking, these representations state that to the
best of the individuals knowledge, (i) he or she has complied with the Companys Code of Conduct,
(ii) the documentation supporting the sales transactions with which he or she was involved is
valid, appropriately authorized and complete and (iii) no conditions to any sales transaction have
been agreed to with the customer that have not been explicitly stated in the documentation
supporting that sales transaction.
    
    In geographies where the Company has a limited operating history (e.g. Latin
America or any other new geography the Company may enter), payment of
sales commissions
will be deferred until collection of accounts receivable has occurred.
    
    We are assigning non-sales personnel to communicate directly with foreign
resellers and end-user customers regarding past due accounts receivable.
    
    We have made changes to our reporting structure to provide for more direct communication. These changes include sales operations now reports to our
chief operating officer and the head of professional services now reports directly
to non-sales management. 28




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
    
    We have implemented more extensive background and reference checks to be
performed on all prospective employees.
    
    We have expanded the Companys disclosure committee to include representations
from a broader cross section of departments.
    
    We are implementing enhanced pre-close analytical review procedures to identify
emerging changes in our business. By implementing its planned internal control improvements, the Company expects to remediate
this material weakness. However, if the Company is unable
to (i) demonstrate that its internal
controls over financial reporting are designed appropriately and operating effectively for a
sufficient period of time, (ii) assert that its internal controls over financial reporting are
effective as of December 31, 2004, and (iii) complete its evaluation on a timely enough basis for its
independent registered public accounting firm to complete their assessment of the Companys
internal controls over financial reporting by the due date for the Companys 2004 Annual Report on
Form 10-K, the Company will have to report the material weakness in such Form 10-K. 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant For information concerning this Item, see text under the captions Election of Directors,
Executive Officers and Compensation, Compliance With Section 16(a) of the Securities Exchange
Act of 1934 and Code of Ethics in the proxy statement relating to our 2004 annual meeting of
shareholders (the Proxy Statement) filed April 21, 2004, which
information is incorporated herein by reference. 
 Item 11.Executive Compensation For information concerning this Item, see text under the captions Executive Officers and
Compensation in the Proxy Statement, which information is incorporated herein by reference. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management For information concerning this Item, see text under the captions Security Ownership of
Certain Beneficial Owners and Management in the Proxy Statement, which information is incorporated
herein by reference. 
 Item 13.Certain Relationships and Related Transactions For information concerning this Item, see text under the caption Certain Relationships and
Transactions in the Proxy Statement, which information is incorporated herein by reference. 
 Item 14.Principal Accounting Fees and Services For information concerning this Item, see text under the caption Relationship with
Independent Accountants in the Proxy Statement, which information is incorporated herein by
reference. 
 29




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PART IV 
 Item 15.Exhibits and Financial Statement Schedule (a) Documents
included in this Annual Report onForm 10-K/A,
Amendment No. 1: Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    31Consolidated Balance Sheets
    
    
    32Consolidated Statements of Operations and Comprehensive Loss
    
    
    33Consolidated Statements of Shareholders Equity
    
    
    34Consolidated Statements of Cash Flows
    
    
    35Notes to Consolidated Financial Statements
    
    
    36Schedule II  Valuation and Qualifying Accounts
    
    
    52
 Other financial schedules under the Securities Exchange Act of 1934, as amended have been
omitted because they are either not required or are not material. (b) Exhibits: Reference is made to the Exhibit Index at the end of this Annual Report on Form 10-K/A,
Amendment No. 1. 30




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of BindView Development Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a) on page 30 present fairly, in all material respects, the financial position of BindView
Development Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15(a) on page 30 presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of
the Companys management. Our
responsibility is to express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 16 to the financial statements, the Company has restated its financial
statements as of and for the year ended December 31, 2003. /s/ PricewaterhouseCoopers LLP Houston, Texas
February 10, 2004, except Note 16 as to which the date is
December 20, 2004 31




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BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED BALANCE SHEETS
(In thousands) December 31,2003
    
    2002As RestatedASSETS
    
    (Note 16)Current assets:Cash and cash equivalents
    
    $
    35,449
    
    
    $
    37,760Cash  restricted
    
    
    2,250
    
    
    
    Accounts receivable, net of allowance of $1,040 and $1,237
    
    
    14,066
    
    
    
    11,199Other
    
    
    2,180
    
    
    
    2,052Total current assets
    
    
    53,945
    
    
    
    51,011Property and equipment, net
    
    
    6,564
    
    
    
    7,816Investments and other assets
    
    
    2,498
    
    
    
    4,729Total assets
    
    $
    63,007
    
    
    $
    63,556LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,066
    
    
    $
    1,990Accrued liabilities
    
    
    4,879
    
    
    
    6,341Accrued compensation
    
    
    5,275
    
    
    
    3,907Deferred revenue
    
    
    13,253
    
    
    
    12,464Total current liabilities
    
    
    25,473
    
    
    
    24,702Deferred revenue
    
    
    1,477
    
    
    
    2,213Other
    
    
    2,087
    
    
    
    1,215Commitments and Contingencies (Note 9)Shareholders equity:Preferred stock, $0.01 par value, 20,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, no par value, 100,000 shares authorized, 47,034 and
46,278 shares issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    105,176
    
    
    
    104,332Notes receivable from shareholder
    
    
    (392
    )
    
    
    (892
    )Accumulated deficit
    
    
    (72,207
    )
    
    
    (68,398
    )Accumulated other comprehensive income
    
    
    1,392
    
    
    
    383Total shareholders equity
    
    
    33,970
    
    
    
    35,426Total liabilities and shareholders equity
    
    $
    63,007
    
    
    $
    63,556
 See notes to consolidated financial statements. 32




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BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share amounts) Year Ended December 31,2003
    
    2002
    
    2001As RestatedRevenues:
    
    (Note 16)Licenses
    
    $
    35,357
    
    
    $
    37,238
    
    
    $
    42,532Services
    
    
    32,315
    
    
    
    29,740
    
    
    
    28,35667,672
    
    
    
    66,978
    
    
    
    70,888Cost of revenues:Cost of licenses
    
    
    527
    
    
    
    500
    
    
    
    1,059Cost of services
    
    
    6,954
    
    
    
    5,782
    
    
    
    6,4077,481
    
    
    
    6,282
    
    
    
    7,466Gross profit
    
    
    60,191
    
    
    
    60,696
    
    
    
    63,422Operating costs and expenses:Sales and marketing
    
    
    36,040
    
    
    
    37,242
    
    
    
    49,079Research and development
    
    
    18,423
    
    
    
    19,219
    
    
    
    22,668General and administrative
    
    
    7,750
    
    
    
    7,932
    
    
    
    14,600Restructuring
    
    
    2,184
    
    
    
    3,002
    
    
    
    6,594Asset impairment
    
    
    
    
    
    
    276
    
    
    
    1,979Operating loss
    
    
    (4,206
    )
    
    
    (6,975
    )
    
    
    (31,498
    )Other income (expense), net
    
    
    447
    
    
    
    2,104
    
    
    
    (2,859
    )Loss before income taxes
    
    
    (3,759
    )
    
    
    (4,871
    )
    
    
    (34,357
    )Provision (benefit) for income taxes
    
    
    50
    
    
    
    19,562
    
    
    
    (10,211
    )Net loss
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )Loss per common share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.49
    )
    
    $
    (0.47
    )Number of shares used to calculate per share amounts, basic and diluted
    
    
    46,714
    
    
    
    50,319
    
    
    
    51,438Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )Unrealized gain from foreign currency translation
    
    
    1,009
    
    
    
    568
    
    
    
    84Comprehensive loss
    
    $
    (2,800
    )
    
    $
    (23,865
    )
    
    $
    (24,062
    )
 See notes to consolidated financial statements. 33




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BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands) AccumulatedCommon Stock
    
    AdditionalPaid-In Capital
    
    ShareholderNote
    
    Accumulated
    
    OtherComprehensive
    
    Treasury
    
    TotalShareholders'Shares
    
    Amount
    
    Amount
    
    Receivable
    
    Deficit
    
    Income (Loss)
    
    Stock
    
    EquityBalance at December 31, 2000
    
    
    52,298
    
    
    $
    1
    
    
    $
    117,816
    
    
    $
    (144
    )
    
    $
    (19,819
    )
    
    $
    (269
    )
    
    $
    (5,324
    )
    
    $
    92,261Exercise of stock options and warrants
    
    
    1,490
    
    
    
    
    
    
    
    1,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,558Tax benefit related to exercise of
employee stock options
    
    
    
    
    
    
    
    
    
    
    867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    867Employee stock purchase plan
    
    
    187
    
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    599Treasury stock purchases (2,363 shares).
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,414
    )
    
    
    (7,414
    )Common stock issued under restricted
stock agreement
    
    
    400
    
    
    
    
    
    
    
    1,044
    
    
    
    (1,044
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,146
    )
    
    
    
    
    
    
    
    
    
    
    (24,146
    )Balance at December 31, 2001
    
    
    54,375
    
    
    $
    1
    
    
    $
    121,884
    
    
    $
    (1,188
    )
    
    $
    (43,965
    )
    
    $
    (185
    )
    
    $
    (12,738
    )
    
    $
    63,809Exercise of stock options
    
    
    108
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Employee stock purchase plan
    
    
    490
    
    
    
    
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    498Treasury stock purchases (5,697 shares).
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,378
    )
    
    
    (5,378
    )Retirement of treasury stock
    
    
    (8,695
    )
    
    
    
    
    
    
    (18,116
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,116
    
    
    
    Reduction of shareholder note in lieu
of guaranteed bonus
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296Foreign currency translation adjustment.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568
    
    
    
    
    
    
    
    568Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,433
    )
    
    
    
    
    
    
    
    
    
    
    (24,433
    )Balance at December 31, 2002
    
    
    46,278
    
    
    $
    1
    
    
    $
    104,332
    
    
    $
    (892
    )
    
    $
    (68,398
    )
    
    $
    383
    
    
    $
    
    
    
    $
    35,426Exercise of stock options
    
    
    281
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390Provision for reserve on note receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Reduction of shareholder note in lieu
of guaranteed bonus
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356Employee stock purchase plan
    
    
    475
    
    
    
    
    
    
    
    454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    454Foreign currency translation adjustment.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,009
    
    
    
    
    
    
    
    1,009Net loss (As Restated-Note 16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,809
    )
    
    
    
    
    
    
    
    
    
    
    (3,809
    )Balance at December 31, 2003 (As
Restated-Note 16)
    
    
    47,034
    
    
    $
    1
    
    
    $
    105,176
    
    
    $
    (392
    )
    
    $
    (72,207
    )
    
    $
    1,392
    
    
    $
    
    
    
    $
    33,970
 See notes to consolidated financial statements. 34




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##### Table of Contents



BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31,2003
    
    2002
    
    2001As RestatedCash flows from operating activities:
    
    (Note 16)Net loss
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    3,574
    
    
    
    4,442
    
    
    
    5,413Bad debt expense
    
    
    
    
    
    
    
    
    
    
    3,474Asset impairments
    
    
    
    
    
    
    276
    
    
    
    8,148Deferred income tax provision (benefit)
    
    
    
    
    
