-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VoPhYjVUA0T8qk84tKLXvDzSUisCpzPxq4IUQpLWo2coSf1HkpckkKcC60GMuksL a2nOpQlMQNFTHzHnnnwrqg== 0000950129-00-001555.txt : 20000331 0000950129-00-001555.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950129-00-001555 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BINDVIEW DEVELOPMENT CORP CENTRAL INDEX KEY: 0001061646 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 760306721 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24677 FILM NUMBER: 588721 BUSINESS ADDRESS: STREET 1: 5151 SAN FELIPE 21ST FLOOR CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7135613000 MAIL ADDRESS: STREET 1: 5151 SAN FELIPE 21ST FLOOR CITY: HOUSTON STATE: TX ZIP: 77056 10-K 1 BINDVIEW DEVELOPMENT CORPORATION - DATED 12/31/99 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 000-24677 BINDVIEW DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) TEXAS 76-0306721 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5151 SAN FELIPE, 21ST FLOOR, HOUSTON, TX 77056 (Address of principal executive offices) (Zip code)
(713) 561-3000 (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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common 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 [X] No [ ] 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on February 29, 2000 (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 $1,250,000,000. The number of shares of the registrant's common stock, no par value per share, outstanding as of February 29, 2000 was 51,294,088. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OVERVIEW BindView develops, markets and supports a suite of IT Risk Management solutions that manage the safety, integrity and availability of complex networks operating on Microsoft Windows NT and Novell NetWare environments. BindView solutions reduce the overall risk and Total Cost of Ownership of an enterprise's business and e-business infrastructure. Our primary product line, the BindView EMS software, provides software solutions for systems administration, security management and enterprise inventory of local area network ("LAN") assets. The BindView EMS software can be used by network administrators, security auditors and other information technology ("IT") personnel to proactively identify, diagnose and, in many cases, fix a wide range of systems management problems, allowing organizations to reduce the Total Cost of Ownership of enterprise computing before it negatively impacts the business or e-business infrastructure. As a result of the acquisition of Entevo Corporation in February 2000, BindView enhances its offering by providing a complete administration suite for managing multiple Network Operating Systems (NOS) and Enterprise Directories that form the backbone of the evolving e-business infrastructure. THE BINDVIEW SOLUTION BindView EMS can be used proactively to diagnose, and in many cases fix, a wide range of specific problems occurring in Windows NT and NetWare environments. In addition, BindView EMS is built to scale with networks as they grow enterprise-wide. BindView EMS provides customers with products that are both easy to use and easy to deploy enterprise-wide. PROACTIVE, QUERY-BASED SYSTEMS MANAGEMENT We offer a query-based approach to systems management for Windows NT and NetWare environments. The query-based approach provides systems administrators, security auditors and other IT professionals with a simple, graphical user interface ("GUI") for asking questions, or "queries," about the configuration and security of the network operating system ("NOS") environment. This approach provides a framework for proactive management of the NOS environment. Rather than waiting for an event or alarm to occur, the systems administrator can locate, and in many cases fix, issues with the configuration and security of the network before they turn into problems. For IT organizations with existing event management systems, we provide a diagnostic tool to help find the root cause of a NOS-related problem when an alarm is triggered. The query-based approach can perform diagnostic and reporting tasks in a matter of minutes that previously might have taken hours or even days to complete. In addition, the modular architecture of this query-based technology facilitates the development of new add-on products. We believe this provides us with a competitive advantage in the development of future applications. The ease and proactive nature of BindView solutions are critical for many e-business and e-commerce companies where security issues are paramount. COMPREHENSIVE IN SCOPE BindView EMS addresses a wide range of system administration and security issues, including file server management, user and group administration, disk space management and management of directory services. All of the critical configuration parameters and security settings of Windows NT and NetWare network operating systems are made available through the simple user interface of BindView EMS. As a result, BindView EMS empowers a broader group of IT personnel, rather than just a limited number of IT experts, to solve problems quickly by providing a way to automate the labor-intensive tasks necessary to ensure the integrity and security of enterprise servers, applications and users. ARCHITECTED TO SCALE BindView EMS has been designed to manage both workgroup LANs as well as enterprise-wide networks that are frequently geographically dispersed. Customers often purchase BindView EMS to manage one or two 1 3 workgroups and then over time purchase more products to manage their LANs as they grow to enterprise-wide, distributed networks. BindView EMS is used routinely to manage networks ranging from tens to tens of thousands of users. A Fortune 25 consumer goods company, for example, uses BindView EMS to manage over 70,000 users on its global NetWare-based network. NATIVE TO EACH ENVIRONMENT Each of our products for managing Windows NT and NetWare operating systems has an agent architecture designed to match its particular environment and to exploit the unique features of each platform. The object-oriented architecture of our products separates the user interface from the back-end data gathering modules. This approach allows us to build each of these modules to be native to the specific platform it supports. Our products are not programmed with a "least common denominator" approach across heterogeneous platforms. We believe this enables us to build "best-of-breed" products for managing and exploiting each operating environment. EASY TO DEPLOY, MAINTAIN AND USE Our products are built to be both easy to install and easy to use. In addition to being easy to install on a single server or workstation, our products can be rapidly deployed enterprise-wide. Our systems administration and security products can typically be deployed enterprise-wide in a matter of days, and our enterprise inventory product can typically be deployed enterprise-wide in a matter of weeks. Our products are also designed to be easy to upgrade and maintain on an ongoing basis following initial deployment. As a result, customers can rapidly implement and utilize our products with minimal training, thereby reducing their total cost of ownership without overburdening the customer's IT personnel. STRATEGY Our objective is to be the leading provider of IT RISK Management software for enterprise networks. Key elements of our strategy to achieve these objectives include: Enhance Leadership Position in Security Assessment Software. We believe we are currently a leading vendor for Windows NT and NetWare-based security assessment software, both in product sales and technology leadership. We will continue our research and development efforts to maintain our technology leadership in comprehensive security assessments of Windows NT and NetWare networks. Enhance Systems Management Capabilities. We intend to add new capabilities to our modules for managing Windows NT and NetWare-based networks. These capabilities include new user interface components and analysis tools for presenting information to BindView EMS users in more meaningful ways and new features for managing the performance and availability of network components. We also intend to continue to make enhancements allowing customers to proactively fix more problems through the "ActiveAdmin" features of BindView EMS and additional features specific to NOSadmin for Windows NT. Apply Query-Based Management to New Applications. We intend to apply our query-based management approach to high-growth opportunities and to introduce high value-added modules for managing a wide variety of critical applications and services. We are evaluating opportunities to develop new BindView EMS modules, including those for managing e-mail systems such as Microsoft Exchange, other operating environments such as UNIX application servers and other mission-critical, client/server applications such as electronic commerce servers or SAP R/3. Expand Direct Telesales Model. We believe our direct telesales strategy enables us to maintain a low cost sales model and to effectively track and meet the needs of our customers. We intend to continue to expand our direct telesales force, both in the United States and internationally. We also believe we can continue to increase our success rate in achieving strategic, enterprise-level sales by selling to higher levels of management of major enterprises. 2 4 Leverage Existing Customer Base. Our products have been sold to over 4,000 customers worldwide, including over 70% of the Fortune 100. Although we have already sold BindView EMS into some of these companies for deployment enterprise-wide, many of these organizations have used BindView EMS only on some of their departmental LANs and have additional networks which represent sales opportunities for us. We believe we can sell more deeply within these existing customer sites and sell more products as we expand our product line. Strengthen Strategic Relationships. We will continue to strengthen existing relationships and pursue new relationships with key partners. Technology partners (including Microsoft, Novell, Computer Associates and IBM/Tivoli) provide us with product integration and marketing opportunities. Service providers (including the Big Five accounting firms and, systems integrators) provide us with distribution opportunities, as well as implementation and project management leverage. PRODUCTS AND TECHNOLOGY Our primary product line is BindView EMS, which is designed to provide a wide range of IT Risk Management capabilities to our customers for use with their heterogeneous, distributed networks. BindView EMS employs a Windows-based console to provide scalable and comprehensive systems management solutions. BindView EMS utilizes an object-oriented architecture enabling the management of a wide variety of network operating systems and managed objects to be supported through snap-in modules. These snap-in modules are sold either separately or as a "suite". Each snap-in module to the Enterprise Console software increases the scope of BindView EMS to cover a new set of management issues for a particular platform. Current snap-in modules for BindView EMS include the NOSadmin series (for both Windows NT and NetWare) and NETinventory. The Enterprise Console provides an effective set of tools that work across all snap-in modules. Central to the BindView EMS architecture is the Universal Data Processing Engine ("UDPE") which enables the query-processing capabilities of BindView EMS by utilizing an object-oriented design which separates the common components of the Enterprise Console from the specific features and platforms of the snap-in modules. The UDPE provides a querying engine that gathers data from across the network and presents the query results to the user through the Enterprise Console. Query results may be displayed in a variety of meaningful ways, including tabular spreadsheets, printed reports, graphs and charts, or may be exported to over a dozen popular formats, including those viewable through e-mail or a web browser. The user can create queries from scratch, or can select a predefined query from an initial set of over one hundred sample reports supplied "out-of-the-box" with BindView EMS. Once queries have been created, they can be saved to build a suite of management reports monitoring the deployment of "best practices" and IT-mandated policies across the network. With this architecture, BindView EMS enables the management of heterogeneous, distributed networks through a common GUI. Customers typically purchase one Enterprise Console per administrator and one or more snap-in modules to manage their particular network, often including both NOSadmin for NetWare and NOSadmin for Windows NT. All components of BindView EMS have been developed using industry-standard compilers, development tools and languages, including C, C++, Java and Assembly for Intel hardware platforms. Enterprise Console The Enterprise Console software is the central component and user interface of BindView EMS. It provides a common tool-set used by security auditors and network administrators for the analysis, reporting, policy management and automated administration of enterprise resources and assets. The Enterprise Console's query-based approach provides the ability to ask questions, automatically collect the data necessary to answer those questions, present the answers in meaningful ways and, in some instances (where ActiveAdmin and other features are available), make necessary corrections while documenting any required changes. We are working to add and expand ActiveAdmin and other capabilities to future versions of BindView EMS modules, increasing the user's ability to both diagnose and fix problems from the Enterprise Console. 3 5 NOSadmin Series The NOSadmin series of software products provides comprehensive security assessment and systems management across heterogeneous environments. The NOSadmin series addresses a complete range of systems administration and security issues, including file server management, user and group administration, disk space management and management of directory services. All of the critical configuration parameters and security settings of Windows NT and NetWare network operating systems are made available through a simple user interface, without requiring an agent to be placed on every managed server and workstation. As a result, the NOSadmin series empowers a broader group of IT personnel, rather than just a limited number of IT experts, to solve problems quickly by providing them with a way to automate the labor-intensive tasks necessary to ensure the integrity and security of enterprise servers, applications and users. - NOSadmin for Windows NT enables IT professionals to view and analyze multi-domain Windows NT networks enterprise-wide from a single administrative console. The product includes the capability to pinpoint a variety of potential security risks for Windows NT servers and workstations. In addition, AddPack for NOSadmin for Windows NT enables users to make changes to the Windows NT NOS configuration and fix problems from the Enterprise Console. The current version of AddPack supports managing Windows NT services. In subsequent AddPack updates, we plan to include support for managing additional aspects of the NOS, including Windows NT domain user account information. - NOSadmin for NetWare 3 and NOSadmin for NetWare 4 and 5 provide comprehensive security and configuration management of NetWare servers enterprise-wide from a single administrative console. These include the capability to make changes to the NOS configuration and fix problems enterprise-wide through a feature called "ActiveAdmin". In addition, NOSadmin for NetWare 4 and 5 enables management of Novell Directory Services ("NDS") for a variety of platforms (including NetWare 4 and 5, Windows NT and UNIX servers). All NOSadmin modules "snap in" to the Enterprise Console through a Windows-based Dynamic Link Library ("DLL") that interfaces the snap-in module to the UDPE. In addition to this snap-in DLL, each NOSadmin module utilizes a distributed agent architecture that is particular to the native environment that it supports. The distributed agents for the NOSadmin for Windows NT run as Windows NT services in each Windows NT domain. The distributed agents for the NOSadmin for NetWare products run as NetWare Loadable Modules on one or more NetWare file servers. NETinventory The NETinventory software is a scalable, fast and accurate asset management and inventory analysis tool for large multi-site networks. It extends the capabilities of BindView EMS to include comprehensive network inventory and asset tracking for an entire enterprise. As a result, the user can discover, document and evaluate PC assets throughout the entire enterprise and make better-informed strategic technology decisions. NETinventory also reduces help desk costs and response times by providing immediate access to any end-user's hardware and software configuration changes. bv-Web bv-Web software is a Java-based solution that provides a summary view of risks to network integrity and assets. bv-Web enables faster escalation of issues through easily customizable warning-level indicators and a summary format for network security, asset, and operational data. This product allows system administrators to quickly and efficiently identify and respond to network security and operational risks using email and paging -- dramatically reducing the time needed to escalate and fix risks to business-critical operations. It also enables executive-level management to quickly see a summary of the health of the network from their Web browsers through easily customizable warning-level indicators and a summary format for network security, asset, and operational data. 4 6 bv-LifeLine The bv-LifeLine series of products provides event notification and response software into the company's feature-rich BindView EMS software family of systems management products. bv-LifeLine products provide fully integrated event notification and response solutions for scheduling, notification, dispatch, escalation, and response, giving IT personnel the tools they need to respond to critical events almost immediately. bv-Control for SAP bv-Control for SAP improves the management, administration and return on investment of large SAP installations. This product automates routine changes and administrative tasks, documents the business reasons for changes, and provides improved controls. It is a powerful, non-intrusive, solution for managing the risks inherent in a complex enterprise resource planning application system that touches many facets of business and it also helps create the certainty to make intelligent business decisions by limiting exposures, reducing complexity, and increasing clarity. bv-Control for Exchange bv-Control for Microsoft Exchange provides comprehensive configuration, security, administrative and availability management through a central Microsoft Management Console without deploying technology on each desktop. This product effectively pinpoints and identifies risks to the health and integrity of Microsoft Exchange environments. Constantly monitoring the health and efficiency of the Microsoft Exchange environment, bv-Control issues alerts to administrators before users experience system downtime and performance issues. Service levels are maintained by allowing administrators to effectively pinpoint and proactively identify problems before they impact the Exchange environment. HackerShield HackerShield is a network vulnerability scanner that examines devices on IP networks for security holes that hackers could use to break-in. For systems and network administrators who need to ensure that their company's assets are protected from hackers, HackerShield finds and closes holes that hackers use to break into servers, workstations and other network devices. HackerShield examines all IP devices on a network for security holes. While the HackerShield console is Windows NT based, its database of security checks cover multiple operating systems (UNIX, Windows, etc.) and multiple devices (routers, firewalls, servers, workstations, etc.). DirectManage Entevo's DirectManage suite is a scalable, fault tolerant solution that heightens administrative efficiency and productivity, improves customer service by ensuring integrity and consistency, increases system security and enhances the ability to assimilate new technologies. DirectManage allows the user to deploy, integrate, administer, and maintain enterprise directories from a single console. DirectManage is also the most comprehensive suite for managing directories before, during and after Windows 2000. 5 7 The following table describes the BindView EMS family.