    
    19,562
    
    
    
    (10,211
    )Stock compensation expense
    
    
    357
    
    
    
    
    
    
    
    Provision for reserve on note receivable and other
    
    
    144
    
    
    
    48
    
    
    
    197Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,666
    )
    
    
    (933
    )
    
    
    9,753Other assets
    
    
    (62
    )
    
    
    (773
    )
    
    
    75Accounts payable
    
    
    18
    
    
    
    36
    
    
    
    (2,279
    )Accrued liabilities
    
    
    732
    
    
    
    1,811
    
    
    
    4,290Deferred revenues
    
    
    (17
    )
    
    
    1,602
    
    
    
    1,537Net cash provided by (used in) operating activities
    
    
    (1,729
    )
    
    
    1,638
    
    
    
    (3,749
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,307
    )
    
    
    (3,064
    )
    
    
    (2,986
    )Net proceeds from maturity (purchase) of investments
    
    
    
    
    
    
    3,253
    
    
    
    6,951Other
    
    
    
    
    
    
    40
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (2,307
    )
    
    
    229
    
    
    
    3,965Cash flows from financing activities:Restriction on cash under letter of credit
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Repurchase of common stock
    
    
    
    
    
    
    (5,378
    )
    
    
    (7,414
    )Net proceeds from sale of common stock
    
    
    844
    
    
    
    564
    
    
    
    2,060Net cash provided by (used in) financing activities
    
    
    844
    
    
    
    (4,814
    )
    
    
    (9,854
    )Effect of exchange rate changes on cash
    
    
    881
    
    
    
    916
    
    
    
    92Net decrease in cash and cash equivalents
    
    
    (2,311
    )
    
    
    (2,031
    )
    
    
    (9,546
    )Cash and cash equivalents at beginning of year
    
    
    37,760
    
    
    
    39,791
    
    
    
    49,337Cash and cash equivalents at end of year
    
    $
    35,449
    
    
    $
    37,760
    
    
    $
    39,791Non-cash financing and investing activities:Reduction of shareholder note in lieu of guaranteed bonus
    
    $
    356
    
    
    $
    296
    
    
    $
    Tax benefit related to the exercise of employee stock options
    
    $
    
    
    
    $
    
    
    
    $
    867Note receivable from shareholder in exchange for 400 shares
of restricted common stock
    
    $
    
    
    
    $
    
    
    
    $
    1,044
 See notes to consolidated financial statements. 35




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BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Summary of Significant Accounting Policies Operations BindView Development Corporation (BindView or the Company), a Texas corporation, was
incorporated in May 1990. The Company delivers security management software solutions to help
safeguard computer systems and networks from security breaches and helps protect business systems
from both internal and external threats. The Companys suite of cross-platform software and
associated services help secure, automate and reduce the costs of managing information technology
infrastructures. Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of BindView and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. Revenue Recognition The Company follows American Institute of Certified Public Accountants (AICPA) Statement of
Position 97-2, Software Revenue Recognition (SOP 97-2) and Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions (SOP
98-9), with respect to revenue recognition. The Company primarily licenses its software products
under perpetual licenses. Revenues are recognized under these arrangements once the following
criteria are met: (i) a written purchase order, license agreement or contract has been executed;
(ii) software, or software license authorization code in situations where the customer previously
received evaluation software, has been delivered to the customer; (iii) license agreements with no
significant vendor obligations or customer acceptance rights outstanding have been issued to the
customer; (iv) the license fee is fixed and determinable and collection of the fee is probable; and
(v) vendor-specific objective evidence exists to allocate the total fee. Vendor-specific objective
evidence is based on the price generally charged when an element is sold separately or at the
renewal rate for maintenance agreements in subsequent years. In situations where vendor-specific
objective evidence does not exist, and all other revenue recognition criteria have been met,
revenue is recognized ratably over the term of the agreement. The Company does not develop new products under contractual arrangements with customers and
does not substantially modify its products and their functionality for specific customers and
therefore does not use contract accounting in determining revenue recognition. In rare situations
when installation is essential to the functionality of the software, revenue is deferred until
completion of the installation. Certain of these items may require the application of judgment when
evaluating specific business arrangements in a changing environment against the Companys normal
business practices. The Company does not provide price protection in customer agreements and generally does not
provide conditions of acceptance in sales agreements. If conditions of acceptance exist, the
Company defers revenue recognition until such acceptance clauses lapse. If a right of return is
granted on a sales transaction, it is generally for a period of 10 days and related return
experience has been nominal. In situations where the Company grants a 10-day right of return
period, revenue recognition is not precluded. In the few situations were return rights exceed 10 days, revenue recognition is deferred as appropriate. The Company has
experienced di minimus warranty claims. The Company provides customary software warranties
indicating the software will conform to published specifications, does not include viruses, back
doors, etc., and does not infringe third-party intellectual property rights. To date, the Company
has experienced di minimus warranty claims. The Company recognizes revenues from sales made through distributors, value-added resellers
(VARs), and original equipment manufacturers (OEMs) after all revenue recognition criteria set
forth above are met and after execution of a written purchase order, license agreement or contract
with either the reseller or end user. The Company performs ongoing credit evaluations and
assessments of the financial viability of its customers, including distributors, VARs and OEMs, in
determining whether or not revenue recognition is appropriate. Service revenues are comprised primarily of maintenance revenue, with much smaller components
of revenue from training and consulting services. Maintenance revenue represented approximately
86%, 88% and 92% of total service revenue in 2003, 2002 and 2001, respectively. Customers generally
elect to purchase a one to three year maintenance agreement in conjunction with their 36




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##### Table of Contents



licensing of the Companys products, which is renewable, at the customers discretion, upon expiration of the
original maintenance contract. Maintenance revenues are recognized ratably over the contract term.
Training and consulting service revenues are recognized when the training or consulting activities
are performed, generally within a few weeks of product installation by the customer. Services,
other than maintenance, are of a short-term nature and are not provided under multi-year contracts. Deferred revenue is comprised primarily of maintenance revenue and revenue from training and
consulting services. The portion of maintenance contract revenues that have not yet been recognized
as revenues are reported as deferred revenue in the accompanying consolidated balance sheet.
Deferred maintenance revenue which has not been collected is not recognized. Research and Development The Company follows SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, in accounting for research and development costs. These costs are
charged to operations as they are incurred until technological feasibility has been determined. The
Company currently considers technological feasibility to have been established once a working model
of a product has been produced and tested. The judgment regarding when an adequate working model
has been satisfactorily tested is subjective and the degree of proximity of that date to product
release influences how much cost is capitalized. To date, costs incurred by the Companys
development staff subsequent to the establishment of technological feasibility have not been
material. Software Developed for Internal Use The Company follows Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1) in accounting for certain costs related to the
development or purchase of internal-use software. Under SOP 98-1, generally costs, other than those
related to the preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project, which are expensed as incurred, are capitalized
and amortized over the estimated useful life of the software. During 2003, there were no costs
associated with the development of internal-use software that were capitalized. The Company capitalized approximately $0.8 million in 2002 and $0.3
million in 2001 in costs associated with the development of internal-use software. At December 31,
2003 and 2002, capitalized software development costs, net of amortization, totaled approximately
$0.5 million and $0.8 million, respectively, and were included in property and equipment in the
accompanying Consolidated Balance Sheets. Stock Options The Company accounts for all stock-based employee compensation plans under the recognition and
measurement provisions of APB Opinion 25, Accounting for Stock Issued to Employees, (APB 25)
and related interpretations. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Companys common shares at the date of the grant
over the amount an employee must pay to acquire the common shares. The Company generally grants
options at prices equal to the market price of common shares on the date of the grant. However, if
options are granted at a price below fair market value, compensation expense is recorded in
accordance with the provisions of APB 25. Compensation expense may also be recognized for certain
options which are considered variable option grants. Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based Compensation  an Amendment to FAS 123, requires
companies that continue to account for stock-based compensation in accordance with APB 25 to
disclose certain information using tabular presentation as presented below. This table illustrates
the effect on net loss and loss per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation (in thousands, except per share amounts): Year Ended December 31,2003
    
    2002
    
    2001As Restated(Note 16)Net loss as reported
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )Add: Stock-based employee compensation
expense included in reported net loss
    
    
    357
    
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards
    
    
    (6,343
    )
    
    
    (7,979
    )
    
    
    (7,685
    )Pro forma net loss
    
    $
    (9,795
    )
    
    $
    (32,412
    )
    
    $
    (31,831
    )Loss per common share (basic and diluted): As reported
    
    $
    (0.08
    )
    
    $
    (0.49
    )
    
    $
    (0.47
    ) Pro forma
    
    $
    (0.21
    )
    
    $
    (0.64
    )
    
    $
    (0.62
    )
 37




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##### Table of Contents



The above pro forma amounts were based on a Black-Scholes option-pricing model, which included
the following information and assumptions: Year Ended December 31,2003
    
    2002
    
    2001Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    6Interest rate
    
    
    4
    %
    
    
    5
    %
    
    
    5
    %Volatility
    
    
    100
    %
    
    
    106
    %
    
    
    112
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Income Taxes The Company follows the liability method of accounting for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences between the
financial statement and income tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation allowances may also
be provided based upon subjective evaluations of facts, circumstances and expectations, which may
change over the course of time (see Note 5). Cash and Cash Equivalents All short-term investments with an original maturity of 90 days or less are considered cash
equivalents. Accounts Receivable and Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts when collection is considered
doubtful. The Company performs ongoing credit evaluations of its customers, reviews its collection
efforts and analyzes its payment experience with specific customers in order to determine whether
or not collection is doubtful. There may be a significant fluctuation in the provision for doubtful
accounts to the extent the Companys evaluation of the economy, facts, circumstances and
expectations change. Investments The Companys short-term investments include commercial paper, corporate bonds or certificates
of deposit that have original maturities of more than three months and less than one year. The
Companys long-term investments are comprised entirely of restricted cash deposits. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets. Leasehold improvements are amortized over the
shorter of the lives of the respective leases or the service lives of the improvements. Repairs and
maintenance are charged to expense as incurred. When an item is sold or retired, the related
accumulated depreciation is relieved and the resulting gain or loss net of cash received, if any,
is recognized in the consolidated statement of operations and comprehensive loss. Long-Lived Assets In the event that facts and circumstances indicate that long-lived assets may be impaired, the
Company evaluates the recoverability of such assets. The estimated future undiscounted cash flows
associated with the asset are compared to the assets carrying amount to determine if a write-down
to market value or discounted cash flow value is necessary. The Company believes all long-lived
assets are fully realizable as of December 31, 2003. Advertising Costs Advertising costs are expensed when incurred. 38