BINDVIEW FEATURES/BENEFITS - -------- ----------------- Enterprise - The Desktop Manager allows for the delegation of tasks to Console individuals filling special roles (for example, security auditors or help desk personnel) by giving them customized desktops focused on the tasks they perform - A Query Builder to ask questions about the state of the network through an easy-to-use GUI - Spreadsheet and graphics/charting interfaces to view query results - A Report Writer to generate presentation-quality Reports - An export function to export data to over a dozen popular file formats NOSadmin - Comprehensive security assessments for Windows - Configuration analysis of both servers and workstations, NT Including services, sessions, shares and device drivers - Network integrity analysis of domain infrastructure, users, groups, policies and trust relationships between domains - A single report can span multiple Windows NT domains for enterprise-wide analysis of all Windows NT servers and Workstations - Documentation and analysis of the values of any registry Keys across all servers and workstations enterprise-wide - File system and disk space management NOSadmin - Comprehensive security assessments for NetWare 4 and 5 - Management of file server configuration, NetWare Loadable Modules and "Set" variables - User and group administration - File system and disk space management - Documentation of organizational policies throughout the Enterprise - ActiveAdmin for making global changes to system Configuration - Management of NDS and ActiveAdmin for making global changes to NDS NOSadmin for NetWare 3 - See features/benefits for NOSadmin for NetWare 4 and 5 above, except that it supports NetWare binding services instead of NDS NETinventory - Automated discovery and tracking of hardware assets - Automated detection of over 4,000 software packages - A three-tiered architecture providing central administration and synchronization services, with fault-tolerant collection and distribution of asset management information - Management of database integrity across all segments of the distributed inventory database enterprise-wide - Generation of complete reports for all PC hardware and software assets across the enterprise
6 8
BINDVIEW FEATURES/BENEFITS - -------- ----------------- bv-Web - Provides a summary view of risks to network integrity and assets - E-mail, paging, and custom response capabilities that dramatically reduces the time needed to escalate and fix risks to business-critical operations - Capability to review a summary on the health of the network through a Web browser - Easily customizable warning-level indicators - Summary format for network security, asset, and operational data bv-LifeLine - Complete rule-based engine for event routing - Robust scheduling engine for resource scheduling, down-time scheduling and delivery method scheduling - Filtering capabilities to prioritize critical events - Automatic event escalation - Remote response capabilities - Fault-tolerant, multi-tier architecture - Follow-the-sun capabilities for global organization that requires 24x7 support bv-Control for SAP - Define internal controls to meet your business needs - Prevent unnecessary risks and reduce complexity - Automate routine system changes and internal controls - Manage transports through a single point of administration - Streamline SAP migration and implementation - Empower business personnel with change and security information - Simplify controls with an easy-to-use Web interface bv-Control for Exchange - Comprehensively document Microsoft Exchange server configurations, including verification of the latest service packs and hot fixes that are loaded - Effectively identify potential security exposures in an Exchange organization - Efficiently analyze and report on mailboxes and public folders - Automatically scan the content of mailboxes for potential violation of corporate policies - Effortlessly produce reports on Microsoft Exchange traffic statistics - Quickly identify Microsoft Exchange errors - Instantly alert administrators when problems occur via e-mail, pager, console message or network broadcast Hackershield - Easy-to-use interface - Examines devices of all types (i.e. servers, workstations, routes, hubs, printer, etc.) by IP address - Creates detailed and in depth reports which summarizes the security holes by severity - Can detect changes in key system files to identify potential intrusions - Finds and closes holes that hackers use to break into Company servers, workstations and other network devices.
7 9
BINDVIEW FEATURES/BENEFITS - -------- ----------------- DirectManage - Able to manage hundreds of Windows NT domains and multiple Active Directory trees from a single console - Create custom roles over Windows NTv4 or Windows 2000/Active Directory to delegate granular administrative responsibility - Framework that can host multiple LDAP directories -- enabling management of Novell NDS, Exchange Server and Active Directory from a single console - Automate day-to-day administrative tasks - A comprehensive solution for domain and server consolidation
CUSTOMERS Our products have been sold to over 4,000 customers worldwide, including over 70% of the Fortune 100. No customer accounted for more than 5% of revenues in 1999, 1998 or 1997. Our five largest customers represented less than 10% of our 1999 revenues. SALES AND MARKETING We sell our products primarily through a direct telesales force, and, to a lesser extent, through value-added resellers ("VARs"), distributors and systems integrators. In addition, we have strategic marketing relationships with professional service organizations and software vendors that provide us with increased visibility as well as sales leads. Direct Telesales We sell our products primarily through a direct telesales force. We utilize a direct telesales model that reduces the number of remote sales offices and customer site visits and focuses on effective use of the telephone and Internet communications for product demonstrations and product sales. When necessary, our sales force will also travel to customer locations. We believe our direct telesales approach allows us to achieve better control of the sales process and respond rapidly to customer needs, while maintaining an efficient, low-cost sales model. Sales cycles typically range between as little as three months for departmental sales and up to 12 months for enterprise-wide contracts. As of December 31, 1999, our worldwide direct telesales organization consisted of 174 employees which is comprised of approximately two-thirds quota carrying sales personnel and one-third sales support staff. The direct telesales force for North America is based in Houston and accounts for a majority of our revenues. We also have direct telesales offices in Frankfurt, Germany and Paris, France. We have increased the size of our direct telesales organization from 125 to 174 individuals over the last year and expect to continue hiring sales personnel, both domestically and internationally, over the next 12 months. VARs and Distributors In addition to our direct telesales strategy, we have established indirect distribution channels through VARs and distributors. Outside North America, where we are in the process of developing our direct telesales presence, we rely heavily on our reseller channel. We have established a network of VARs and distributors in Europe, Latin America and the Pacific Rim, with the highest concentration of such distributors 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 direct to the customer, via other resellers or through a mixture of both channels. We actively train our international VARs and distributors in both product and sales methodology. 8 10 Systems Integrators and Service Providers We also market our products through service organizations that help customers install, manage and secure large Windows NT and NetWare networks. Such organizations include large systems integrators, outsourcing companies and security auditing groups in the Big Five 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. Marketing Partnerships and Programs To support our growing sales organization and channel, we have in the last year devoted significant resources to building a series of marketing partnerships and programs. We have developed a partnership with IBM/Tivoli for marketing BindView EMS as a companion product to Tivoli TME 10, as well as partnerships with other key vendors, including Microsoft, Novell and Computer Associates. We are a Microsoft Solution Provider and hold "Microsoft Back Office" certification for our products. We also partner with many of the Big Five accounting firms to increase awareness of network security issues. Results of these partnerships in the past year include a seminar series with Ernst & Young entitled "Issues in Windows NT Security" given in over 25 cities in the United States and Europe, and a white paper published by the former Coopers & Lybrand entitled "Evaluating Novell NetWare 4.X Security Using BindView EMS." In addition, our marketing efforts have resulted in a number of programs, such as seminars, industry trade shows, vendor executive briefings, analyst and press tours, advertising and public relations. CUSTOMER SUPPORT AND PROFESSIONAL SERVICES We believe that 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 increasing the size of our support and services organization in the past and plan to continue to do so in the future. As of December 31, 1999, our customer support and professional services organization consisted of 33 employees. Customer support personnel provide technical support by telephone, e-mail and fax, and maintain our Web site and bulletin boards to complement these services. Technical support for customers is provided at no charge for 30 days after the product's sale and on a subscription basis thereafter. Future versions of our products are provided at no extra charge as part of the subscription service. International offices and resellers extend this service for overseas customers. Our professional services group provides product training, consulting and implementation services for a fee in order to assist customers in maximizing the benefits of BindView products. In addition, we periodically offer training to our channel partners and employees. PRODUCT DEVELOPMENT We have been and continue to be an innovator and leader in the development of systems management tools for the LAN marketplace. We believe that a technically skilled, quality oriented and highly productive software development organization is a key to the continued success of new product offerings. The software development staff is also responsible for enhancing our existing products and expanding our product line. Our product development staff consisted of 179 and 90 employees as of December 31, 1999 and 1998, respectively. We expect that we will continue to invest substantial resources in product development expenditures. We are currently developing enhancements to existing products as well as working to develop new products for managing additional applications and platforms not currently within the scope of BindView EMS. Potential future applications include other operating system platforms such as UNIX application servers. We are also currently developing the next generation of the BindView EMS product family which we expect to deliver over the next 24 months. We cannot assure you that these development efforts will be completed within our anticipated schedules or that, if completed, they will have the features necessary to make them successful in the marketplace. Moreover, products as complex as ours may contain undetected errors when first introduced or as new versions are released. Such undetected errors in new products may be 9 11 found after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Future delays in the development or marketing of product enhancements or new products could result in a material adverse effect on our business, financial condition and results of operations. COMPETITION The market in which we compete is intensely competitive and characterized by rapidly changing technology and evolving standards. Companies offering competitive products vary in the scope and breadth of the products and services offered and include the following among others: (i) providers of security analysis and audit products, such as Axent Technologies, Inc., ODS Networks, Inc., ISS Group, Inc. and Network Associates, Inc. (ii) providers of standalone inventory and asset management products such as Tally Systems Corp.; (iii) providers of LAN desktop management suites, such as Intel Corporation, Hewlett-Packard Company and Microsoft Corporation;, (iv) providers of event notification and response technology such as Attention Software, Inc., (v) providers of Windows NT management and migration tools, such as Mission Critical Software, FastLane Technologies Inc., and NetIQ Corporation, (vi) providers of network security scanning technology, such as Network Associates, ISS Group, Inc. and Axent Technologies and (vii) providers of enterprise resource planning application add-ons for SAP security administration and vulnerability assessment, such as BMC Software, Insite Objects, Inc. and Envive Corp. In addition, certain management features included in our products compete with the native tools from Novell, Inc. and third-party tools from certain vendors, such as Computer Associates, Inc. and other companies. We have experienced, and expect to continue to experience, increased competition from current and potential competitors, many of whom have greater name recognition, a larger installed customer base and significantly greater financial, technical, marketing, and other resources than us. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than us. We expect additional competition as other established and emerging companies enter into the systems management software market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share, any of which would materially adversely affect our business, operating results and financial condition. In addition, vendors of operating system software, particularly Microsoft and Novell, may in the future enhance their products to include functionality that is currently provided by our products. The widespread inclusion of the functionality of our software as standard features of operating system software could render our products obsolete and unmarketable, particularly if the quality of such functionality were comparable to that of our products. Even if the functionality provided as standard features by operating system software is more limited than that of our software, we cannot assure you that a significant number of customers would not elect to accept more limited functionality in lieu of purchasing additional software. Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the needs of our current or prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect our ability to obtain new licenses or to obtain maintenance and support renewals for existing licenses on terms favorable to us. We cannot assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would materially adversely affect our business, operating results and financial condition. We believe that significant competitive factors affecting the markets described above are depth of product functionality, breadth of platform support, product quality and performance, conformance to industry standards, product price and customer support. In addition the ability to rapidly develop and implement new products and features for these markets is critical. 