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Foreign Currency Translation The Companys foreign subsidiaries use the local currency as their functional currency.
Financial statements of these subsidiaries are translated into U.S. dollars using the exchange rate
at each balance sheet date for assets and liabilities and a weighted average exchange rate for each
period for revenues, expenses, gains and losses and cash flows. The impact of currency fluctuations
is recorded as a separate component of comprehensive income (loss) in the accompanying consolidated
statement of operations and comprehensive loss. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Management considers many factors in selecting
appropriate operational and financial accounting policies and controls, and in developing the
estimates and assumptions that are used in the preparation of these financial statements. These
factors include: the range of accounting policies permitted by U.S. generally accepted accounting
principles; managements understanding of the Companys business (both historical results and
expected future results); the extent to which operational controls exist that provide high degrees
of assurance that all desired information to assist in the estimation is available and reliable or
whether there is a greater uncertainty in the information that is available upon which to base the
estimate; expected rates of change, sensitivity and volatility associated with the assumptions used
in developing estimates; and whether historical trends are expected to be representative of future
trends. Management must apply significant judgment in this process. The estimation process often
times may yield a range of potentially reasonable estimates of the ultimate future outcomes and
management must select an amount that lies within that range of reasonable estimates, which may
result in the selection of estimates that could be viewed as conservative or aggressive by others,
based upon the quantity, quality and risks associated with the variability that might be expected
from the future outcome and the factors considered in developing the estimate. Actual results could
differ from those estimates. Reclassifications Certain reclassifications have been made to the consolidated financial statements for prior
years to conform to the presentation for the current year. In
addition, the Company has reclassified $0.5 million from current
restricted cash to investments and other assets on its
December 31, 2003 consolidated balance sheet. Recent Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin (ARB) No. 51 (FIN 46). This interpretation clarifies the application of ARB No. 51,
Consolidated Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. In December 2003, the FASB revised FIN 46 and extended the effective date for variable
interests created on or before January 31, 2003, to the first quarter of 2004. FIN 46 significantly
changes the criteria used in determining whether entities are consolidated within financial
statements. The Company expects that the adoption of FIN 46 will not have a material impact on its
results of operations, financial position, and cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149). This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). This
statement is effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. In addition, all provisions of this statement should
be applied prospectively. The provisions of this statement that relate to SFAS 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. The adoption of SFAS
No. 149 had no impact on the Companys financial condition, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). This statement establishes standards
for the classification and measurement of certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. These effective dates are not applicable to the provisions of
paragraphs 9 and 10 of 39




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##### Table of Contents



SFAS 150 as they apply to mandatorily redeemable noncontrolling interests,
as the FASB has delayed these provisions indefinitely. The adoption of SFAS 150 had no impact on
the Companys financial condition, results of operations or cash flows. 2. Restructuring Expenses and Asset Impairments Restructuring costs were $2.2 million in 2003, $3.0 million in 2002 and $6.6 million in 2001.
Restructuring costs in 2003 consisted of a $1.6 million increase in the accrual for carrying costs
of abandoned lease space (which were accrued as part of the Company restructuring plans in 2001 and
2002) and a $0.6 million charge related to the Companys sales and marketing reorganization plan
(the 2003 Restructuring Plan). The $1.6 million increase in the accrual reflected the Companys
decision to (i) cancel its lease on two of the three abandoned floors (the maximum cancelable under
the lease agreement), which resulted in a $1.9 million payment to the landlord in December and (ii)
an assessment of the estimated remaining carrying costs (i.e., estimated future lease expense, less
estimated sublease income over the remaining term of the leases) associated with the remaining
excess floor in Houston and other excess office space held by the Company. The cancellation of two
floors by the Company resulted in an upward adjustment to the Companys 2001 Restructuring Plan
accrual of $0.9 million, which was partially offset with a reduction to deferred rent expense
associated with the canceled space of approximately $0.4 million. The assessment of the carrying
costs with the remaining excess floor in Houston resulted in an upward adjustment to the 2002
Restructuring Plan of $1.1 million. Restructuring costs in 2002 consisted of a $1.9 million charge
for the Companys 2002 Restructuring Plan and a $1.1 million increase to the accrual for the 2001
Restructuring Plan. The $1.1 million adjustment was the result of an increase in the estimated
carrying costs for the Companys two floors abandoned as part of the 2001 Restructuring Plan. The estimated carrying costs of the remaining abandoned lease space were determined with the
assistance of the Companys leasing agent and were based on an assessment of applicable commercial
real estate markets. The principal reason for the change in estimate was the continued
deterioration of the sublease market for commercial real estate in Houston, Texas that occurred since the original determinations were
made. The change in estimates primarily related to: (i) a lowering of the expected sublease rate to
reflect the drop in rates (with minimal expected escalation over the remaining lease term), (ii)
lengthening the time to sublease the abandoned lease space either initially or after the existing
sublease expires and (iii) an increase in expense for inducements (e.g., rent abatement, tenant
improvement allowances, etc.) that potentially would be offered to prospective tenants of the
space. In January 2003, the Company approved a sales and marketing reorganization plan (the 2003
Restructuring Plan). The cost of this plan totaled approximately $0.6 million and consisted
primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in
workforce of approximately 4 percent), (ii) closing the Companys Netherlands sales office, and
(iii) reserves for leasehold abandonment. The 2003 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Restructuring
    
    Restructuring Charge
    
    Cash
    
    Remaining AccrualCharges
    
    Adjustments
    
    Expenditures
    
    12/31/2003Employee severance
    
    $
    442
    
    
    $
    (6
    )
    
    $
    (436
    )
    
    $
    Lease commitments
    
    
    27
    
    
    
    (14
    )
    
    
    (13
    )
    
    
    Office closure costs
    
    
    80
    
    
    
    
    
    
    
    (80
    )
    
    
    $
    549
    
    
    $
    (20
    )
    
    $
    (529
    )
    
    $
    
 All actions under the 2003 Restructuring Plan were completed by December 31, 2003. In July 2002, the Company approved a restructuring plan to improve operating efficiency and
improve sales and marketing productivity (the 2002 Restructuring Plan). The cost of this plan
totaled approximately $1.9 million and consisted primarily of (i) involuntary employee separation
for approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing
the Companys Boston development center and certain European sales offices, (iii) reserves for
leasehold abandonment, and (iv) various non-personnel related cuts. The costs of the plan were
based on the Companys best estimate utilizing information available at the time. 40




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##### Table of Contents



The 2002 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Remaining Accrual
    
    Restructuring Charge
    
    Cash
    
    Remaining Accrual12/31/2002
    
    Adjustments
    
    Expenditures
    
    12/31/2003Employee severance
    
    $
    238
    
    
    $
    
    
    
    $
    (238
    )
    
    $
    Lease commitments
    
    
    944
    
    
    
    1,089
    
    
    
    (495
    )
    
    
    1,538$
    1,182
    
    
    $
    1,089
    
    
    $
    (733
    )
    
    $
    1,538
 The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 is comprised of the
estimated carrying costs for the remaining excess space in Houston, Texas. As discussed in detail
above, the restructuring charge adjustments during 2003 were based on the Companys assessment of
the remaining carrying costs of the remaining excess lease space. Additional adjustments to this
balance could be required in future periods based on the economic outlook of the real estate market
in Houston, Texas. In connection with the 2002 Restructuring Plan, the Company also determined that certain
leasehold improvements related to the downsized or closed offices were impaired and recognized an
asset impairment of $0.3 million. In 2001, the Company completed a corporate reorganization and implemented a number of
cost-cutting measures to improve operating efficiency and to accelerate our return to profitability
(the 2001 Restructuring Plan). The cost of this plan totaled approximately $6.6 million and
consisted primarily of: (i) involuntary employee separation expenses for approximately 160
employees (a reduction in workforce of approximately 21 percent), (ii) downsizing or closing of the
Companys Boston and Arlington development centers and certain of the Companys European sales
offices, (iii) reserves for leasehold abandonment, and (iv) various non-personnel related costs.
The restructuring costs included a $1.2 million charge related to asset impairments of leasehold
improvements, equipment and other assets of the closed or downsized offices. The 2001 Restructuring Plan activity from January 1, 2003 to December 31, 2003 was as follows
(in thousands): Remaining
    
    Restructuring
    
    
    
    RemainingAccrual
    
    Charge
    
    Cash
    
    Accrual12/31/2002
    
    Adjustments
    
    Expenditures
    
    12/31/2003Lease commitments
    
    $
    1,384
    
    
    $
    941
    
    
    $
    (1,872
    )
    
    $
    453
 The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs until
the cancellation is effective in September of 2004. As discussed in detail above, the restructuring
charge adjustments during 2003 were the result of the lease cancellation for the Companys two
floors abandoned as part of the 2001 Restructuring Plan. The Company also recorded asset impairment charges totaling $7.0 million during 2001
consisting of: (i) a write off of a $5.0 million equity investment in a UK-based software
distribution and consulting firm and (ii) an asset impairment charge of $2.0 million consisting of
$1.5 million for software and computer equipment and a $0.5 million impairment of certain
intangible assets. The investment in the UK-based software firm was originally made during the
second quarter of 2000 and consisted of $5.0 million of redeemable preferred stock in the firm and
$1.0 million of intangible assets, primarily consisting of customer lists and non-compete
agreements which were being amortized over their useful lives ranging from one to three years. The
write-off of the $5.0 million equity investment, which is included in other income (expense) in the
Companys consolidated statement of operations and comprehensive loss, was based on an independent
appraisal of the current fair value of the investment and managements assessment of the value that
would be derived from the investment. The intangible assets had a net book value of $0.5 million at
the date of the impairment after the Company incurred $0.2 million and $0.3 million in amortization
expense for the years ending December 31, 2001 and 2000, respectively. The majority of the $1.5
million in software and computer equipment impairment related to the acquisition of a financial
management system that management had determined would not be installed or utilized in the future. 3. Restricted Cash At December 31, 2003 and 2002, the Company had $4.5 million of restricted cash, which is on
deposit with a financial institution as collateral for a $4.5 million irrevocable letter of credit
that was issued by that institution on the Companys behalf to meet the collateral requirement of
its corporate office lease. Under terms of the office lease, this letter of credit requirement is
reduced to $2.25 million in 2004 and expires in 2005. Except for the current portion of the
restricted cash, which is included in current assets, the restricted cash is included in
investments and other assets in the accompanying Consolidated Balance Sheets. 41




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4. Property and Equipment Property and equipment were comprised of the following: Estimated
    
    December 31,Useful Lives
    
    2003
    
    2002(In thousands)Computer equipment and software
    
    3 years
    
    $
    19,549
    
    
    $
    18,402Office furniture and other equipment
    
    3-10 years
    
    
    4,161
    
    
    
    3,497Autos
    
    5 years
    
    
    49
    
    
    
    49Leasehold improvements
    
    Lease terms
    
    
    5,061
    
    
    
    4,77728,820
    
    
    
    26,725Less  accumulated depreciation
    
    
    
    
    (22,256
    )
    
    
    (18,909
    )$
    6,564
    
    
    $
    7,816
 Depreciation expense totaled $3.6 million in 2003, $4.1 million in 2002, and $5.2 million in 2001. 5. Income Taxes The components of income (loss) before income taxes are summarized as follows (in thousands): Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Restated(Note 16)U.S. operations
    
    $
    (4,524
    )
    
    $
    (5,653
    )
    
    $
    (37,112
    )Foreign
    
    
    765
    
    
    
    782
    
    
    
    2,755Total loss before income taxes
    
    $
    (3,759
    )
    
    $
    (4,871
    )
    
    $
    (34,357
    )
 The provision (benefit) for income taxes consisted of the following: Year Ended December 31,2003
    
    2002
    
    2001(In thousands)CurrentU.S. operationsFederal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    50
    
    
    
    
    
    
    
    75Total current
    
    $
    50
    
    
    $
    
    
    
    $
    75DeferredU.S. operationsFederal
    
    $
    
    
    
    $
    19,466
    
    
    $
    (10,250
    )State
    
    
    
    
    
    
    96
    
    
    
    (36
    )Foreign
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    $
    
    
    
    $
    19,562
    
    
    $
    (10,286
    )Total
    
    $
    50
    
    
    $
    19,562
    
    
    $
    (10,211
    )
 The differences between income taxes computed at the federal statutory income tax rate and the
provision (benefit) for income taxes follow: Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Restated(Note 16)Income taxes computed at federal statutory income tax rate
    
    $
    (1,278
    )
    
    $
    (1,656
    )
    
    $
    (11,681
    )State income taxes, net of federal benefit
    
    
    (513
    )
    
    
    (112
    )
    
    
    (36
    )Foreign income taxes
    
    
    (212
    )
    
    
    (203
    )
    
    
    25Research and development credit
    
    
    (791
    )
    
    
    (275
    )
    
    
    (780
    )Foreign interest and dividends
    
    
    467
    
    
    
    
    
    
    
    Valuation allowance
    
    
    2,156
    
    
    
    21,705
    
    
    
    2,035Other
    
    
    221
    
    
    
    103
    
    
    
    226Total provision (benefit) for income taxes
    
    $
    50
    
    
    $
    19,562
    
    
    $
    (10,211
    )
 42




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##### Table of Contents



The components of deferred tax assets and liabilities at December 31, 2003 and 2002 are
comprised of the following: December 31,2003
    
    2002(In thousands)Restated(Note 16)Deferred tax assets:Net operating loss carryforwards
    
    $
    18,384
    
    
    $
    21,445Capitalized research and development costs
    
    
    5,539
    
    
    
    4,155Difference in basis for equity investment
    
    
    1,872
    
    
    
    1,872Research and development credit carryforward
    
    
    4,122
    
    
    
    3,331Allowance for doubtful accounts
    
    
    372
    
    
    
    439Accrued liabilities
    
    
    544
    
    
    
    886Differences in basis for long-lived assets
    
    
    1,705
    
    
    
    1,646Other
    
    
    956
    
    
    
    40933,494
    
    
    
    34,183Deferred tax liabilities
    
    
    
    
    
    
    Total
    
    
    33,494
    
    
    
    34,183Less: Valuation allowance
    
    
    (33,494
    )
    
    
    (34,183
    )Total deferred tax asset
    
    $
    
    
    
    $
    
 At December 31, 2003, the Company has a domestic NOL carryforward of approximately $51
million, of which $8 million expires in 2012, $39 million expires from 2018 through 2021 and $4
million expires in 2022. The Company also has foreign NOL carryforwards totaling approximately $3
million and a research and development credit carryforward of $4 million expiring between 2018 and
2023. During 2002, the Company made an assessment of realization of its deferred tax assets and
concluded that a full valuation allowance was appropriate, resulting
in a charge of $19.6 million.
As of December 31, 2003, the Company has a full valuation allowance of $33.5 million against its
deferred tax assets. As in its prior assessments, the Company considered its current and previous
performance and other relevant factors in determining the sufficiency of its valuation allowance.
Objective factors, such as current and previous operating losses, were given substantially more
weight than managements outlook for future profitability. Until such time as a consistent pattern
of sufficient profitability is established, no tax benefit will be recognized associated with the
Companys pre-tax accounting losses and a full income tax provision will not be provided on any
future pre-tax accounting income. United States income taxes have not been provided on the cumulative undistributed earnings,
which totaled approximately $2.6 million at December 31, 2003, of the Companys foreign
subsidiaries as it is the Companys intention to reinvest such earnings indefinitely. 6. Net Loss Per Share The Companys loss per share data is presented in accordance with SFAS No. 128, Earnings Per
Share. Basic earnings (loss) per share are computed using the weighted average number of shares
outstanding. Diluted earnings (loss) per share are computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to outstanding securities with a
right to purchase or convert into common stock. The following table sets forth the computation of
basic and diluted loss per share (in thousands, except per share amounts): 2003
    
    2002
    
    2001As Restated(Note 16)Numerator:Net loss  numerator for loss per share  basic and diluted
    
    $
    (3,809
    )
    
    $
    (24,433
    )
    
    $
    (24,146
    )Denominator:Denominator for basic loss per share  weighted-average shares
    
    
    46,714
    
    
    
    50,319
    
    
    
    51,438Effect of dilutive securities:Effect of stock options
    
    
    
    
    
    
    
    
    
    
    Total diluted shares
    
    
    46,714
    
    
    
    50,319
    
    
    
    51,438Loss per common share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.49
    )
    
    $
    (0.47
    )
 Options to purchase 9.6 million, 7.5 million and 8.2 million shares of common stock for the
years ended December 31, 2003, 2002 and 2001, respectively, were outstanding, but were not included
in the computation of diluted loss per share as their inclusion would have been anti-dilutive. 43




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##### Table of Contents



7. Shareholders Equity Common Stock In 1998, the Company issued 0.5 million shares of common stock to the two founders of Entevo
pursuant to the terms of restricted stock purchase agreements. The common stock was issued at $0.05
per share in consideration of full recourse promissory notes due in 2003 bearing interest at 6
percent from the founders. During 2000, one promissory note totaling $0.1 million was paid in full.
During 2003, the Company provided a full reserve on the remaining note which had an outstanding
balance of $0.1 million. In May of 2001, the Company, under terms of a restricted stock agreement, issued 0.4 million
shares of restricted common stock to an executive officer at $2.61 per share in exchange for a full
recourse promissory note of approximately $1.0 million. The restricted common stock vests over a
four-year period from the date of issuance. At December 31, 2001, the May 2001 agreements were
rescinded and a new restricted stock agreement and promissory note were entered into reflecting
issuance of 0.4 million shares to the executive at $1.97 per share. Additionally, the executives
employment agreement was amended to lower his guaranteed signing bonus in proportion to the
reduction in proceeds to the Company from the stock issuance. Shareholder Rights Plan On September 17, 2001 the Board of Directors adopted a Shareholder Rights Plan (the Rights
Plan). Pursuant to the Rights Plan, the Company distributed Preferred Stock Purchase Rights
(Rights) as a dividend at the rate of one Right for each share of the Companys common stock held
by stockholders of record as of September 21, 2001 (the Record Date). The Board of Directors also
authorized the issuance of Rights for each share of common stock issued after Record Date, until
the occurrence of certain specified events. The Rights Plan was adopted to provide protection to
stockholders in the event of an unsolicited attempt to acquire the Company. The Rights are not
exercisable until the earlier of (i) ten days following an announcement that a person or group has
acquired beneficial ownership of 15 percent of the Companys common stock or (ii) ten days
following the announcement of a tender offer which would result in a person or group obtaining
beneficial ownership of 15 percent or more of the Companys outstanding common stock, subject to
certain exceptions (the earlier of such dates being called the (Distribution Date)). The Rights
are initially exercisable for one one-hundredth of a share of the Companys preferred stock at a
price of $11 per share, subject to adjustment. However, if (i) after the Distribution Date the
Company is acquired in certain types of transactions, or (ii) any person or group, with certain
exceptions, acquires beneficial ownership of 15 percent of the Companys common stock, then holders
of Rights (other than the 15 percent holder) will be entitled to receive upon exercise of the
Right, common stock of the Company (or in the case of acquisition of the Company, common stock of
the acquirer) having a market value of two times the exercise price of the Right. The Company is
entitled to redeem the Rights, for $0.001 per Right, at the discretion of the Board of Directors,
until certain specified times. The Company may also require the exchange of Rights, at a rate of
one share of common stock, for each Right, under certain circumstances. The Company also has the
ability to amend the Rights, subject to certain limitations. Treasury Stock Transactions Under terms of a share repurchase program approved by the Board of Directors in 2002, the
Company purchased approximately 5.7 million shares of common stock during the year ended December
31, 2002, at an average price per share of $0.94. The Company retired these shares in November
2002. Under terms of a share repurchase program approved by the Board of Directors in 2000, the
Company purchased approximately 2.4 million and 0.6 million shares of common stock at an average
price per share of $3.14 and $8.38 during the years ended December 31, 2001 and 2000, respectively.
In February 2002, the Company retired all of the 3.0 million shares of common stock held in
treasury as of December 31, 2001. 44




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##### Table of Contents



8. Stock-Based Compensation Plans Incentive Stock Option Plan In 1996, the Companys Board of Directors adopted the Incentive Stock Option Plan under which
3.7 million shares of common stock have been reserved for issuance of options. As of December 31,
2003, options to purchase 0.5 million common shares were outstanding and 1.1 million options were
available for issuance under this plan. Summary data on exercisable options at December 31, 2003,
2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.6Weighted average exercise price on options exercisable
    
    $
    1.49
    
    
    $
    1.38
    
    
    $
    1.63
 Nonqualified Stock Option Plan In 1996, the Companys Board of Directors adopted the Nonqualified Stock Option Plan under
which 3.5 million shares of common stock have been reserved for issuance of options. As of December
31, 2003, 2002, and 2001, there were no options outstanding and 0.3 million options available for
issuance under this plan. 1997 Employee Stock Option Plan In 1997, the Companys Board of Directors adopted the 1997 Employee Stock Option Plan under
which 2.6 million shares of common stock have been reserved for issuance of options. As of December
31, 2003, options to purchase 0.4 million common shares were outstanding and 0.4 million options
were available for issuance under this plan. Summary data on exercisable options at December 31,
2003, 2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.4Weighted average exercise price on options exercisable
    
    $
    1.42
    
    
    $
    2.91
    
    
    $
    2.53
 1998 Omnibus Incentive Plan In 1998, the Companys Board of Directors adopted the 1998 Omnibus Incentive Plan under which
8.0 million shares of common stock have been reserved for issuance of options. As of December 31,
2003, options to purchase 3.8 million common shares were outstanding and 3.3 million options were
available for issuance under this plan. Summary data on exercisable options at December 31, 2003,
2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    1.3
    
    
    
    1.2
    
    
    
    1.5Weighted average exercise price on options exercisable
    
    $
    6.72
    
    
    $
    7.16
    
    
    $
    8.13
 Non-Employee Director Plan In 1998, the Companys Board of Directors adopted the Non-Employee Director Plan under which
0.5 million shares of common stock have been reserved for issuance of options. As of December 31,
2003, options to purchase 0.4 million common shares were outstanding and 0.1 million options were
available for issuance under this plan. Summary data on exercisable options at December 31, 2003,
2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Weighted average exercise price on options exercisable
    
    $
    1.47
    
    
    $
    1.73
    
    
    $
    1.92
 During 2003, the Companys Board of Directors approved an increase of 0.5 million common
shares available for issuance under the plan. This increase is subject to shareholder approval at
the Companys 2004 Annual Meeting of Shareholders. In connection with the authorization of
additional shares for the plan, the Board of Directors approved the issuance of options to purchase
0.1 million common shares. These issuances, which are contingent upon shareholder approval, were
approved by the Board of Directors at the fair market value at the time of approval. The Company
will recognize compensation expense over the vesting period of these options for the difference
between the exercise price and the value of the Companys common stock on the date of shareholder
approval. 45