10 12 PROPRIETARY RIGHTS We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. However, we believe that such measures afford only limited protection. We cannot assure you that others will not develop technologies that are similar or superior to our technology or design around our copyrights and trade secrets. We license our software products primarily under "click-through" licenses agreements (our click-through license agreements are displayed to the user by the installation program(s) for our software; they require the user to signify assent to the agreement by taking action such as clicking on an "I agree" button). Click-through license agreements are not negotiated with or signed by individual licensees, and take effect upon the user's taking action required by the installation program. We believe, however, that 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 that we regard as proprietary. Policing unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of its 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. We cannot assure you that our means of protecting our proprietary rights will be adequate or that competition will not independently develop similar or superior technology. We are not aware that we are infringing any proprietary rights of third parties. We cannot assure you, however, that third parties will not claim that we have infringed on their intellectual property rights. We expect that 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. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or 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. In the event of a successful claim of product infringement against us and our failure or inability to either license the infringed or similar technology or develop alternative technology on a timely basis, our business, operating results and financial condition could be materially adversely affected. EMPLOYEES As of December 31, 1999, we employed 440 full-time employees, including 187 in sales and marketing, 179 in research and development, 33 in technical support and professional services and 41 in general and administrative. We believe that our future success will depend in large part upon our continuing ability to attract and retain highly skilled managerial, sales, marketing, customer support and research and development personnel. Like other software companies, we face intense competition for such personnel, and we have at times experienced and continue to experience difficulty in recruiting and retaining qualified personnel. We cannot assure you that we will be successful in attracting, assimilating and retaining other qualified personnel in the future. We are not subject to any collective bargaining agreement and we believe that our relationships with our employees are good. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Report, including without limitation, statements regarding the Company's 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 that those expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's 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 and 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. For 11 13 purposes of this Item 5, references to the "Company", "BindView", "we", "us" and "our" refer to BindView Development Corporation and its subsidiaries. CAUTIONARY STATEMENTS In addition to the other information in this Annual Report on Form 10-K, the following factors should be considered carefully in evaluating the Company. Our quarterly and annual revenues, expenses and operating results may fluctuate significantly. These fluctuations may be due to a number of factors, including: - demand for our products; - size and timing of significant orders and their fulfillment; - our ability to develop and upgrade our technology; - changes in our level of operating expenses; - our ability to compete in a highly competitive market; - undetected software errors and other product quality problems; - changes in our sales incentive plans and staffing of sales territories; and - changes in the mix of domestic and international revenues and the level of international expansion. Generally, we do not operate with a backlog because we ship our products and recognize revenue shortly after orders are received. The Company recognizes revenue in accordance with the Statement of Position No. 97-2 "Software Revenue Recognition" (SOP 97-2) and Statement of Position No. 98-9 "Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions" (SOP 98-9), as applicable. As the Company's sales transactions and product mix becomes more complex, revenue recognition under SOP 97-2 or SOP 98-9 could require the Company to defer a significant portion of the total contract and recognize this deferred revenue in future periods. Orders booked throughout a quarter may substantially impact product revenues in that quarter. Our sales also fluctuate throughout the quarter as a result of customer buying patterns. We base our expenses to a significant extent on our expectations of future revenues. Most of our expenses are fixed in the short term, and we may not be able to reduce spending quickly if our revenues are lower than we had projected. If our revenue levels do not meet our projections, we expect our operating results to be adversely and disproportionately affected. Our quarterly operating results also are subject to certain seasonal fluctuations. Year-end customer buying patterns and compensation policies based on annual revenue quotas have caused our revenues to be strongest in the fourth quarter of the year and to decrease in the first quarter of the following year. In future periods, we expect that these seasonal trends may cause first quarter revenues to be significantly lower than the level achieved in the preceding fourth quarter. However, first quarter revenues in any given fiscal year are not necessarily indicative of, and should not be used as a basis for prediction of, higher revenues in any future quarter. Before January 1, 1998, we provided telephone support free of charge and sold product upgrades separately or through subscription contracts. We now require our customers to purchase a subscription to receive product upgrades and technical support. Unlike software license revenues, which we generally recognize upon shipment of the product, we recognize subscription contract revenues ratably over the life of the contract term. As a result, if we derive a larger percentage of our revenues from subscription contracts, we will experience an increase in deferred revenue that is likely to decrease our operating margins. Decreased operating margins may materially adversely affect our, operating results and financial condition. 12 14 We believe quarter-to-quarter comparisons of our revenues, expenses and results of operations are not necessarily meaningful. You should not rely on our quarterly revenues, expenses and results of operations to predict our future performance. We have a limited operating history. We have a limited operating history based on our primary products. An investor in our Company must consider the risks and uncertainties frequently encountered by software companies in the early stages of development, particularly those faced by companies in the highly competitive and rapidly evolving systems management software market. To compete in this market, we believe that we must devote substantial resources to expanding our sales and marketing organization and to continue product development. As a result, we will need to recognize significant quarterly revenues to remain profitable. Our revenues have increased in recent years, and revenues for recent quarters have exceeded revenues for the same quarter for the prior year. However, we cannot be certain that we can sustain these growth rates or that we will remain profitable on a quarterly or annual basis in the future. Our markets are highly competitive. We face competition from different sources. Currently, our products compete with products from the following organizations: - providers of security analysis and audit products, such as Axent Technologies, Inc., ODS Networks, Inc., ISS Group, Inc. and Network Associates Inc.; - providers of stand-alone inventory and asset management products, such as Tally Systems Corp.; - providers of LAN desktop management suites, such as Intel Corporation, Hewlett-Packard Company and Microsoft Corporation; - providers of event notification and response technology, such as Attention Software, Inc.; - providers of Windows NT management and migration tools, such as Mission Critical Software, FastLane Technologies Inc., and NetIQ Corporation; - certain management features included in our products compete with the native tools from Novell, Inc. and third-party tools from certain vendors, such as Computer Associates, Inc. and other companies; - providers of enterprise resource planning application add-ons for SAP security administration and vulnerability assessment, such as BMC Software, Insite Objects, Inc. and Envive Corp.; and - providers of network security scanning technology, such as Network Associates, ISS Group, Inc. and Axent Technologies. We expect competition in the network management software market to increase significantly as new companies enter the market and current competitors expand their product lines and services. Many of these 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. We also believe that operating system software vendors, particularly Microsoft and Novell, could enhance their products to include functionality that we currently provide in our products. If these vendors include our software functionality as standard features of their operating system software, our products could become obsolete. Even if the functionality of the standard software features of these vendors is more limited than ours, there is a substantial risk that a significant number of customers would elect to keep this limited functionality rather than purchase additional software. 13 15 To be competitive, we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors' innovations by continuing to enhance our products, services and sales channels. In addition, we have and may continue to bundle and offer discounts to our customers. Bundling or discounting our products may result in reduced operating margins, reduced profitability and increase the complexity of revenue recognition. Any pricing pressures, reduced margins or loss of market share resulting from our failure to compete effectively could materially adversely affect our business. Our products are subject to rapid technological change. The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if new products based on new technologies are introduced or new industry standards emerge. We rely heavily on our relationships with Microsoft and Novell and attempt to coordinate our product offerings 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 that case, we may not be able to introduce products on a timely basis that capitalize on new operating system releases and feature enhancements. Client/server computing environments are inherently complex. As a result, we cannot accurately estimate our software product life cycles. New products and product enhancements can require long development and testing periods, which depend significantly on our ability to hire and retain increasingly scarce and technically competent personnel. Significant delays in new product releases or significant problems in installing or implementing new product releases could seriously damage our business. We have, on occasion, experienced delays in the scheduled introduction of new and enhanced products and cannot be certain that such delays will not occur again. Our future success will depend, in part, upon our ability to enhance existing products, develop and introduce new products, satisfy customer requirements and achieve market acceptance. We cannot be certain that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, the products, capabilities or technologies developed by others may render our products or technologies obsolete or shorten their life cycles. We are dependent upon continued growth of the market for Windows NT and Novell NetWare operating systems. We depend upon the success of Microsoft's Windows NT and Novell's NetWare operating systems. In particular, market acceptance of our products depends on the increasing complexity of these operating systems and the lack of effective tools to simplify system administration and security management for these environments. Although demand for Windows NT and NetWare operating systems has grown in recent years, we cannot be certain that it will continue to grow. If the market does continue to grow, we cannot be certain that the market for our products will continue to develop or that our products will be widely accepted. If the markets for our products fail to develop or develop more slowly than we anticipate, our business could be materially adversely affected. The percentages of our revenues attributable to software licenses for particular operating system 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 platforms which we support and the relative mix of development and installation by value-added resellers ("VARs") of application software operating on such platforms. Product concentration. Majority of our revenues are from the sale of our NOSadmin and NETinventory products. We anticipate that these products, along with products additions as a result of the Curasoft, Netect and Entevo acquisitions, will account for majority or all of all of our revenues for the foreseeable future. Our future operating results will depend on continued market acceptance of NOSadmin and NETinventory, introduction of new products from the Curasoft, Netect and Entevo acquisitions, enhancements to these products and the continued development of additional snap-in modules for our Enterprise Console product. Competition, technological change or other factors could reduce demand for, or market acceptance of any or all of our products and could substantially damage our business. Although we currently plan to broaden our product line, we cannot be certain that we will be able to reduce our product concentration or that we will be 14 16 able to generate material revenues from products acquired as a result of the Curasoft, Netect and Entevo acquisitions. Risks associated with length of sales cycle. We have sold our products to customer workgroups and corporate divisions. As a result, our sales cycle has ranged from three to six months. Recently, we have focused more of our selling effort on products for the customer's entire enterprise and have found that our sales cycle to enterprises has ranged from six to twelve months. The sales cycle to enterprises is typically longer for a number of reasons, including: - the significant resources committed to an evaluation of network management software by an enterprise require us to expend substantial time, effort and money educating them on the value of our products and services; and - decisions to license and deploy enterprise-wide software generally involve an evaluation of our software by a significant number of personnel of the enterprise in various functional and geographic areas, each often having specific and conflicting requirements. As a result, we cannot predict the timing and amount of specific sales. Our inability to complete one or more enterprise-wide sales in a particular quarter or calendar year could materially adversely affect our business and could cause our operating results to vary significantly from quarter to quarter. For more information, see "-- Our Quarterly Financial Results are Subject to Significant Fluctuations". Need to manage changing operations. We have expanded our operations rapidly in recent years. We intend to continue to expand in the foreseeable future to pursue existing and potential market opportunities. This rapid growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. If we fail to implement and improve these systems, our business, operating results and financial condition will be materially adversely affected. Dependence on key personnel. Our success depends largely on the efforts of our executive officers, particularly Eric J. Pulaski, the President and Chief Technology Officer of BindView. We do not have an employment contract requiring Mr. Pulaski to continue his employment for any period of time. We do not maintain key man life insurance policies on any of our executive officers. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled research and development, technical support and sales and marketing personnel. We face intense competition for qualified personnel, and we cannot be certain that we will successfully attract and retain additional qualified personnel in the future. The loss of the services of one or more of our key individuals or the failure to attract and retain additional qualified personnel could substantially damage our business. Risks associated with international sales and operations. During 1999, 1998 and 1997, we derived approximately 17%, 10% and 13% of our revenues, respectively, from sales outside North America. We only recently opened direct telesales offices outside the United States. We have historically generated revenues outside North America through indirect channels, including VARs and other distributors. We are in the early stages of developing our indirect distribution channels in certain markets outside the United States. We cannot be certain that we will be able to attract third parties that will be able to market our products effectively or to provide timely and cost-effective customer support and service. Our reseller arrangements generally provide that resellers may carry competing product offerings. We cannot be certain that any distributor or reseller will continue to represent our products. The inability to recruit, or the loss of, important sales personnel, distributors or resellers could materially and adversely affect our business. As we expand our sales and support operations internationally, we anticipate that international revenues will grow as a percentage of our total revenues. To successfully expand international sales, we must: - establish additional international direct telesales offices; - expand the management and support organizations for our international sales channel; 15 17 - hire additional personnel; - customize our products for local markets; - recruit additional international resellers where appropriate; and - expand the use of our direct telesales model. If we are unable to generate increased sales through a direct telesales model, we will incur higher personnel costs without corresponding increases in revenue, resulting in lower operating margins for our international operations. In addition, employment 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. However, 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. Limited protection of proprietary technology; risks of infringement. Our success depends to a significant degree upon our software and other proprietary technology. The software industry has experienced widespread unauthorized reproduction of software products. We rely on a combination of trademark, trade secret, and copyright law and contractual restrictions to protect our technology. These legal protections provide only limited protection. The steps we have taken may deter competitors from misappropriating our proprietary information. However, we may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights. If we litigated to enforce our rights, litigation would be expensive, would divert management resources and may not be adequate to protect our business. We also could be subject to claims alleging infringement of third-party intellectual property rights. In addition, we may be required to indemnify our distribution partners and end-users for similar claims made against them. Any claims against us could require us to spend significant time and money in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. As a result, claims against us could materially adversely affect our business. Risks associated with completed and potential acquisitions. We have made and may continue to make investments in complementary companies, technologies, services or products if we find appropriate opportunities. If we buy a company, we could have difficulty assimilating the personnel and operations of the acquired company. If we make other types of acquisitions, assimilating the technology, services or products into our operations could be difficult. Acquisitions can disrupt our ongoing business, distract management and other resources and make it difficult to maintain our standards, controls and procedures. We may not succeed in overcoming these risks or in any other problems we might encounter in connection with any future acquisitions. We may be required to incur debt or issue equity securities to pay for any future acquisitions. In addition, there can be no assurance that we will be able to successfully integrate our recent acquisitions of Curasoft, Netect and Entevo or that we will be able to integrate the products and technology we acquired into our sales model or product offerings. Risks of undetected software errors. Our software products are complex and may contain certain undetected errors, particularly when first introduced or when new versions or enhancements are released. We have previously discovered software errors in certain of our new products after their introduction. We cannot be certain that, despite our testing, such errors will not be found in current versions, new versions or enhancements of our products after commencement of commercial shipments. Such undetected errors could result in adverse publicity, loss of revenues, delay in market acceptance or claims against us by customers, all of which could materially adversely affect our business. Risk of product liability claims. Because our product design provides important network management services, we may receive significant liability claims. Our agreements with customers typically contain provisions intended to limit our exposure to liability claims. These limitations may not, however, preclude all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay 16 18 significant damages. As a result, any such claims, whether or not successful, could seriously damage our reputation and our business. Anti-takeover provisions. Incumbent management and our Board of Directors could use certain provisions of our certificate of incorporation to 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 adversely affect the market price of our common stock. ITEM 2. PROPERTIES Our principal administrative, sales and marketing, support and research and development facility is located in Houston, Texas. We also currently have office space for our remote sales offices in Frankfurt, Germany and Paris, France and our remote development offices in Fremont, California and Framingham, Massachusetts, and the Entevo offices are in Arlington, Virginia with a development office in Pune, India. However, anticipated expansions in international sales may result in us moving to new facilities within the next 12 months. We believe suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS We are not aware of any current or pending litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK Our common stock began trading on the Nasdaq National Market on July 24, 1998 under the symbol "BVEW". Before that time, there was no market for our common stock. The initial public offering price on July 24, 1998 was $5.00 per share. On December 31, 1999, the 46,695,116 shares of our common stock outstanding were held by approximately 108 holders of record. As of February 29, 2000, the last sales price per share of the Company's common stock, as reported by The Nasdaq Stock Market, was $33.75. The following table presents the range of high and low closing prices for our common stock during the year ended December 31, 1999, from the date our stock began trading on Nasdaq through December 31, 1999, as reported by The Nasdaq National Market. This information, and all share and per share data contained in this report, gives effect to a dividend of one share of common stock paid on each outstanding share of our stock common stock on February 9, 2000 (the "Stock Split").
HIGH LOW ------ ----- 1998 Third Quarter (beginning July 24, 1998)................... $10.07 $4.88 Fourth Quarter............................................ 13.75 7.25 1999 First Quarter............................................. 15.56 9.75 Second Quarter............................................ 14.50 8.94 Third Quarter............................................. 14.38 9.38 Fourth Quarter............................................ 24.84 10.00
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 that all future earnings, if any, 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. 18 20 ITEM 6. SELECTED FINANCIAL DATA The following income statement and balance sheet data for the years ended and as of December 31, 1999, 1998 and 1997 are derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere in this report. This data does not give effect to the pooling of interests business combination with Entevo Corporation which was consummated on February 9, 2000. 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 Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 1996 1995 ------- ------- -------- ------- ------- IN THOUSANDS EXCEPT PER SHARE AMOUNTS STATEMENT OF OPERATIONS Revenues: Licenses............................................ $49,963 $30,209 $ 17,821 $ 9,720 $ 7,005 Services............................................ 17,985 8,275 3,056 1,294 328 ------- ------- -------- ------- ------- Total revenues............................... 67,948 38,484 20,877 11,014 7,333 ------- ------- -------- ------- ------- Cost of revenues: Cost of licenses.................................... 1,425 958 644 465 693 Cost of services.................................... 2,045 1,123 637 362 139 ------- ------- -------- ------- ------- Total cost of revenues....................... 3,470 2,081 1,281 827 832 ------- ------- -------- ------- ------- Gross profit.......................................... 64,478 36,403 19,596 10,187 6,501 ------- ------- -------- ------- ------- Costs and expenses: Sales and marketing................................. 27,965 19,096 10,200 4,267 3,234 Research and development............................ 16,656 10,513 4,320 2,254 1,249 General and administrative.......................... 5,904 4,311 3,421 1,526 1,235 Acquisition related earnout(1)...................... 1,200 -- -- -- -- Merger and restructuring(2)......................... 2,524 -- -- -- -- Purchased in-process research and development(3).... -- 2,488 -- -- -- Stock compensation expense(4)....................... -- -- 15,262 436 -- ------- ------- -------- ------- ------- Operating income (loss)(5)............................ 10,229 (5) (13,607) 1,704 783 Other income (expenses), net.......................... 3,079 1,086 79 5 (29) ------- ------- -------- ------- ------- Income (loss) before income tax provision............. 13,308 1,081 (13,528) 1,709 754 Provision (benefit) for income tax.................... 6,299 2,945 (3,150) -- -- ------- ------- -------- ------- ------- Net income (loss)..................................... 7,009 (1,864) (10,378) 1,709 754 Pro forma charge (benefit) in lieu of income taxes.... -- -- (765) 697 264 ------- ------- -------- ------- ------- Pro forma net income (loss) (6)(7).................... $ 7,009 $(1,864) $ (9,613) $ 1,012 $ 490 ======= ======= ======== ======= ======= Earnings (loss) per common share: Basic(8)............................................ $ 0.15 $ (0.07) $ (0.55) $ 0.06 $ 0.03 ======= ======= ======== ======= ======= Diluted(8).......................................... $ 0.14 $ (0.07) $ (0.55) $ 0.05 $ 0.03 ======= ======= ======== ======= ======= Shares used in computing earnings (loss) per common share: Basic............................................... 45,183 28,196 17,524 16,634 16,456 ======= ======= ======== ======= ======= Diluted............................................. 50,482 28,196 17,524 22,270 16,456 ======= ======= ======== ======= ======= AS OF DECEMBER 31, FINANCIAL POSITION Working capital....................................... $66,526 $58,994 $ 12,391 $ 1,750 $ 671 Total assets.......................................... 99,923 76,037 18,857 4,016 2,747 Long-term debt........................................ -- 7,666 3,274 -- 68 Shareholders' equity.................................. 81,830 58,536 10,742 2,647 1,214
- --------------- (1) Represents a $1,200 charge for an earnout bonus payment in connection with the acquisition of Curasoft, Inc. in December 1998. 19 21 (2) Represents $1,533 in transaction related charges and $991 in restructuring related charges in connection with the acquisition of Netect, Ltd. in March 1999. (3) Represents a $2,488 charge for purchased in-process research and development in connection with the acquisition of Curasoft, Inc. in December 1998. (4) Stock compensation expense of $15,262 and $436 in 1997 and 1996, respectively, was recognized in connection with the Company's terminated Phantom Stock Plan and a terminated provision of an employment agreement. (5) Operating income excluding the acquisition related earnout of $1,200 and transaction and restructuring expenses of $2,524 in 1999 and purchased in-process research and development of $2,488 in 1998 and stock compensation expense of $15,262 and $436 in 1997 and 1996, respectively, would have been $13,953, $2,483, $1,655 and $2,140 in 1999, 1998, 1997 and 1996, respectively. (6) Pro forma net income excluding the acquisition related earnout of $1,200 and transaction and restructuring expenses of $2,524 in 1999 and purchased in-process research and development of $2,488 in 1998 and stock compensation expense of $15,262 and $436 in 1997 and 1996, respectively, would have been $10,971, $624, $305 and $1,296 in 1999, 1998, 1997 and 1996, respectively. (7) This represents net income (loss), adjusted for a pro forma charge in lieu of income taxes for the periods the Company was an S Corporation as if BindView were a C Corporation for all periods. (8) Basic earnings per common share excluding the acquisition related earnout of $1,200, transaction and restructuring expenses of $2,524 in 1999, purchased in-process research and development of $2,488 in 1998 and stock compensation expense of $15,262 and $436 in 1997 and 1996, respectively, would have been $0.24, $0.02, $0.02 and $0.08 in 1999, 1998, 1997 and 1996, respectively. Diluted earnings per share excluding these expenses would have been $0.22, $0.01, $0.01 and $0.06 in 1999, 1998, 1997 and 1996 respectively. 20 22 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 Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. 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". RESULTS OF OPERATIONS The following table presents, as a percentage of total revenue, selected consolidated financial data for each of the three years most recent years ended December 31.