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##### Table of Contents



2000 Indian Stock Option Plan In 2000, the Companys Board of Directors adopted the 2000 Indian Stock Option Plan under
which 0.5 million shares of common stock have been reserved for issuance of options. As of December
31, 2003, options to purchase 0.4 million common shares were outstanding and 0.1 million options
were available for issuance under this plan. Summary data on exercisable options at December 31,
2003, 2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Weighted average exercise price on options exercisable
    
    $
    4.57
    
    
    $
    5.70
    
    
    $
    6.63
 2000 Employee Incentive Plan In 2000, the Companys Board of Directors adopted the BindView 2000 Employee Incentive Plan
under which 4.4 million shares of common stock have been reserved for issuance of options. As of
December 31, 2003, options to purchase 4.1 million common shares were outstanding and 0.2 million
options were available for issuance under this plan. Summary data on exercisable options at
December 31, 2003, 2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    1.6
    
    
    
    0.8
    
    
    
    0.4Weighted average exercise price on options exercisable
    
    $
    2.46
    
    
    $
    3.01
    
    
    $
    4.74
 International Employee Stock Option Plan and Section 102 Share Option Plan In 1998, Netects Board of Directors adopted the International Employee Stock Option and
Section 102 Share Option Plans under which 0.4 million shares of common stock have been reserved
for issuance of options. As of December 31, 2003, options to purchase 0.1 million common shares
were outstanding. No
options are available for issuance under the plans as these plans were made inactive during
2003. In connection with the merger of Netect and the Company, these options were exchanged for
options to purchase the Companys common stock using the exchange ratio, which is reflected in the
amounts listed herein. Summary data on exercisable options at December 31, 2003, 2002 and 2001,
follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Weighted average exercise price on options exercisable
    
    $
    7.13
    
    
    $
    4.59
    
    
    $
    3.50
 1997 Entevo Stock Plan and 1998 Indian Stock Option Plan In 1997, Entevos Board of Directors adopted the 1997 Entevo Stock Plan and in 1998 the 1998
Indian Stock Option Plan under which 0.4 million shares of common stock have been reserved for
issuance of options. As of December 31, 2003, options to purchase 0.1 million common shares were
outstanding and 0.3 million options were available for issuance under this plan. Certain local
regulatory restrictions apply to the Indian Stock Option Plan. In connection with the merger of
Entevo into the Company, these options were exchanged for options to purchase the Companys common
stock using the exchange ratio, which is reflected in the amounts listed herein. Summary data on
exercisable options at December 31, 2003, 2002 and 2001, follow: 2003
    
    2002
    
    2001Options exercisable (in millions)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Weighted average exercise price on options exercisable
    
    $
    1.75
    
    
    $
    1.65
    
    
    $
    0.94
 All Stock-Based Compensation Plans Options granted under the Incentive Stock Option Plan and Nonqualified Stock Option Plan
generally vest 20 percent per year over five years. Options granted under the International
Employee Stock Option Plan, the Section 102 Share Option Plan, 1997 Entevo Stock Plan, 1998 Indian
Stock Option Plan, 2000 Indian Stock Option Plan, Non-Employee Director Plan, and 2000 Employee
Incentive Plan generally vest 25 percent per year over four years. Options granted under the 1997
Employee Stock Option Plan and 1998 Omnibus Incentive Plan vest at varying rates. Options expire
between one year and ten years from the date of grant. Except as noted below, stock options have
been granted at the fair market value of the Companys stock at the date of grant. The following table summarizes combined activity under the stock option plans for each of the
three years ended December 31, 2003: 46




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##### Table of Contents



WeightedAveragePrice PerOptions
    
    Price Per Share
    
    Share(In thousands, except per share amounts)Options outstanding, December 31, 2000
    
    
    11,956
    
    
    $
    0.38-$22.50
    
    
    $
    7.22Options granted
    
    
    6,057
    
    
    $
    1.00-$8.91
    
    
    $
    3.13Options lapsed or canceled
    
    
    (8,328
    )
    
    $
    0.39-$13.81
    
    
    $
    7.27Options exercised
    
    
    (1,486
    )
    
    $
    0.38-$10.06
    
    
    $
    1.01Options outstanding, December 31, 2001
    
    
    8,199
    
    
    $
    0.38-$13.81
    
    
    $
    5.28Options granted
    
    
    3,149
    
    
    $
    0.79-$2.37
    
    
    $
    1.41Options lapsed or canceled
    
    
    (3,698
    )
    
    $
    0.41-$13.81
    
    
    $
    6.34Options exercised
    
    
    (107
    )
    
    $
    0.38-$2.07
    
    
    $
    0.61Options outstanding, December 31, 2002
    
    
    7,543
    
    
    $
    0.38-$13.75
    
    
    $
    3.20Options granted
    
    
    3,478
    
    
    $
    1.10-$3.06
    
    
    $
    1.34Options lapsed or canceled
    
    
    (1,300
    )
    
    $
    0.41-$12.38
    
    
    $
    4.73Options exercised
    
    
    (280
    )
    
    $
    0.46-$2.90
    
    
    $
    1.39Reinstated exchange plan options
    
    
    198
    
    
    $
    3.19-$13.13
    
    
    $
    10.07Options outstanding, December 31, 2003
    
    
    9,639
    
    
    $
    0.38-$22.50
    
    
    $
    2.54
 The following table summarizes outstanding and exercisable options at various price ranges at
December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageRemaining
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Life in Years
    
    Price
    
    Options
    
    Price(Options in thousands)under $1.00
    
    
    743
    
    
    
    5.6
    
    
    $
    0.78
    
    
    
    552
    
    
    $
    0.72$1.01-$1.50
    
    
    3,798
    
    
    
    8.5
    
    
    $
    1.17
    
    
    
    663
    
    
    $
    1.34$1.51-$2.00
    
    
    1,645
    
    
    
    7.9
    
    
    $
    1.57
    
    
    
    689
    
    
    $
    1.62$2.01-$5.00
    
    
    2,445
    
    
    
    7.4
    
    
    $
    2.90
    
    
    
    1,356
    
    
    $
    3.21$5.01-$10.00
    
    
    770
    
    
    
    6.0
    
    
    $
    8.92
    
    
    
    655
    
    
    $
    8.98Over $10.00
    
    
    238
    
    
    
    5.6
    
    
    $
    11.80
    
    
    
    210
    
    
    $
    11.769,639
    
    
    
    7.6
    
    
    $
    2.54
    
    
    
    4,125
    
    
    $
    3.66
 Included in the Companys 2003 stock option activity are grants that were issued with an
exercise price that was less than the market price of the Companys common stock at the date of
grant under an option exchange program completed during 2003. The Company issued 0.3 million
options at an exercise price of $1.10 per share related to these grants. The weighted average fair
value of these shares at the date of grant was $1.86. Option Exchange Program In July 2003, the Company completed a voluntary exchange program whereby employees could
surrender options to purchase the Companys common stock having an option price of $3.00 or higher
in exchange for a lesser number of new options at a price equal to the market price on the date of
issuance. The program was initiated in November 2002 and during 2003, extended in a manner that
enabled participants who previously surrendered their options with the opportunity to rescind their
participation. Under this program, the participants in the program surrendered 0.7 million options
(which were cancelled by the Company in 2002) and in July 2003, the Company issued new options to
purchase 0.3 million shares of common stock. As part of its 2003 annual option awards to employees, the Company issued to these
participants in 2003 options to purchase 0.2 million common shares. For accounting purposes, these
options are variable and during 2003, the Company recognized compensation expense of approximately
$0.3 million. At December 31, 2003, the Company had deferred compensation expense related to these
options of approximately $0.5 million, which will be amortized over the remaining vesting period of
the options. Related future stock compensation expense will increase or decrease dependent upon the
value of the Companys stock until the related option is exercised or expires. As part of its annual option awards to employees, the Company also issued options to purchase
approximately 0.3 million shares of the Companys common stock to employees who had exercised their
rescission right and opted out of the exchange program referred to above. These options were issued
in July 2003 at the same option price for employees who received their annual option award earlier
in the year. Since the exercise price of these options was lower than the market price of the
Companys stock at the date of 47




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##### Table of Contents



issuance, the Company will recognize compensation expense of
approximately $0.3 million over the four year vesting term for these fixed options, of which $0.1
million was recognized in the year ended December 31, 2003. Employee Stock Purchase Plan During 1999, the Companys Board of Directors adopted the 1999 Employee Stock Purchase Plan
whereby eligible employees may purchase shares of the Companys common stock at a price equal to 85
percent of the lower of the closing market price on the first or last trading day of a six-month
period. The Board of Directors originally authorized 1.0 million shares for issuance of common
stock under this plan. During 2003, the Board of Directors authorized an additional 1.0 million
shares for issuance and received shareholder approval during the Companys 2003 Annual Meeting of
Shareholders. Employees purchased 0.5 million, 0.5 million and 0.2 million shares during 2003, 2002
and 2001, respectively. Aggregate proceeds to the Company totaled $0.5 million, $0.5 million and
$0.6 million in 2003, 2002 and 2001, respectively. At December 31, 2003, 0.7 million shares remain
available for issuance under the plan. 9. Commitments and Contingencies Guarantees FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others (FIN 45) requires certain guarantees
to be recorded at fair value and requires a guarantor to make
disclosures, even when the likelihood of making any payments under the
guarantee is remote. For those guarantees and indemnifications that
do not fall within initial recognition and measurement requirements
for FIN 45, the Company must continue to monitor the conditions
that are subject to the guarantees and indemnifications, as required
under existing generally accepted accounting principles, to
identify if a loss has been incurred. If the Company determines
that is probable that a loss has been incurred, any such estimable
loss would be recognized. The initial recognition and measurement
requirements do not apply to the Companys product warranties or
to the provisions contained in the majority of the Companys
software license agreements that indemnify licensees of the
Companys software from damages and costs resulting from claims
alleging that the Companys software infringes the intellectual
property rights of a third party. The Company has historically
received only a limited number of requests for payment under these
provisions and has not been required to make material payments
pursuant to these provisions. The Company has not identified any
losses that are probable under these provisions and, accordingly, the
Company has not recorded a liability related to these
indemnification provisions. Lease Commitments The Company conducts its operations in leased facilities under operating leases expiring at
various dates through 2011. Total lease expense amounted to approximately $3.2 million in 2003,
$4.1 million in 2002, and $4.4 million in 2001. The minimum rental commitments under operating leases at December 31, 2003 are: $5.0 million
in 2004, $3.6 million in 2005, $3.5 million in 2006, $3.5 million in 2007, $3.5 million in 2008 and
$6.0 million in 2009 and beyond. A portion of the Companys leased facilities under operating
leases have been sub-leased. Anticipated cash receipts from these executed sub-lease arrangements
are: $0.6 million in 2004. Under terms of the Companys lease agreement covering its corporate office, the Company posted
a $4.5 million irrevocable letter of credit to the lessor. The letter of credit requirement drops
to $1.75 million in 2004 and expires in 2005. Employment Agreements Certain of the Companys executives are covered by employment agreements covering, among other
things, base compensation, incentive-bonus determinations and payments in the event of termination
or a change in control of the Company. Legal Matters From time to time the Company is a plaintiff or defendant in various lawsuits and claims
arising in the normal course of business. There are no such pending or threatened lawsuits or
claims whose outcomes, individually or in the aggregate, are likely to have a material adverse
effect on the balance sheet, results of operations or cash flows of the Company. 10. Employee Benefit Plans Effective January 1, 1995, the Company adopted a 401(k) plan which is available to all
full-time employees. Employees contribute to the plan through payroll deductions. The Company
matches 50 percent of the participants contribution up to a maximum of 6 percent. Additionally,
the Company may make a discretionary contribution as determined by the Board of Directors. Total
Company contributions were $0.7 million in 2003, $0.3 million in 2002 and $1.1 million in 2001. 11. Fair Value of Financial Instruments The Company has determined, based on available market information and appropriate valuation
methodologies, that the fair value of its financial instruments approximates carrying value. The
carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued liabilities approximate their carrying value due to the short-term maturity of
the instruments. 48




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12. Concentrations of Credit Risk Financial instruments that subject the Company to concentrations of credit risk consist
primarily of cash equivalents, short-term and long-term investments, and accounts receivable. The
Company maintains its cash equivalent balance in money market funds invested in U.S. Treasury
Certificates or in U.S. dollar-linked instruments with major banks. These funds are not FDIC
insured. The Company has not experienced any losses in such funds and believes it is not exposed to
any significant credit risk on cash equivalents. The Companys investment policies restrict its
investments to low risk, highly liquid securities. The Company also performs periodic evaluations
of its investment policies to reduce its investment credit risk. Management believes that concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Companys customer base and their
dispersion across many different industries and geographic regions. No single customer accounted
for more than 10 percent of revenue in 2003, 2002, or 2001. The Company performs ongoing credit
evaluations of its customers to reduce credit risk. As previously disclosed, during the second quarter of 2001, the Company recorded a provision
for bad debt expense of $2.8 million. This provision was the result of an assessment made on the
adequacy of the allowance
for bad debts by the Company after hiring new financial and accounting management (new Chief
Financial Officer and new Corporate Controller). Subsequent to the end of 2000 and prior to the
hiring of new management, (during which time the Company did not have a CFO), the Company
experienced an increase in its past due accounts and a deterioration in its accounts receivable
aging and days sales outstanding, which was due, in part, to less-than-desired focus on receivable
collections, the economic downturn and the reduction and other changes in sales personnel,
particularly in the Companys foreign operations. The changes in sales personnel, particularly with
respect to foreign operations, related to the Companys focus on reducing its net operating loss by
eliminating or downsizing underperforming operations. The changes in sales personnel impaired the
Companys collections efforts of certain of the significant past due accounts. New management conducted a specific account review of all significant past due accounts, a
review of the Companys business processes and accounting policies, and an evaluation of the
adequacy of the estimates related to the Companys accounting reserves. The Company evaluated the
impact on outstanding receivables and the increased risk of collection resulting from changes in
the sales force deployment, which consisted primarily of reductions in headcount in underperforming
international territories and the elimination of specific US sales personnel. As a result of the
reductions in international territories and the reduced presence in such locations, the Company
perceived increased risk related to the collection of certain foreign outstanding receivables and
provided for such receivables accordingly. The $2.8 million provision consisted of approximately
$2.0 million related to foreign accounts receivable and approximately $0.8 million related to
domestic accounts receivable. The Company implemented enhanced collection processes and did not
experience recurring collectibility issues in 2002 or 2003. Approximately 13 percent, 11 percent, and 13 percent of the Companys sales were made to
customers in foreign countries, primarily to customers in Europe, during 2003, 2002, and 2001,
respectively. 13. Segment Data The Company believes that since its inception that it has operated in only one reportable
segment as defined by SFAS 131. The Company manages its business primarily on an overall products
and services basis. Revenues related to operations in the United States totaled $59.2 million,
$59.8 million, and $62.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Revenues related to customers located in foreign countries, primarily in Europe,
totaled $8.3 million, $7.2 million, and $8.9 million for the years ended December 31, 2003, 2002,
and 2001, respectively. Revenues related to bv-Control totaled $54.7 million, $55.2 million, and
$61.2 million for the years ended December 31, 2003, 2002, and 2001, respectively. Revenues related
to bv-Admin totaled $8.8 million, $8.6 million, and $7.4 million for the years ended December 31,
2003, 2002, and 2001, respectively. Revenues related to bv-Policy Center, which was introduced in
2002, were $0.3 million in 2003 and less than $0.1 million in 2002. Because resources used to
provide services are not tracked and segregated by product line, the costs of revenues are not
tracked and segregated by revenue stream and consequently the Company does not measure gross profit
by product line. Long-lived assets within the United States totaled $5.9 million and $6.9 million
at December 31, 2003 and 2002, respectively. Long-lived assets in foreign countries totaled $0.7
million and $0.9 million at December 31, 2003 and 2002, respectively. 49




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##### Table of Contents



14. Other Income (Expense) Other income (expense) for the Company is primarily comprised of income on the Companys cash,
cash equivalents and investments. Other income (expense) in 2002 includes a receipt of $1.3 million
for settlement of a business interruption claim during 2002 related to flooding that occurred in
June 2001. Other income (expense) in 2001 includes a write-off of a $5.0 million equity investment
in a UK-based software distribution and consulting firm. 15. Quarterly Financial Data (Unaudited) Quarterly financial information for 2003 and 2002 is summarized as follows: March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    Adjustments
    
    December 31,As Reported
    
    As Reported
    
    As Reported
    
    As Reported
    
    
    
    
    
    
    As Restated(Note 16)2003:Revenues
    
    $
    13,047
    
    
    $
    15,315
    
    
    $
    15,551
    
    
    $
    23,932
    
    
    $
    (173
    )
    
    $
    23,759Gross profit
    
    
    11,499
    
    
    
    13,515
    
    
    
    13,458
    
    
    
    21,892
    
    
    
    (173
    )
    
    
    21,719Net income (loss)
    
    
    (2,701
    )
    
    
    (2,143
    )
    
    
    (1,146
    )
    
    
    2,354
    
    
    
    (173
    )
    
    
    2,181Basic net income (loss) per share
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    0.05
    
    
    
    
    
    
    
    0.05Diluted net income (loss) per share
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    0.05
    
    
    
    (0.01
    )
    
    
    0.042002:Revenues
    
    $
    16,805
    
    
    $
    15,003
    
    
    $
    15,944
    
    
    $
    19,226
    
    
    
    
    
    
    
     19,226Gross profit
    
    
    15,079
    
    
    
    13,552
    
    
    
    14,368
    
    
    
    17,697
    
    
    
    
    
    
    
    17,697Net income (loss)
    
    
    (424
    )
    
    
    (22,466
    )
    
    
    (2,941
    )
    
    
    1,398
    
    
    
    
    
    
    
    1,398Basic and diluted net income
(loss) per share
    
    
    (0.01
    )
    
    
    (0.43
    )
    
    
    (0.06
    )
    
    
    0.03
    
    
    
    
    
    
    
    0.03
 16. Restatement of Financials In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin America resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004 with the
investigation substantially complete, the Audit Committee concluded that the Company had
inappropriately recognized approximately $1.0 million in revenues, involving six transactions in
Latin America. The Companys reported revenues were
overstated by $173,000 in the
fourth quarter of 2003; $131,000 in the first quarter of
2004; and $698,000 in the second quarter
of 2004. As a result of the overstatement of revenues, the Audit
Committee concluded that the Company would restate its financial
statements for the year ended December 31, 2003 and the first
two quarters of 2004 and also concluded that previously issued financial statements
for those periods
should no longer be relied upon. These conclusions were set forth in the Form 8-K dated December
6, 2004. The Audit Committee investigation was completed on December 8, 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product return,
which certain Company personnel in Latin America knew to have occurred within the contractually
allowable return period, but which they did not report to the Companys accounting department. If
this return had been reported in a timely manner to the Companys accounting department, revenues
from this transaction would not have been recognized in the fourth quarter of 2003. Certain
personnel in Latin America who knew of the product return also made inaccurate representations as
to the status of the receivable in response to the on-going collection efforts of the Companys
accounting department. For
the three months ended December 31, 2003, total revenue
decreased $173,000 to $23.8 million, gross profit decreased
$173,000 to $21.7 million and net income decreased $173,000 to
$2.2 million, each as compared to the amounts previously reported by the Company on
its Form 10-K on February 10, 2004. There was no change to basic earnings per share and a $0.01
per share reduction to diluted earnings per share as a result of the adjustment. For
the year ended December 31, 2003, total revenue decreased to
$173,000 to $67.7 million,
gross profit decreased $173,000 to $60.2 million and net loss increased $173,000 to
$3.8 million, each as compared to the amounts previously reported by the Company on its Form
10-K on February 10, 2004. There was no change to basic or diluted earnings per share as a result
of the adjustment. Consequently,
the consolidated financial statements for the year ended December 31, 2003 are
restated in this Annual Report on Form 10-K/A, Amendment No. 1. The following table summarizes the impact of these adjustments on the Companys previously reported
annual results filed on Form 10-K (in thousands): 50




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##### Table of Contents



Consolidated Balance Sheet: As of December 31, 2003As Reported
    
    Adjustments
    
    As AdjustedASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,449
    
    
    $
    
    
    
    $
    35,449Cash  restricted
    
    
    2,250
    
    
    
    
    
    
    
    2,250Accounts receivable
    
    
    14,337
    
    
    
    (271
    )
    
    
    14,066Other
    
    
    2,180
    
    
    
    
    
    
    
    2,180Total current assets
    
    
    54,216
    
    
    
    (271
    )
    
    
    53,945Property and equipment, net
    
    
    6,564
    
    
    
    
    
    
    
    6,564Investments and other assets
    
    
    2,498
    
    
    
    
    
    
    
    2,498Total assets
    
    $
    63,278
    
    
    $
    (271
    )
    
    $
    63,007LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,066
    
    
    $
    
    
    
    $
    2,066Accrued liabilities
    
    
    4,879
    
    
    
    
    
    
    
    4,879Accrued compensation
    
    
    5,275
    
    
    
    
    
    
    
    5,275Deferred revenue
    
    
    13,351
    
    
    
    (98
    )
    
    
    13,253Total current liabilities
    
    
    25,571
    
    
    
    (98
    )
    
    
    25,473Deferred revenue
    
    
    1,477
    
    
    
    
    
    
    
    1,477Other
    
    
    2,087
    
    
    
    
    
    
    
    2,087Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1
    
    
    
    
    
    
    
    1Additional paid-in capital
    
    
    105,176
    
    
    
    
    
    
    
    105,176Note receivable from shareholder
    
    
    (392
    )
    
    
    
    
    
    
    (392
    )Accumulated deficit
    
    
    (72,034
    )
    
    
    (173
    )
    
    
    (72,207
    )Accumulated other comprehensive income
    
    
    1,392
    
    
    