1999 1998 1997 ----- ----- ----- Revenues: Licenses.................................................. 73.5 78.6 85.4 Services.................................................. 26.5 21.4 14.6 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- Cost of revenue: Cost of licenses.......................................... 2.1 2.5 3.1 Cost of services.......................................... 3.0 2.9 3.0 ----- ----- ----- Total cost of revenues............................ 5.1 5.4 6.1 ----- ----- ----- Gross profit................................................ 94.9 94.6 93.9 ----- ----- ----- Costs and expenses Sales and marketing....................................... 41.2 49.6 48.9 Research and development.................................. 24.5 27.3 20.7 General and administrative................................ 8.7 11.2 16.4 Acquisition related earnout(1)............................ 1.8 -- -- Merger and restructuring(2)............................... 3.6 -- -- Purchases in-process research and development(3).......... -- 6.5 -- Stock compensation expense(4)............................. -- -- 73.1 ----- ----- ----- Operating income (loss)(5).................................. 15.1 0.0 (65.2) Other income, net........................................... 4.5 2.8 0.4 ----- ----- ----- Income (loss) before income tax provision................... 19.6 2.8 (64.8) Provision (benefit) for income tax.......................... 9.3 7.6 (15.1) ----- ----- ----- Net income (loss)........................................... 10.3 (4.8) (49.7) Pro forma charge (benefit) in lieu of income taxes.......... -- -- (3.7) ----- ----- ----- Pro forma net income (loss) (6),(7)......................... 10.3 (4.8) (46.0) ===== ===== =====
- --------------- (1) Represents a $1,200 charge for an earnout bonus payment in connection with the acquisition of Curasoft, Inc. in December 1998. (2) Represents $1,533 in transaction related charges and $991 in restructuring related charges in connection with the acquisition of Netect, Ltd. in March 1999. (3) Represents a $2,488 charge for purchased in-process research and development in connection with the acquisition of Curasoft, Inc. in 1998. (4) Stock compensation expense of $15,262 was recognized in connection with the Company's terminated Phantom Stock Plan and a terminated provision of an employment agreement in 1997. (5) Operating income excluding the acquisition related earnout of $1,200 and transaction and restructuring expenses of $2,524 in 1999 and purchased in-process research and development of $2,488 in 1998 and 21 23 stock compensation expense of $15,262 in 1997, would have been $13,953, $2,483 and $1,655 in 1999, 1998 and 1997, respectively. (6) Pro forma net income excluding the acquisition related earnout of $1,200 and transaction and restructuring expenses of $2,524 in 1999 and purchased in-process research and development of $2,488 in 1998 and stock compensation expense of $15,262 in 1997, would have been $10,971, $624 and $305 in 1999, 1998 and 1997, respectively. (7) This represents net income (loss), adjusted for a pro forma charge in lieu of income taxes for the periods the Company was an S Corporation as if BindView were a C Corporation for all periods. REVENUES The Company's revenues are derived from the sale of software products and related services including subscription contracts. Total revenues were $67.9 million, $38.5 million and $20.9 million in fiscal 1999, 1998 and 1997, respectively, representing year-to-year increases of 84% between 1997 and 1998 and 77% between 1998 and 1999. We had no customers that accounted for more than 10% of our revenues in 1999, 1998 or 1997. Revenues recognized from sales to customers outside North America, primarily in the United Kingdom and Europe, represented approximately 17%, 10% and 13% in 1999, 1998 and 1997, respectively. Licenses. License revenues were $50.0 million, $30.2 million and $17.8 million in fiscal 1999, 1998 and 1997, respectively, representing 74%, 79% and 85% of total revenues in the respective periods. The increase in the Company's license revenues over these periods is a result of continued market acceptance of the BindView EMS product family and revenues generated from new product introductions. No assurances can be made that revenues will continue to increase at the rates reflected. Services. Service revenues were $18.0 million, $8.3 million and $3.1 million in fiscal 1999, 1998 and 1997, respectively, representing 26%, 21% and 15% of total revenues in the respective periods. The increase in the Company's service revenues over these periods is a result of an increase in purchases and renewals of subscription contracts by the Company's growing installed customer base. Because revenues from subscription contracts are recognized ratably over the contract term, this increase in these revenues as a percentage of total revenues results in greater deferred revenue recognition. The costs associated with these services are recognized as they are incurred. This may negatively impact the Company's operating margins during periods in which the Company incurs infrastructure ramp-up costs in response to increases in purchases and renewals of subscription contacts. COST OF REVENUES Cost of Licenses. Cost of licenses includes product manuals, packaging, distribution and media costs for our software products. Cost of licenses were $1.4 million, $958,000 and $644,000 in fiscal 1999, 1998 and 1997, respectively, representing 3%, 3% and 4% of license revenues in the respective periods. The cost of licenses has increased primarily due to increases in product shipments. The Company believes these costs will remain relatively constant as a percentage of total revenue, although there will continue to be quarterly fluctuations due to the timing of certain expenses. Cost of Services. Cost of services includes personnel and other costs related to technical support and professional services. Cost of services were $2.0 million, $1.1 million and $637,000 in fiscal 1999, 1998 and 1997, respectively, representing 11%, 14% and 21% of service revenues in the respective periods. The increase in the absolute dollar cost of services is primarily from increases in the cost of technical support staff providing support to the Company's growing customer base and increases in the cost of professional services staff providing customer training and implementation services. The decrease in cost of services as a percentage of service revenues over these periods is primarily due to service revenues outpacing technical support staffing levels as we benefited from greater efficiencies of scale. We believe services gross margin as a percentage of service revenues in the foreseeable future will remain relatively consistent with services gross margins realized in 1999. Professional service revenues generally results in a lower gross margin than other types of revenues and in the event that professional service revenues increase as a percentage of total revenues, our overall gross margin may be adversely affected. 22 24 COSTS AND EXPENSES Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, general office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses were $28.0 million, $19.1 million and $10.2 million in fiscal 1999, 1998 and 1997, respectively, representing 41%, 50% and 49% of total revenues in the respective periods. The increase in the absolute dollar cost of sales and marketing expenses is related to the hiring of additional personnel in connection with the building of the Company's sales force and the additional facilities and computer systems required by these additional personnel. The decrease in sales and marketing expenses as a percentage of revenues is related to the reduction of duplicative marketing efforts associated with Netect over these periods, the start-up costs incurred with the launch of the Company's direct telesales organization in Germany and France in 1998 and the ongoing efforts of the Company to manage operating expenses. As we continue to devote resources to the expansion of our domestic and international sales and marketing organization, BindView expects that the annual sales and marketing expenses as a percentage of total revenue to be in the range of 40-50% for the foreseeable future. Research and Development. Research and development expenses consist primarily of salaries and benefits for product development, product management and quality assurance personnel, payments to contract programmers and expendable equipment purchases. Research and development expenses were $16.7 million, $10.5 million and $4.3 million in fiscal 1999, 1998 and 1997, respectively, representing 25%, 27% and 21% of total revenues in the respective periods. The increase in research and development expenses is related to increased personnel, additional facilities and an increase in the computer systems and software development tools required by the additional personnel. The decline in research and development expenses as a percentage of revenue is a result of certain product lines reaching a stage in their product life cycle requiring less research and development effort relative to the respective license revenue generated by these products and the Company's ongoing efforts to manage operating expenses. However, the Company believes that a significant research and development investment is essential for it to maintain and grow its market position and continue to expand its product line. Accordingly, the Company anticipates it will continue to devote substantial resources to product research and development for the foreseeable future. General and Administrative. General and administrative expenses consist primarily of salaries, personnel and related costs for the Company's executive, administrative, finance and information services staff. General and administrative expenses were $5.9 million, $4.3 million and $3.4 million in fiscal 1999, 1998 and 1997, respectively, representing 9%, 11% and 16% of total revenues in the respective periods. The increase in the general and administrative expenses is related to increased staffing, facilities costs and associated expenses necessary to manage and support the Company's increased scale of operations and the increase in the allowance for doubtful accounts over this period. The decline in general and administrative expenses as a percentage of revenue is a result of the reduction of duplicative staff associated with the Netect acquisition and the Company's ongoing efforts to manage operating expenses combined with the Company's revenue growth. The Company expects that for 2000 general and administrative expenses will remain relatively constant from 1999 as a percentage of total revenue, but increase in absolute dollars. ACQUISITION RELATED EARNOUT At December 31, 1999, the Company was obligated to make an earnout payment of $1.2 million to certain former owners of Curasoft based on the achievement of revenue targets related to an existing product, as well as their continued employment with the Company. The Company is not obligated to any other future earnout payments related to this acquisition. MERGER AND RESTRUCTURING EXPENSES On March 1, 1999, the Company merged with Netect, Ltd. ("Netect") in a stock-for-stock transaction accounted for as a pooling of interests. The transaction costs related to the acquisition include investment banking fees of $590,000, accounting and legal expenses of $565,000, transfer fees of $138,000, and other miscellaneous transaction expenses of $240,000. At December 31, 1999 there were no remaining unpaid 23 25 transaction costs on the Company's Balance Sheet. At the time of the merger, management approved restructuring plans to eliminate duplicate senior management positions and to close the Israeli operations of Netect. The restructuring plans were based on management's best estimate of those costs based on the information available at that time. The restructuring expenses related to this plan include involuntary employee separation expenses for approximately 15 former Netect employees, the costs to close Netect's Israeli operations and other miscellaneous restructuring expenses. The restructuring expense adjustment relates to additional costs to close Netect's Israeli operations that exceeded management's initial estimate. The Company has completed most of the actions related to the restructuring plans. The Company believes the remaining reserve is sufficient to complete the remaining actions under the plan. The accrued restructuring expenses and amounts charged against the provision as of December 31, 1999, were as follows:
BEGINNING CASH ACCRUED EXPENSES AT ACCRUAL ADJUSTMENT EXPENDITURES DECEMBER 31, 1999 -------- ---------- ------------ ------------------- (IN THOUSANDS) Employee severance and related costs............................ $575 $238 $(780) $33 Israeli office closing............. 119 -- (119) -- Other restructuring costs.......... 59 -- (59) -- ---- ---- ----- --- Total.................... $753 $238 $(958) $33 ==== ==== ===== ===
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT In December 1998, the Company committed to deliver 350,000 shares of its common stock in exchange for all of the outstanding equity interests in Curasoft, Inc. in a transaction accounted for as a purchase. These shares were issued in the first quarter of 1999. The purchase price allocation resulted in an immediate write-off of approximately $2.5 million in 1998 for purchased in-process research and development costs related to a Curasoft product ("CuraSLAM") undergoing development at the time of the acquisition. CuraSLAM has been designed as a stand-alone product by Curasoft and is not related to the Curasoft ENR product family. This product is currently being designed to enable customers to improve the service levels of their computing environments and will help customers better align business processes with their IT functions. This product has been integrated with BindView products. The Company determined that the purchased in-process technology had not reached technological feasibility and had no alternative future use based on the status of design and development activities at the acquisition date. To determine the fair value of the purchased in-process research and development activities, the Company utilized values determined by an independent valuation firm, which applied the percentage of completion approach. Prior to the acquisition, Curasoft conducted in-depth market research, designed the product architecture, substantially completed the coding of the user interface and began the coding of the other modules. The Company has estimated that the development effort of this product was 50% complete at the date of acquisition. The percentage completed of 50% was applied to the estimated fair value of the completed product to determine the in-process research and development charge upon acquisition. The estimated fair value of the completed product was determined using the future revenue streams expected from the product, net of related expenses, discounted at a rate based upon the specific level of risk associated with achieving the forecasted revenues. The Company estimates that in order for this product to be available for general distribution during the first half of 2000, it will need to invest between $1.5 and $2.0 million in development costs associated with its operations in Fremont, California. The Company estimates that future revenues related to this product will be between $40.0 million and $60.0 million between 2000 and 2006. The management of the Company has conducted due diligence and performed an assessment of remaining tasks and risks to achieve completion. The development activities required to complete the acquired in-process technologies include additional design, coding, quality assurance procedures and customer beta testing. The challenges facing the Company to 24 26 complete the development of this product on schedule include 1) the management of a development office away from its principle offices in Houston, Texas, 2) the ability to adequately staff this office, 3) the ability to effectively integrate the product with the Company's existing products and 4) the validation of the product and its features by potential customers. If the development of the product is delayed, this could adversely impact its availability date and time-to-market and therefore, its ability to market the product. If the product is available for general distribution during the first half of 2000, the Company anticipates generating material net cash inflows from this product in 2001. STOCK COMPENSATION EXPENSE Stock compensation expense was $15.3 million for 1997. $14.7 million of such expense resulted from the issuance of 9.8 million shares of Common Stock in connection with the termination of our Phantom Stock Plan and $550,000 of such expense resulted from the issuance of a warrant to purchase 875,000 shares of Common Stock to an officer in exchange for extinguishing a bonus provision in his employment agreement. OTHER INCOME, NET The Company had other income of $3.1 million, $1.1 million and $79,000 in fiscal 1999, 1998 and 1997. This increase is primarily