    
    
    
    
    1,392Total shareholders equity
    
    
    34,143
    
    
    
    (173
    )
    
    
    33,970Total liabilities and shareholders equity
    
    $
    63,278
    
    
    $
    (271
    )
    
    $
    63,007
 Statement of Operations and Comprehensive Loss: Year Ended December 31, 2003As Reported
    
    Adjustments
    
    As AdjustedRevenues:Licenses
    
    $
    35,530
    
    
    $
    (173
    )
    
    $
    35,357Services
    
    
    32,315
    
    
    
    
    
    
    
    32,31567,845
    
    
    
    (173
    )
    
    
    67,672Cost of revenues:Cost of licenses
    
    
    527
    
    
    
    
    
    
    
    527Cost of services
    
    
    6,954
    
    
    
    
    
    
    
    6,9547,481
    
    
    
    
    
    
    
    7,481Gross profit
    
    
    60,364
    
    
    
    (173
    )
    
    
    60,191Operating costs and expenses:Sales and marketing
    
    
    36,040
    
    
    
    
    
    
    
    36,040Research and development
    
    
    18,423
    
    
    
    
    
    
    
    18,423General and administrative
    
    
    7,750
    
    
    
    
    
    
    
    7,750Restructuring
    
    
    2,184
    
    
    
    
    
    
    
    2,184Asset impairment
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (4,033
    )
    
    
    (173
    )
    
    
    (4,206
    )Other income, net
    
    
    447
    
    
    
    
    
    
    
    447Loss before income taxes
    
    
    (3,586
    )
    
    
    (173
    )
    
    
    (3,759
    )Provision for income taxes
    
    
    50
    
    
    
    
    
    
    
    50Net loss
    
    $
    (3,636
    )
    
    $
    (173
    )
    
    $
    (3,809
    )Loss per common share  basic and diluted
    
    $
    (0.08
    )
    
    $
    
    
    
    $
    (0.08
    )Number of shares used to calculate per share
amounts, basic and diluted
    
    
    46,714
    
    
    
    
    
    
    
    46,714Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (3,636
    )
    
    $
    (173
    )
    
    $
    (3,809
    )Unrealized gain from foreign currency translation
    
    
    1,009
    
    
    
    
    
    
    
    1,009Comprehensive loss
    
    $
    (2,627
    )
    
    $
    (173
    )
    
    $
    (2,800
    )
 51




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Consolidated Cash Flows: None of the adjustments described above has any impact on cash balances for any period. However,
our consolidated statements of cash flows have been restated to reflect the restated net loss and
the effect revisions to certain balance sheet accounts has on changes in operating assets and
liabilities. Year Ended December 31, 2003As Reported
    
    Adjustments
    
    As AdjustedCash flows from operating activities:Net loss
    
    $
    (3,636
    )
    
    $
    (173
    )
    
    $
    (3,809
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    3,574
    
    
    
    
    
    
    
    3,574Stock compensation expense
    
    
    357
    
    
    
    
    
    
    
    357Provision for reserve on note receivable and other
    
    
    144
    
    
    
    
    
    
    
    144Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,937
    )
    
    
    271
    
    
    
    (2,666
    )Other assets
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Accounts payable
    
    
    18
    
    
    
    
    
    
    
    18Accrued liabilities
    
    
    732
    
    
    
    
    
    
    
    732Deferred revenues
    
    
    81
    
    
    
    (98
    )
    
    
    (17
    )Net cash used in operating activities
    
    
    (1,729
    )
    
    
    
    
    
    
    (1,729
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,307
    )
    
    
    
    
    
    
    (2,307
    )Net cash used in investing activities
    
    
    (2,307
    )
    
    
    
    
    
    
    (2,307
    )Cash flows from financing activities:Net proceeds from sale of common stock
    
    
    844
    
    
    
    
    
    
    
    844Net cash provided by used in financing activities
    
    
    844
    
    
    
    
    
    
    
    844Effect of exchange rate changes on cash
    
    
    881
    
    
    
    
    
    
    
    881Net decrease in cash and cash equivalents
    
    
    (2,311
    )
    
    
    
    
    
    
    (2,311
    )Cash and cash equivalents at beginning of year
    
    
    37,760
    
    
    
    
    
    
    
    37,760Cash and cash equivalents at end of year
    
    $
    35,449
    
    
    $
    
    
    
    $
    35,449
 Pro Forma Stock-Based Compensation: Year Ended December 31,
2003As Reported
    
    Adjustments
    
    As AdjustedNet loss as reported
    
    $
    (3,636
    )
    
    $
    (173
    )
    
    $
    (3,809
    )Add: Stock-based employee compensation expense included in reported net loss
    
    
    357
    
    
    
    
    
    
    
    357Deduct: Total stock-based employee compensation expense determined under fair value
method for all awards
    
    
    (6,343
    )
    
    
    
    
    
    
    (6,343
    )Pro forma net loss
    
    $
    (9,622
    )
    
    $
    (173
    )
    
    $
    (9,795
    )Loss per common share (basic and diluted): As reported
    
    $
    (0.08
    )
    
    $
    
    
    
    $
    (0.08
    ) Pro forma
    
    $
    (0.21
    )
    
    $
    
    
    
    $
    (0.21
    )
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS Additions-ChargesBalance at
    
    to
    
    Charges
    
    Balance atJanuary 1
    
    Expense
    
    Against Reserve
    
    December 31Accounts receivable  allowance for doubtful accounts2001
    
    $
    804
    
    
    $
    3,474
    
    
    $
    3,181
    
    
    $
    1,0972002
    
    
    1,097
    
    
    
    
    
    
    
    (140
    )
    
    
    1,2372003
    
    
    1,237
    
    
    
    
    
    
    
    197
    
    
    
    1,040Deferred tax asset valuation allowance2001
    
    $
    10,443
    
    
    $
    2,035
    
    
    $
    
    
    
    $
    12,4782002
    
    
    12,478
    
    
    
    21,705
    
    
    
    
    
    
    
    34,1832003
    
    
    34,183
    
    
    
    
    
    
    
    689
    
    
    
    33,494
 52




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. BINDVIEW DEVELOPMENT CORPORATION /s/ ERIC J. PULASKI
Eric J. PulaskiChairman of the Board and Chief Executive Officer
(Principal Executive Officer) Date: December 20, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated below. Signature
    
    Title
    
    Date/s/        ERIC J. PULASKI

Eric J. Pulaski
    
    Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
    
    December 20, 2004/s/   EDWARD L. PIERCE

Edward L. Pierce
    
    Director, Executive Vice
President and Chief Financial
Officer (Principal Financial
Officer)
    
    December 20, 2004/s/   KEVIN P. COHN

Kevin P. Cohn
    
    Vice President, Chief Accounting
Officer and Corporate Controller
(Principal Accounting Officer)
    
    December 20, 2004/s/   PETER T. DAMERIS

Peter T. Dameris
    
    Director
    
    December 20, 2004/s/   RICHARD A. HOSLEY II

Richard A. Hosley II
    
    Director
    
    December 20, 2004/s/   ROBERT D. REPASS

Robert D. Repass
    
    Director
    
    December 20, 2004/s/   ARMAND SHAPIRO

Armand Shapiro
    
    Director
    
    December 20, 2004
 Exhibits
designated by the symbol * are filed with this Annual Report
on Form 10-K/A, Amendment No. 1.
All exhibits not so designated are incorporated by reference to a prior filing as indicated. Exhibits designated by the symbol  are management contracts or compensatory plans or
arrangements that are required to be filed with this report pursuant to this Item 15. We undertake to furnish to any stockholder so requesting a copy of any of the following
exhibits upon payment to us of the reasonable costs incurred by us in furnishing any such exhibit. 53




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##### Table of Contents



ExhibitNumber
        
        
        
        Description2.1
        
        
        
        Agreement of Merger dated as of January 26,
          2000, by and among BindView, Bravo Acquisition Corporation, Entevo Corporation
          and the Representing Stockholders identified therein (incorporated by
          reference to Exhibit 2.1 to BindViews Current Report on form
          8-K (File No. 000-24677), dated February 9, 2000).3.1
        
        
        
        Amended and Restated Articles of Incorporation
          of BindView (incorporated by reference to Exhibit 3.1 to the Registration
          Statement on Form S-1 of BindView (Reg. No. 333-52883), filed
          with the Commission on May 15, 1998 (the Form S-1)).3.2
        
        
        
        Bylaws of BindView Development Corporation,
          as amended May 23, 2002 (Incorporated by reference to Exhibit 3.3
          to BindViews Quarterly Report on Form 10-Q for the quarter
          ended June 30, 2002)4.1
        
        
        
        Reference is hereby made to Exhibit 3.1
          (incorporated by reference to Exhibit 4.1 to the Form S-1) and
          Exhibit 3.2 (incorporated by reference to Exhibit 3.3 to BindViews
          Quarterly Report on Form 10-Q for the quarter ended June 30,
          2002)4.2
        
        
        
        Rights Agreement dated September 17,
          2001 between BindView and Mellon Investor Services LLC (incorporated
          by reference to Exhibit 4.1 to BindViews Form 8-K filed
          on September 20, 2001 (the 9/20/2001 8-K).4.3
        
        
        
        Resolution Establishing a Series of Preferred
          Stock dated September 17, 2001 (incorporated by reference to Exhibit 4.2
          to the 9/20/2001 8-K).4.4
        
        
        
        Form of Right Certificate (incorporated
          by reference to Exhibit 4.3 to the 9/20/2001 8-K).4.5
        
        
        
        Summary of Rights to Purchase Preferred
          Shares (incorporated by reference to Exhibit 4.4 to the 9/20/2001
          8-K).10.1
        
        
        
        Incentive Stock Option Plan (incorporated
          by reference to Exhibit 10.1 to the Form S-1).10.2
        
        
        
        Stock Option Plan (incorporated by reference
          to Exhibit 10.2 to the Form S-1).10.3
        
        
        
        1997 Incentive Plan (incorporated by reference
          to Exhibit 10.3 to the Form S-1).10.4
        
        
        
        Omnibus Incentive Plan, as amended (incorporated
          by reference to Exhibit 10.2 to BindViews Annual Report on
          Form 10-K for the year ended December 31, 1999 (the 1999
          10-K).10.5
        
        
        
        Agreement to Sublease dated June 25,
          1998 between BindView and Halliburton Energy Services, Inc.10.6
        
        
        
        Lease Agreement dated June 20, 1995
          between BindView and School Employees Holding Corp., including all amendments
          thereto (incorporated by reference to Exhibit 10.7 to the Form S-1).10.7
        
        
        
        Amended and Restated Employment Agreement,
          dated June 24, 1999, between BindView and Marc R. Caminetsky (incorporated
          by reference to BindViews Quarterly Report On Form 10-Q (File
          No. 000-24677) for the quarter ended June 30, 1999 (the 6/30/99
          10-Q).10.8
        
        
        
        Amended and Restated Employment Agreement,
          dated June 24, 1999, between BindView and Paul J. Cormier (incorporated
          by reference to Exhibit 10.2 to the 6/30/99 10-Q).10.9
        
        
        