due to an increase in interest income related to higher cash, cash equivalents and investment balances as a result of the proceeds from Company's initial public offering in July 1998, the secondary offering in December 1998 and positive cash flow from operating activities. PROVISION FOR INCOME TAXES Prior to October 16, 1997, Bindview was treated as a Subchapter S Corporation for federal income tax purposes. Accordingly, no federal income tax expense was recorded for the period January 1, 1997 to October 16, 1997. The taxable income generated from results of operations during this period was reported in the income tax returns of the individual shareholders. A pro forma charge in lieu of income taxes has been recognized in the Consolidated Statement of Operations to reflect income taxes as if the Company had been a C Corporation for all periods. Historical restated results of the Company related to the acquisition of Netect in March, 1999 do not recognize a tax benefit for certain net operating losses generated by Netect because the Company's ability to realize the net operating losses is limited by the former structure of Netect and by the Company's plans for Netect's future operations. The effective tax rate was 47.3% in 1999 and 272.4% in 1998. Valuation allowances booked on foreign net operating losses adversely impacted both 1999 and 1998's rates. Certain transaction expenses recorded in connection with the Company's merger with Netect are not deductible for federal income tax purposes and adversely impacted the 1999 rate. Purchased in-process research and development expenses recorded in conjunction with the acquisition of Curasoft, Inc. are not deductible for federal income tax purposes and adversely impacted the 1998 rate. The Company anticipates an effective tax rate of 37% for 2000. LIQUIDITY AND CAPITAL RESOURCES Our working capital increased to $66.5 million at December 31, 1999 from $59.0 million at December 31, 1998. The Company's cash, cash equivalents, short-term and long-term investments balance increased to $72.3 million at December 31, 1999 from $58.2 million at December 31, 1998 due primarily to positive cash flows from operating activities and proceeds from the exercise of stock options, partially offset by the purchases of property and equipment. To provide immediate short-term liquidity, should we need it, we entered into a $30.0 million line-of-credit arrangement in March, 2000. This facility expires on September 9, 2000, but we may renew it for up to five years. Any borrowings against this line will bear an interest rate of LIBOR plus 1.5% (7.6% as of March 9, 2000). The facility is secured by cash and cash equivalents and short-term investments. We are not obligated to pay any fees for the unused portion of this line. To date, we have not borrowed against this line. The Company believes that the net proceeds of its initial and secondary offerings completed in 1998, together with existing cash, cash equivalents, short-term investments and cash flow from operations will be sufficient to meet its normal working capital requirements for at least the next 12 months. Thereafter, the Company may require additional funds to support its working capital requirements or for other purposes and 25 27 may seek to raise such additional funds through public or private equity financing or from other sources. There can be no assurance that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to the Company or that any additional financing would not be dilutive. The Company currently intends to use the net proceeds of its initial and secondary public offerings for working capital and general corporate purposes, including financing accounts receivable and capital expenditures made in the ordinary course of business, as well as for possible acquisitions of businesses, products and technologies that are complementary to those of the Company. There can be no assurance that the Company will be able to identify any acquisitions of businesses, products or technology that are complementary to those of the Company or are on terms that are acceptable to the Company. Possible acquisitions of businesses, products and technologies could require the use of substantial amounts of capital, some of which might require the issuance of additional equity or debt securities. Pending such uses, the net proceeds will continue to be invested in government securities and other short-term, investment-grade, interest-bearing instruments. YEAR 2000 ISSUES Background. Some computers, software and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900 or some other default condition, rather than 2000. These problems and are commonly referred to as the "Millennium Bug" or "Year 2000 Problem". The Year 2000 Problem could have affected computers, software and other equipment that we and our customers and suppliers use. Accordingly, we reviewed our internal computer programs and systems to ensure that they were Year 2000 compliant. Our expenditures to address potential Year 2000 problems were not significant. We have not experienced any Year 2000 related problems to date. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of its investments. FOREIGN CURRENCY EXCHANGE RATES The Company operates globally and the functional currency for most of its non-U.S. enterprises is the local currency. For the fiscal years 1999, 1998 and 1997, approximately 17%, 10% and 13% of the Company's consolidated revenues were derived 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 the Company's foreign subsidiaries are incurred in foreign currencies. As a result, the Company's U.S. dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates. Based on the Company's foreign currency exchange instruments outstanding at December 31, 1999, the Company estimates that a near-term change in foreign currency rates would not materially affect its financial position, results of operations or net cash flows for the year ended December 31, 1999. The Company 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% confidence level. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses in fair value that will be incurred by the Company. INTEREST RATE RISK The Company adheres to a conservative investment policy, whereby its principle concern is the preservation of liquid funds while maximizing its yield on such assets. Cash, cash equivalents, short-term investments and long-term investments approximated $72.3 million and $58.2 million at December 31, 1999 and 1998, respectively. Such amounts were invested in different types of investment-grade securities with the 26 28 intent of holding these securities to maturity. Although the Company's 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. The Company estimates that a near-term change in interest rates would not materially affect its financial position, results of operations or net cash flows for the year ended December 31, 1999. The Company used a value-at-risk ("VAR") model to measure potential market risk on its marketable securities due to interest rate fluctuations. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses in fair value that will be incurred by the Company. 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 14 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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" and "Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the proxy statement relating to our 2000 annual meeting of shareholders (the "Proxy Statement") to be filed subsequent to the filing of this Annual Report on Form 10-K, 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. 27 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents included in this Annual Report on Form 10-K:
(1) FINANCIAL STATEMENTS PAGE - ------------------------ ---- Report of PricewaterhouseCoopers LLP........................ 31 Consolidated Balance Sheet at December 31, 1999 and 1998.... 32 Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended December 31, 1999, 1998 and 1997.................................................. 33 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1999..... 34 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 35 Notes to Consolidated Financial Statements.................. 36
Other financial schedules under the Act have been omitted because they are either not required or are not material. (b) Reports of Form 8-K: We did not file any current reports on Form 8-K during the fourth quarter of 1999. (c) Exhibits: Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. 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 14. 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.
EXHIBIT DESCRIPTION ------- ----------- 2.1 -- Share Purchase Agreement dated as of January 29, 1999, among BindView, Netect, Ltd. the holders of all of the share capital of Netect, Ltd. and rights to acquire share capital of Netect, Ltd. and Paul E. Blondin, as Shareholders' Representative (incorporated by reference to Exhibit 2.1 to BindView's Current Report on form 8-K (File No. 000-24677), dated March 1, 1999). 3.1 -- Amended and Restated Articles of Incorporation of BindView (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of BindView (Reg. No. 333-52883), filed with the Commission on July 23, 1998 (the "Form S-1")). 3.2 -- Bylaws of BindView (incorporated by reference to Exhibit 3.1 to the Form S-1). 4.1 -- Reference is hereby made to Exhibits 3.1 and 3.2 (incorporated by reference to Exhibit 4.1 to the Form S-1). 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.
28 30
EXHIBIT DESCRIPTION ------- ----------- 10.5*+ -- 1998 Non-Employee Director Stock Option Plan, as amended. 10.6 -- Agreement to Sublease dated June 25, 1998 between BindView and Halliburton Energy Services, Inc. 10.7 -- 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). 10.8+ -- 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"). 10.9+ -- 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). 10.10 -- Registration Rights Agreement dated October 16, 1997 among BindView, General Atlantic Partners 44 L.P., GAP Coinvestment Partners, L.P., JMI Equity Fund III, L.P. and Eric J. Pulaski (incorporated by reference to Exhibit 10.10 to the Form S-1). 10.11 -- Registration Rights Agreement dated November 7, 1997 among BindView and Scott R. Plantowsky (incorporated by reference to Exhibit 10.11 to the Form S-1). 10.12+ -- 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). 10.13 -- Form of Indemnification Agreement (incorporated by reference to Exhibit 10.16 to the Form S-1). 23.1* -- Consent of PricewaterhouseCoopers LLP. 27.1* -- Financial Data Schedule.
29 31 BINDVIEW DEVELOPMENT CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of PricewaterhouseCoopers LLP........................ 31 Consolidated Balance Sheet at December 31, 1999 and 1998.... 32 Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended December 31, 1999, 1998 and 1997.................................................. 33 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1999..... 34 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 35 Notes to Consolidated Financial Statements.................. 36 Supplemental Combined Financial Statements.................. 52
30 32 REPORT OF INDEPENDENT ACCOUNTANTS 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 14(a)(1) on page 28 present fairly, in all material respects, the financial position of BindView Development Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(1) on page 28 present 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 based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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 the opinion expressed above. As described in Note 14, on February 9, 2000, BindView Development Corporation merged with Entevo Corporation in a transaction accounted for as a pooling of interests. The accompanying supplementary combined financial statements give retroactive effect to the merger of BindView Development Corporation with Entevo Corporation. Accounting principles generally accepted in the United States proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation, however, they will become the historical consolidated financial statements of BindView Development Corporation and its subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, based upon our audits, the accompanying supplementary combined balance sheets and the related supplementary combined statements of operations and comprehensive loss, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of BindView Development Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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 the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas January 26, 2000, except as to Note 14 which is as of February 9, 2000 and except as to the pooling of interests with Entevo Corporation which is as of March 29, 2000 31 33 BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31, ------------------ 1999 1998 ------- -------- ASSETS Current assets: Cash and cash equivalents................................. $61,329 $ 48,010 Short-term investments.................................... 4,834 10,187 Accounts receivable, net of allowance of $523 and $204, respectively........................................... 14,487 5,711 Deferred tax assets....................................... 3,069 3,245 Other current assets...................................... 900 1,676 ------- -------- Total current assets.............................. 84,619 68,829 Property and equipment, net................................. 7,570 5,342 Capitalized software and related assets, net................ 1,177 1,374 Long-term investments....................................... 6,120 -- Other assets................................................ 437 492 ------- -------- Total assets...................................... $99,923 $ 76,037 ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,672 $ 1,954 Accrued liabilities....................................... 2,356 1,903 Accrued compensation...................................... 3,386 984 Deferred revenue.......................................... 9,679 4,994 ------- -------- Total current liabilities......................... 18,093 9,835 ------- -------- Commitments and contingencies (Note 9) Convertible debentures...................................... -- 7,572 Other long-term liabilities................................. -- 94 ------- -------- Total long-term liabilities....................... -- 7,666 ------- -------- Total liabilities................................. 18,093 17,501 ------- -------- Shareholders' equity: Convertible preferred stock, $0.01 par value, 20,000 shares authorized, 0 and 2,528 shares issued and outstanding, respectively.............................. -- -- Convertible preferred stock, $0.025 par value, 520 shares authorized, 7 and 4 shares issued and outstanding, respectively........................................... -- -- Common stock, no par value, 100,000 shares authorized, 46,695 and 42,206 shares issued and outstanding, respectively........................................... 1 1 Additional paid-in capital................................ 85,517 65,675 Common Stock to be issued, 350 shares..................... -- 3,352 Accumulated deficit....................................... (3,523) (10,532) Accumulated other comprehensive income (loss)............. (165) 40 ------- -------- Total shareholders' equity........................ 81,830 58,536 ------- -------- Total liabilities and shareholders' equity........ $99,923 $ 76,037 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 32 34 BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ------- ------- -------- Revenues: Licenses.................................................. $49,963 $30,209 $ 17,821 Services.................................................. 17,985 8,275 3,056 ------- ------- -------- Total revenues.................................... 67,948 38,484 20,877 ------- ------- -------- Cost of revenues: Cost of licenses.......................................... 1,425 958 644 Cost of services.......................................... 2,045 1,123 637 ------- ------- -------- Total cost of revenues............................ 3,470 2,081 1,281 ------- ------- -------- Gross profit................................................ 64,478 36,403 19,596 ------- ------- -------- Costs and expenses: Sales and marketing....................................... 27,965 19,096 10,200 Research and development.................................. 16,656 10,513 4,320 General and administrative................................ 5,904 4,311 3,421 Acquisition related earnout............................... 1,200 -- -- Merger and restructuring.................................. 2,524 -- -- Purchased in-process research and development............. -- 2,488 -- Stock compensation expense................................ -- -- 15,262 ------- ------- -------- Operating income (loss)..................................... 10,229 (5) (13,607) Other income, net........................................... 3,079 1,086 79 ------- ------- -------- Income (loss) before income tax provision................... 13,308 1,081 (13,528) Provision (benefit) for income taxes........................ 6,299 2,945 (3,150) ------- ------- -------- Net income (loss)........................................... 7,009 (1,864) (10,378) Other comprehensive income, net of tax: Gain (loss) from foreign currency translation............. (205) 40 -- ------- ------- -------- Comprehensive income (loss)............................... $ 6,804 $(1,824) $(10,378) ======= ======= ======== Basic income (loss) per share............................... $ 0.15 $ (0.07) Diluted income (loss) per share............................. $ 0.14 $ (0.07) Pro forma information: Net loss as reported................................... $(10,378) Pro forma benefit in lieu of income taxes................................................ (765) -------- Pro forma net loss..................................... $ (9,613) ======== Pro forma basic net loss per share..................... $ (0.55) Pro forma diluted net loss per share................... $ (0.55)