        Executive Employment Agreement dated October 2,
          2000 between BindView and Kevin M. Weiss (Incorporated by reference
          to Exhibit 10.10 to BindViews Annual Report on Form 10-K
          for the year ended December 31, 2000 (the 2000 10-K)10.10
        
        
        
        Employee Agreement dated September 26,
          1996 between the Registrant and David E. Pulaski (incorporated by reference
          to Exhibit 10.14 to the Form S-1).10.11
        
        
        
        Form of Indemnification Agreement (incorporated
          by reference to Exhibit 10.16 to the Form S-1).
 54




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##### Table of Contents



ExhibitNumber
        
        
        
        Description10.12
        
        
        
        Executive Employment Agreement dated May 1,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.1 to BindViews Quarterly Report on Form 10-Q
          for the quarter ended June 30, 2001 (the 6/30/2001 10-Q).10.13
        
        
        
        Restricted Stock Agreement dated May 1,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.2 to the 6/30/2001 10-Q).10.14
        
        
        
        Promissory Note dated May 1, 2001 executed
          in favor of Bindview by Edward L. Pierce (incorporated by reference
          to Exhibit 10.3 to the 6/30/2001 10-Q).10.15
        
        
        
        Change of Control Agreement dated May 1,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.4 to the 6/30/2001 10-Q).10.16
        
        
        
        Indemnification Agreement dated May 1,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.5 to the 6/30/2001 10-Q).10.17
        
        
        
        Nonqualified Stock Option Agreement dated
          May 1, 2001 between BindView and Richard P. Gardner (incorporated
          by reference to Exhibit 10.6 to the 6/30/2001 10-Q).10.18
        
        
        
        Nonqualified Stock Option Agreement dated
          May 1, 2001 between BindView and William D. Miller (incorporated
          by reference to Exhibit 10.7 to the 6/30/2001 10-Q).10.19
        
        
        
        Nonqualified Stock Option Agreement dated
          May 1, 2001 between BindView and Kevin M. Weiss (incorporated by
          reference to Exhibit 10.8 to the 6/30/2001 10-Q).10.20
        
        
        
        Executive Employment Agreement dated May 31,
          2001 between BindView and Kevin P. Cohn (incorporated by reference to
          Exhibit 10.9 to the 6/30/2001 10-Q).10.21
        
        
        
        Nonqualified Stock Option Agreement dated
          May 31, 2001 between BindView and Kevin P. Cohn (incorporated by
          reference to Exhibit 10.10 to the 6/30/2001 10-Q).10.22
        
        
        
        Change of Control Agreement dated May 31,
          2001 between BindView and Kevin P. Cohn (incorporated by reference to
          Exhibit 10.11 to the 6/30/2001 10-Q).10.23
        
        
        
        Indemnification Agreement dated May 31,
          2001 between BindView and Kevin P. Cohn (incorporated by reference to
          Exhibit 10.12 to the 6/30/2001 10-Q).10.24
        
        
        
        Indemnification Agreement dated July 18,
          2001 between BindView and Gary S. Margolis (incorporated by reference
          to Exhibit 10.1 to BindViews Quarterly Report on Form 10-Q
          for the quarter ended September 30, 2001 (the 9/30/2001 10-Q).10.25
        
        
        
        Separation Agreement dated August 1,
          2001 to be effective July 2, 2001 between BindView and Richard
          P. Gardner (incorporated by reference to Exhibit 10.2 to the 9/30/2001
          10-Q).10.26
        
        
        
        Separation Agreement dated August 3,
          2001 to be effective July 16, 2001 between BindView and Kevin M.
          Weiss (incorporated by reference to Exhibit 10.3 to the 9/30/2001
          10-Q).10.27
        
        
        
        1998 Non-Employee Director Stock Option
          Plan, as amended October 26, 2001 and February 21, 2002 (incorporated
          by reference to Exhibit 10.28 to BindViews Annual Report
          on Form 10K for the year ended December 31, 2001 (the 2001
          10-K))10.28
        
        
        
        Amended and Restated Executive Employment
          Agreement dated December 31, 2001 between BindView and Edward L.
          Pierce (incorporated by reference to Exhibit 10.29 to the 2001
          10-K)10.29
        
        
        
        Lease agreement dated March 30, 2001
          between BindView and Sage Plaza One Ltd (incorporated by reference to
          Exhibit 10.30 to the 2001 10-K)
 55




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##### Table of Contents



ExhibitNumber
        
        
        
        Description10.30
        
        
        
        Indemnification Agreement between the Company
          and Armand S. Shapiro, effective October 26, 2001 (incorporated
          by reference to Exhibit 10.31 to the 2001 10-K)10.31
        
        
        
        Promissory Note dated December 31,
          2001 executed in favor of Bindview by Edward L. Pierce (incorporated
          by reference to Exhibit 10.32 to the 2001 10-K)10.32
        
        
        
        Rescission Agreement dated December 31,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.33 to the 2001 10-K)10.33
        
        
        
        Restricted Stock Agreement dated December 31,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.34 to the 2001 10-K)10.34
        
        
        
        Security Agreement dated December 31,
          2001 between BindView and Edward L. Pierce (incorporated by reference
          to Exhibit 10.35 to the 2001 10-K)10.35
        
        
        
        Indemnification agreement between the Company
          and Eric J. Pulaski, executed March 27, 2002 (incorporated by reference
          to Exhibit 10.1 to BindViews Quarterly Report on Form 10-Q
          for the quarter ended March 31, 2002 (the 3/31/2002 10-Q))10.36
        
        
        
        Indemnification agreement between the Company
          and Peter L. Bloom, executed March 27, 2002 (incorporated by reference
          to Exhibit 10.2 to the 3/31/2002 10-Q)10.37
        
        
        
        Indemnification agreement between the Company
          and Richard A. Hosley II, executed March 27, 2002 (incorporated
          by reference to Exhibit 10.2 to the 3/31/2002 10-Q)10.38
        
        
        
        Indemnification agreement between the Company
          and Peter T. Dameris, executed August 15, 2002 (incorporated by
          reference to Exhibit 10.1 to BindViews Quarterly Report on
          Form 10-Q for the quarter ended September 30, 2002 (the 9/30/2002
          10-Q))10.39
        
        
        
        Nonqualified Stock Option Agreement, August 15,
          2002, between the Company and Peter T. Dameris (incorporated by reference
          to Exhibit 10.2 to the 9/30/2002 10-Q)10.40
        
        
        
        1999 Employee Stock Purchase Plan (incorporated
          by reference to Annex A to the Registrants Proxy Statement relating
          to its 1999 Annual Shareholders Meeting, filed with the commission
          on April 30, 1999)10.41
        
        
        
        1999 Employee Stock Purchase Plan, as amended
          effective January 1, 2001 (incorporated by reference to Exhibit 10.41
          to BindViews Annual Report on Form 10-K for the year ended
          December 31, 2002 (the 2002 10-K)10.42
        
        
        
        Second Amendment to Employee Stock Purchase
          Plan, adopted by the Board of Directors on January 27, 2003, subject
          to subsequent shareholder approval (incorporated by reference to Exhibit
          10.42 to the 2002 10-K)10.43
        
        
        
        BindView Development Corporation 2000 Indian
          Stock Option Plan, as amended through March 30, 2001 (incorporated
          by reference to Exhibit 10.43 to the 2002 10-K)10.44
        
        
        
        BindView Development Corporation 2000 Employee
          Incentive Plan, as amended through March 30, 2001 (incorporated
          by reference to Exhibit 10.44 to the 2002 10-K)10.45
        
        
        
        Executive Employment Agreement entered into
          effective December 30, 2002, between the Company and Eric J. Pulaski
          (incorporated by reference to Exhibit 10.45 to the 2002 10-K)10.46
        
        
        
        Executive Employment Agreement entered into
          effective December 30, 2002, between the Company and David S. Flame
          (incorporated by reference to Exhibit 10.46 to the 2002 10-K)
 56




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##### Table of Contents



ExhibitNumber
        
        
        
        Description10.47
        
        
        
        Executive Employment Agreement entered into
          effective December 30, 2002, between the Company and David E. Lloyd
          (incorporated by reference to Exhibit 10.47 to the 2002 10-K)10.48
        
        
        
        Executive Employment Agreement entered into
          effective December 30, 2002, between the Company and Gary S. Margolis
          (incorporated by reference to Exhibit 10.48 to the 2002 10-K)10.49
        
        
        
        Executive Employment Agreement entered into
          effective December 30, 2002, between the Company and Ronald E.
          Rosenthal (incorporated by reference to Exhibit 10.49 to the 2002
          10-K)10.50
        
        
        
        Form of Change of Control Agreement entered
          into effective December 30, 2002, between the Company and, respectively,
          Eric J. Pulaski, Kevin P. Cohn, Jeffery E. Margolis, Gary E. Margolis,
          and D.C. Toedt (incorporated by reference to Exhibit 10.50 to the
          2002 10-K)10.51
        
        
        
        Change of Control Agreement entered into
          effective December 30, 2002, between the Company and David S. Flame
          (incorporated by reference to Exhibit 10.51 to the 2002 10-K)10.52
        
        
        
        Change of Control Agreement entered into
          effective December 30, 2002, between the Company and David E. Lloyd
          (incorporated by reference to Exhibit 10.52 to the 2002 10-K)10.53
        
        
        
        Change of Control Agreement entered into
          effective December 30, 2002, between the Company and Ronald E.
          Rosenthal (incorporated by reference to Exhibit 10.53 to the 2002
          10-K)10.54
        
        
        
        Form of First Amended and Restated Executive
          Employment Agreement entered into effective December 30, 2002,
          between the Company and, respectively, Jeffery E. Margolis and D.C.
          Toedt (incorporated by reference to Exhibit 10.54 to the 2002 10-K)10.55
        
        
        
        Form of Executive Employment Agreement entered
          into effective December 30, 2002, between the Company and, respectively,
          Scott S. Blake, Shantanu Ghosh, Diana Massaro, and Bruce K. Swope (incorporated
          by reference to Exhibit 10.55 to the 2002 10-K)10.56
        
        
        
        Form of Change of Control Agreement entered
          into effective December 30, 2002, between the Company and, respectively,
          Scott S. Blake, Shantanu Ghosh, Diana Massaro, and Bruce K. Swope (incorporated
          by reference to Exhibit 10.56 to the 2002 10-K)21.1
        
        
        
        Subsidiaries of the Company (Incorporated
          by reference to Exhibit 21.1 to BindViews Annual Report on
          Form 10-K for the year ended December 31, 2003)23.1*
        
        
        
        Consent of PricewaterhouseCoopers LLP31.1*
        
        
        
        Certification of the Companys Chief
          Executive Officer, Eric J. Pulaski, pursuant to Rule 13a-14(a) under
          the Securities and Exchange Act of 193431.2*
        
        
        
        Certification of the Companys Chief
          Financial Officer, Edward L. Pierce, pursuant to Rule 13a-14(a) under
          the Securities and Exchange Act of 193432.1*
        
        
        
        Certifications of the Chief Executive Officer
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
          of the Sarbanes-Oxley Act of 200232.2*
        
        
        
        Certifications of the Chief Financial Officer
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002
   *
    
    filed herewith 57