The accompanying notes are an integral part of these consolidated financial statements. 33 35 BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON RETAINED ACCUMULATED COMMON STOCK STOCK ADDITIONAL COMMON EARNINGS OTHER --------------- TO BE PAID-IN STOCK (ACCUMULATED COMPREHENSIVE SHARES AMOUNT DELIVERED CAPITAL WARRANT DEFICIT) INCOME(LOSS) ------ ------ --------- ---------- ------- ------------ ------------- Balance at January 1, 1997................. 16,374 $ 1 -- $ 213 -- $ 2,351 -- Issuance of common stock................. 222 -- -- 902 -- -- -- S Corporation distributions.............. -- -- -- -- -- (1,274) -- Issuance of common stock to satisfy 1993 employment and acquisition liability... 1,006 -- -- 272 -- -- -- Issuance of common stock pursuant to termination of Phantom Stock Plan...... 9,890 -- -- 14,092 -- -- -- Transfer of S Corporation accumulated deficit upon conversion to C Corporation............................ -- -- -- (633) -- 633 -- Issuance of convertible preferred stock (2,532 shares)......................... -- -- -- 18,024 -- -- -- Issuance of warrant to purchase common stock (875 shares)..................... -- -- -- -- 550 -- -- Purchase of treasury stock (9,844 shares)................................ -- -- -- -- -- -- -- Exercise of stock options................ 20 -- -- 6 -- -- -- Net loss................................. -- -- -- -- -- (10,378) -- ------ --- ------- -------- ----- -------- ----- Balance at December 31, 1997............... 27,512 1 -- 32,876 550 (8,668) -- Exercise of stock options................ 2,182 -- -- 2,076 -- -- -- Exercise of stock warrants............... 2,376 -- -- 4,796 (550) -- -- Issuance of convertible preferred stock (3 shares)............................. -- -- -- 39 -- -- -- Issuance of common stock................. 8 -- -- 6 -- -- -- Tax benefit related to exercise of employee stock options................. -- -- -- 3,462 -- -- -- Conversion of preferred stock............ 12,640 -- -- -- -- -- -- Initial public offering.................. 6,642 -- -- 30,025 -- -- -- Secondary offering....................... 690 -- -- 6,412 -- -- -- Shares to be issued to acquire business (350 shares)........................... -- -- 3,352 -- -- -- -- Retirement of treasury stock............. (9,844) -- -- (14,017) -- -- -- Cumulative translation adjustment........ -- -- -- -- -- -- 40 Net loss................................. -- -- -- -- -- (1,864) -- ------ --- ------- -------- ----- -------- ----- Balance at December 31, 1998............... 42,206 1 3,352 65,675 -- (10,532) 40 Exercise of stock options................ 2,941 -- -- 2,656 -- -- -- Tax benefit related to exercise of employee stock options................. -- -- -- 6,176 -- -- -- Issuance pursuant to business acquired... 350 -- (3,352) 3,352 -- -- -- Conversion of convertible debentures and preferred stock........................ 1,198 -- -- 7,658 -- -- -- Cumulative translation adjustment........ -- -- -- -- -- -- (205) Net income............................... -- -- -- -- -- 7,009 -- ------ --- ------- -------- ----- -------- ----- Balance at December 31, 1999............... 46,695 $ 1 $ -- $ 85,517 $ -- $ (3,523) $(165) ====== === ======= ======== ===== ======== ===== TOTAL TREASURY SHAREHOLDERS' STOCK EQUITY ---------- ------------- Balance at January 1, 1997................. -- $ 2,565 Issuance of common stock................. -- 902 S Corporation distributions.............. -- (1,274) Issuance of common stock to satisfy 1993 employment and acquisition liability... -- 272 Issuance of common stock pursuant to termination of Phantom Stock Plan...... -- 14,092 Transfer of S Corporation accumulated deficit upon conversion to C Corporation............................ -- -- Issuance of convertible preferred stock (2,532 shares)......................... -- 18,024 Issuance of warrant to purchase common stock (875 shares)..................... -- 550 Purchase of treasury stock (9,844 shares)................................ (14,017) (14,017) Exercise of stock options................ -- 6 Net loss................................. -- (10,378) -------- -------- Balance at December 31, 1997............... (14,017) 10,742 Exercise of stock options................ -- 2,076 Exercise of stock warrants............... -- 4,246 Issuance of convertible preferred stock (3 shares)............................. -- 39 Issuance of common stock................. -- 6 Tax benefit related to exercise of employee stock options................. -- 3,462 Conversion of preferred stock............ -- -- Initial public offering.................. -- 30,025 Secondary offering....................... -- 6,412 Shares to be issued to acquire business (350 shares)........................... -- 3,352 Retirement of treasury stock............. 14,017 -- Cumulative translation adjustment........ -- 40 Net loss................................. -- (1,864) -------- -------- Balance at December 31, 1998............... -- 58,536 Exercise of stock options................ -- 2,656 Tax benefit related to exercise of employee stock options................. -- 6,176 Issuance pursuant to business acquired... -- -- Conversion of convertible debentures and preferred stock........................ -- 7,658 Cumulative translation adjustment........ -- (205) Net income............................... -- 7,009 -------- -------- Balance at December 31, 1999............... $ -- $ 81,830 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 34 36 BINDVIEW DEVELOPMENT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 --------- ------- -------- Cash flows from operating activities: Net income (loss)......................................... $ 7,009 $(1,864) $(10,378) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense................... 3,003 1,205 846 Loss on disposition of property and equipment........... 147 -- -- Stock compensation expense.............................. -- -- 14,642 Increase in provision for bad debts..................... 370 9 170 Purchased in-process research and development........... -- 2,488 -- Deferred income taxes................................... 6,299 2,945 (3,150) Interest payable........................................ -- 392 42 Changes in assets and liabilities, net of acquired business: (Increase) in accounts receivable..................... (8,975) (1,056) (2,762) (Increase) decrease in other current assets........... 808 (1,485) 408 Increase in accounts payable.......................... 629 1,043 614 Increase in accrued liabilities....................... 2,838 800 1,464 Increase in deferred revenue.......................... 4,657 2,843 1,459 --------- ------- -------- Net cash provided by operating activities.......... 16,785 7,320 3,355 --------- ------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (5,181) (5,140) (1,465) Purchase of investments................................... (160,659) (10,187) -- Maturities of short-term.................................. 159,892 -- -- Disposal of property and equipment........................ -- 201 -- Cash acquired in business acquisition..................... -- 156 -- Other..................................................... (79) (397) (94) --------- ------- -------- Net cash used by investing activities.............. (6,027) (15,367) (1,559) --------- ------- -------- Cash flows from financing activities: S Corporation distributions............................... -- -- (1,274) Notes payable and long-term debt.......................... -- 73 83 Proceeds from issuance of convertible preferred stock and common stock warrants................................... -- 39 18,024 Proceeds from issuance of common stock.................... -- -- 559 Proceeds from issuance of debentures...................... -- 3,949 3,099 Purchases of treasury stock............................... -- -- (14,017) Proceeds from initial public offering..................... -- 30,025 -- Proceeds from secondary offering.......................... -- 6,412 -- Proceeds from exercise of stock warrants, net............. -- 4,246 -- Proceeds from exercise of stock options................... 2,656 2,076 6 --------- ------- -------- Net cash provided by financing activities.......... 2,656 46,820 6,480 Effect of exchange rate changes on cash..................... (95) 40 -- --------- ------- -------- Net increase in cash and cash equivalents................... 13,319 38,813 8,276 Cash and cash equivalents at beginning of period............ 48,010 9,197 921 --------- ------- -------- Cash and cash equivalents at end of period.................. $ 61,329 $48,010 $ 9,197 ========= ======= ======== Supplemental disclosures for cash flow information: Cash paid during the year for interest.................... $ -- $ -- $ 9 Cash paid during the year for income taxes................ $ -- $ -- $ -- Noncash financing and investing activities: Issuance of 1,006 shares of common stock in 1997 to satisfy 1993 acquisition liability...................... $ -- $ -- $ 272 Issuance of warrant to purchase 875 shares of common stock in 1997 to satisfy bonus obligation..................... $ -- $ -- $ 550 Issuance of 350 shares of common stock related to the acquisition of Curasoft ................................ $ 3,352 -- -- Tax benefit related to the exercise of employee stock options................................................. $ 6,176 $ 3,462 -- Conversion of convertible debentures and preferred stock into common stock....................................... $ 7,658 -- --
The accompanying notes are an integral part of these consolidated financial statements. 35 37 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PAR VALUE) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS BindView Development Corporation (the Company), a Texas corporation, was incorporated in May 1990. Previous to 1995, the Company was known as The LAN Support Group, Inc. Pursuant to the sale of convertible preferred stock, the Company's Subchapter S election terminated on October 16, 1997. The Company develops, markets and supports a suite of systems and security management software products that manage the security and integrity of complex, distributed client/server networks operating on Microsoft Windows NT and Novell NetWare environments. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of BindView Development Corporation and its wholly-owned subsidiaries. In March of 1999, BindView merged with Netect, Ltd. ("Netect") in a pooling of interests transaction. The financial data included in these financial statements have been restated to reflect the merger with Netect. All significant intercompany transactions have been eliminated. REVENUE RECOGNITION The Company licenses its software products under perpetual licenses and recognizes its license revenue upon meeting each of the following criteria: (i) execution of a written purchase order, license agreement or contract; (ii) delivery of software or, if the customer has previously received evaluation software, delivery of the software license authorization code; (iii) issuance of the related license, with no significant vendor obligations or customer acceptance rights outstanding; (iv) the license fee is fixed or determinable; and (v) collectibility is assessed as being probable. Revenues from perpetual licenses are recorded as license revenue in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss). Service revenues include subscription contracts and professional services. Customers are generally required to purchase a one year subscription agreement in conjunction with their initial licensing of the Company's products. Subscription contracts are purchased separately by customers at their discretion after the first anniversary of a license sale. Subscription revenues are recognized ratably over the contract term. Revenues from subscription contracts and other related services are reported as service revenue in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss). The Company recognizes revenue in accordance with the Statement of Position No. 97-2 "Software Revenue Recognition" and Statement of Position No. 98-9 "Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions." Deferred revenue is comprised primarily of subscription revenue and other services. The portion of subscription contract revenues that have not yet been recognized as revenues is reported as deferred revenue in the accompanying consolidated balance sheet. Deferred subscription revenue which has not been collected is not recognized. Prior to January 1, 1998, postcontract customer support, consisting solely of telephone technical support, was included in the product sale to the Company's customers. During that period, the costs of providing this support was accrued and charged to expense at the time the revenue was recognized. Subsequent to January 1, 1998, post contract customer support is provided under subscription contracts. ADVERTISING COSTS Advertising costs are expensed as incurred. 36 38 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RESEARCH AND DEVELOPMENT Research and development costs are charged to operations when incurred. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", the Company capitalizes costs incurred in the development of software once 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. Amortization of capitalized software development costs is based on a straight line basis over the product's useful life ranging between three and seven years. To date, costs incurred by the Company's development staff and capitalizable subsequent to the establishment of technological feasibility have not been material and are included in capitalized software in the accompanying Consolidated Balance Sheet. Capitalized software also includes the cost of developed products obtained by the Company as a result of its business combinations with other companies. In December 1998, the Company completed its acquisition of Curasoft, Inc. and recorded $1,381 in capitalized software development costs as part of its purchase price allocation (Note 13). SOFTWARE DEVELOPED FOR INTERNAL USE The Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) in 1999. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. The adoption of SOP 98-1 did not result in the capitalization of costs during 1999. STOCK-BASED COMPENSATION The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method, as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock, and is recognized over the related vesting period. The Company provides proforma disclosure of the effect on net income and earnings per share as if the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied in measuring compensation expense. OTHER INCOME Other income consists primarily of interest earned on cash and cash equivalents and short-term and long-term investments. INCOME TAXES Prior to October 16, 1997, the Company had elected to be treated as an S Corporation for federal income tax purposes. Accordingly, all federal income tax liability prior to that date was the responsibility of the shareholders. The provision for income taxes is computed based on income earned from the termination date of the Company's S election on October 16, 1997. The asset and liability approach is used to account for income taxes. This approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the assets and liabilities. 37 39 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The pro forma results of operations of the Company reflect a pro forma charge in lieu of income taxes prior to October 16, 1997. EARNINGS PER SHARE The Company's earnings per share data is presented in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is 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 (Note 11). CASH AND CASH EQUIVALENTS The Company considers investments with original maturity dates of three months or less from the date of purchase to be cash equivalents. INVESTMENTS The Company's investments are classified as held to maturity as the Company has the intent and ability to hold the investments until maturity. These investments are reported at amortized cost. Short-term investments have original maturities of more than three months and a remaining maturity of less than one year. Long-term investments have original maturities of more than one year. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash equivalents, investments, accounts receivable, accounts payable and deferred revenues reflected in the December 31, 1999 and 1998 Consolidated Balance Sheet approximate their carrying value due to their short maturities. The fair value of $7,572 related to convertible debentures reflected in the December 31, 1998 Consolidated Balance Sheet was estimated using discounted cash flow analysis, based on Netect's incremental borrowing rates for similar types of borrowing arrangements. CONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-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 review 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. The Company performs ongoing credit evaluations of its customers to minimize credit risk. Approximately 17%, 10% and 13% of the Company's sales were made on an export basis, primarily to customers in Europe and the United Kingdom in 1999, 1998 and 1997, respectively. RECEIVABLES Trade finance receivables arise in the ordinary course of business. During 1999, the Company transferred $4,975 in trade finance receivables to a financing institution on a non-recourse basis. The Company records 38 40 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) such transfers as sales of the related accounts receivable when the Company is considered to have surrendered control of such receivables under the provisions of Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed by applying the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. LONG-LIVED ASSETS The Company reviews the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value amount. The Company has not identified any such impairment losses. FOREIGN CURRENCY Assets and liabilities of the Company's foreign operations are translated into United States dollars at the exchange rate in effect at the balance sheet date, and revenue and expenses are translated at the average exchange rate for the period. The functional currency of those subsidiaries is their local currency, which is the primary currency in which they operate. Cumulative translation adjustments are reported as a separate component of comprehensive income (loss). To date, adjustments resulting from the process of translating foreign subsidiaries financial statements into U.S. dollars have not been significant. COMPREHENSIVE INCOME (LOSS) The Company's only component of other comprehensive income is foreign currency translation adjustments. Changes in the Company's cumulative translation adjustment have been characterized as other comprehensive income in the accompanying Consolidated Statement of Operations and Comprehensive Income. SEGMENT REPORTING The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998. The management approach required by SFAS 131 designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas and major customers. The Company believes it operated in one reportable segment as defined by SFAS 131 for the years ended December 31, 1999, 1998 and 1997. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 39 41 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECENT PRONOUNCEMENTS In June 1998, the FASB issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities." The pronouncement establishes accounting and reporting standards for derivative instruments. The pronouncement was to become effective for fiscal years beginning after June 15, 1999. During June 1999, FASB issued SFAS 137 -- an amendment of SFAS 133 which delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company has historically not engaged in significant derivative instrument activity. Adoption of SFAS 133 is not expected to have a material effect on the Company's financial position or operational results. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company will adopt SAB 101 as required in the second quarter of 2000 and is evaluating the effect that such adoption may have on its consolidated results of operations and financial position. 2. INVESTMENTS Investments considered held to maturity at December 31, 1999, consisted of the following:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED COST MARKET VALUE HOLDING LOSSES HOLDING GAINS -------------- ------------ -------------- ------------- Short-term corporate bonds....... $ 751 $ 749 $ 2 $ -- Government agency bonds.......... 2,020 2,013 7 -- Asset backed securities.......... 6,120 6,093 27 -- Certificate of deposit........... 2,063 2,061 2 -- ------- ------- --- ----- Total corporate $10,954 $10,916 $38 $ -- bonds................ ======= ======= === =====
All of the investments at December 31, 1999 are scheduled to mature in 2000 and 2001. Market value is based upon quoted market prices for the investments. Investments considered held to maturity at December 31, 1998, consisted of the following:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED COST MARKET VALUE HOLDING LOSSES HOLDING GAINS -------------- ------------ -------------- ------------- Government agency bonds.......... $ 2,019 $ 2,013 $ 6 $ -- Certificates of deposit.......... 2,063 2,061 2 -- Asset backed securities.......... 6,105 6,092 13 -- ------- ------- --- ----- $10,187 $10,166 $21 $ -- ======= ======= === =====
40 42 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment balances are summarized as follows:
DECEMBER 31, ESTIMATED ----------------- USEFUL LIVES 1999 1998 ------------ ------- ------- Computer equipment and software..................... 3 years $ 9,233 $ 6,042 Office furniture and other equipment................ 3-10 years 1,665 1,259 Leasehold improvements.............................. Lease terms 2,061 761 ------- ------- 12,959 8,062 Less -- accumulated depreciation.................... (5,389) (2,720) ------- ------- $ 7,570 $ 5,342 ======= =======
Depreciation expense totaled $2,806, $1,198 and $716 in 1999, 1998 and 1997, respectively. 4. CAPITALIZED SOFTWARE Capitalized software costs are summarized as follows:
DECEMBER 31, --------------- 1999 1998 ------ ------ Capitalized software........................................ $1,669 $1,669 Less -- accumulated amortization............................ (492) (295) ------ ------ $1,177 $1,374 ====== ======
Amortization expense for capitalized software totaled $197, $7 and $130, in 1999, 1998 and 1997 respectively. 5. CONVERTIBLE DEBENTURES Convertible debentures for $3,960 and $3,178 were issued by Netect in 1998 and 1997, respectively, to certain investors. These debentures earned interest at 8% accrued annually and payable upon conversion or redemption. In accordance to the terms set forth in the agreement, the debentures were converted into common stock of the Company at a rate of $7.24 per share in connection with the merger of Netect into the Company. 6. INCOME TAXES Effective October 16, 1997, the Company elected to be treated as a C Corporation for federal income tax purposes. Accordingly, no federal income tax expense was recorded by the Company prior to October 16, 1997 because operating results are reported in the individual income tax returns of the shareholders. The components of income (loss) before income taxes are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ------- ------- -------- Continuing operations Domestic.......................................... $18,872 $ 5,350 $(11,676) Foreign........................................... (5,564) (4,269) (1,852) ------- ------- -------- Total income (loss) before income taxes...... $13,308 $ 1,081 $(13,528) ======= ======= ========
41 43 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's income tax provision (benefit) is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ------- Current income tax expense Federal.............................................. $ -- $ -- $ -- State................................................ -- -- -- Foreign.............................................. -- -- -- ------ ------ ------- Total current income tax expense................ -- -- -- Deferred income tax expense Federal.............................................. $6,187 $2,910 $(3,060) State................................................ 112 435 (90) Foreign.............................................. -- (400) -- ------ ------ ------- Total deferred income tax expense............... $6,299 $2,945 $(3,150) ------ ------ ------- Total income tax provision (benefit)............ $6,299 $2,945 $(3,150) ====== ====== =======
The overall income tax provision (benefit) for 1999, 1998 and 1997 resulted in effective tax rates of 47.3%, 272.4% and 23.3%, respectively. A reconciliation of the federal statutory rate and the Company's provision for income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ------- Income tax provision (benefit) at the applicable federal statutory rate.......................................... $4,658 $ 378 $(4,735) State income taxes, net of federal benefit................ 112 50 (68) Research and development credit........................... (700) (500) -- Non-deductible in-process research and development........ -- 870 -- Non-deductible transaction expenses....................... 349 -- -- Tax obligation allocated to S Corporation shareholders.... -- -- (765) S Corporation income from January 1, 1997 through October 16, 1997................................................ -- -- 1,595 Valuation allowance....................................... 1,892 2,330 900 Other..................................................... (12) (183) (77) ------ ------ ------- Total provision (benefit) for income taxes...... $6,299 $2,945 $(3,150) ====== ====== =======
42 44 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets and liabilities at December 31, 1998 and 1999 are comprised of the following (in thousands):
DECEMBER 31, --------------- 1999 1998 ------ ------ Assets Net operating loss carryforwards.......................... $7,435 $6,375 Research and development credit carryforward.............. 1,075 500 Allowance for bad debts................................... 170 70 Other..................................................... 15 -- ------ ------ Total..................................................... 8,695 6,945 Liabilities Differences in basis for long-lived assets................ (404) (370) ------ ------ Total....................................................... 8,291 6,575 Less: Valuation allowance -- foreign losses................. (5,222) (3,330) ------ ------ Total deferred tax asset.................................... $3,069 $3,245 ====== ======
The Company has net operating loss carryforwards at December 31, 1999 of approximately $21,150 available to offset future taxable income that expires between 2003 and 2019 resulting in a deferred tax asset of approximately $7,435. Based on the historical earnings generated by the Company and certain limitations that may limit the utilization of net operating loss carryforwards, management has provided a valuation allowance of $5,222 at December 31, 1999 against the net operating loss carryforwards. The Company's ability to utilize the net operating loss carryforwards related to its acquisitions may be subject to certain limitations. 7. STOCK COMPENSATION EXPENSE PHANTOM STOCK PLAN TERMINATION In 1996, the Company implemented a phantom stock plan which granted phantom stock units to certain employees. Each phantom stock unit provided the participant with the right to receive shares of Company common stock upon the occurrence of a change in control of the Company, an initial public offering of the Company's common stock, liquidation of the Company or a sale of substantially all of the Company's assets (the "Events"). Since the number of shares of Common Stock a participant might receive would not be known until one of the Events occurred, the Company had treated the Phantom Stock Plan in accordance with Financial Accounting Standards Board Interpretation No. 28 (FIN 28) and accordingly had not recognized stock compensation expense upon the grant of the units. Stock compensation expense was recognized by the Company in October 1997 when the plan participants voted to have the Company terminate the Plan in connection with the sale of Convertible Preferred Stock and Warrants and the number of shares to be issued under the Plan were known. The Company granted 6,598 phantom stock units during 1996. No grants were made during 1997. The Company terminated the Phantom Stock Plan in October 1997 and issued 3,514 shares of common stock on October 13, 1997 and 6,376 shares of common stock on October 16, 1997 to retire the Phantom Stock Plan. The Company recognized a related stock compensation charge of $14,712 in October 1997. On October 16, 1997, the Company issued 2,608 common stock options under the Company's 1997 Employee Stock Option Plan with an exercise price of $1.43 per share to former participants in the Phantom Stock Plan (Note 8). No compensation expense has been recorded related to these options as the exercise price is equal to the fair market value of the Company's common stock on the date of grant. 43 45 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OFFICER WARRANTS In November 1997, the Company issued a warrant to purchase 875 shares of common stock at a price of $1.43 per share to an officer to terminate a provision of the stock option agreement with that officer. The Company recognized compensation expense of $550 during the fourth quarter of 1997 based upon the fair value of the warrant issued. 8. SHAREHOLDERS' EQUITY ISSUANCE OF COMMON STOCK TO SATISFY ACQUISITION LIABILITY In April 1997, the Company issued 1,006 shares to satisfy its 1993 obligation incurred related to an employment agreement and the acquisition of certain technology rights. ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND WARRANTS In October 1997, the Company issued 2,528 shares of $0.01 par value convertible preferred stock and warrants to purchase 1,500 shares of common stock, at $2.00 per share in exchange for $18,002 of cash. The warrants were immediately exercisable and had an expiration date of April 16, 2000. In the event of a liquidation of the Company, the Company's preferred stock had a liquidation preference over its common stock. The preferred stock had a liquidation value of $7.12 per preferred share and was convertible at the option of the holder into common stock on a 5-for-1 basis. As a result of the Company's initial public offering in July of 1998, the Company's preferred stock automatically converted into common stock. In February 1997, Netect issued to a certain investor a warrant to purchase 124 shares of common stock, at $8.07 per share. In October 1997 and July 1998, Netect issued 4 and 3 shares of $0.025 par value convertible preferred stock and warrants to purchase 114 and 12 shares of common stock, at less than $0.01 per share in exchange for $22 and $39, respectively. In the event of a liquidation of the Company, the Company's preferred stock had a liquidation preference over its common stock. The preferred stock had a liquidation value of $14.48 per preferred share and was convertible at the option of the holder into common stock on a 2-for-1 basis. These preferred shares had a preferred compound annual dividend of 8% based on the original purchase price of $14.48 per share. In November 1997, Netect issued a warrant to purchase 72 shares of common stock at a price of less than $0.01 per share to its former Chief Executive Officer. This warrant was issued in conjunction with the termination agreement with that officer. In connection with the merger of Netect into the Company, all outstanding Netect warrants and preferred shares were exchanged for shares of Company common stock. TREASURY STOCK TRANSACTIONS The Company repurchased 9,844 shares of common stock for $1.43 per share in October 1997. These treasury shares were retired by the Company in September 1998. INITIAL PUBLIC OFFERING On May 15, 1998, the Company filed a registration statement permitting the Company to sell 5,518 shares of its common stock to the public and 1,124 additional shares to cover over-allotments. The registration statement also permitted certain stockholders of the Company to sell 1,982 shares to the public. The registration statement became effective on July 23, 1998. With the exercise of the over-allotment, the initial public offering resulted in proceeds to the Company of approximately $30,025, net of approximately 44 46 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $3,189 in underwriting fees and offering expenses. The Company received no proceeds from the sale of shares by selling stockholders in the initial public offering. SECONDARY OFFERING On November 25, 1998, the Company filed a registration statement permitting the Company to sell 600 shares of its common stock to the public and 90 additional shares to cover over-allotments. The registration statement also permitted certain stockholders of the Company to sell 5,400 shares to the public and 810 additional shares to cover over-allotments. The registration statement became effective on December 4, 1998. With the exercise of the over-allotment, the secondary offering resulted in proceeds to the Company of approximately $6,412, net of approximately $833 in underwriting fees and offering expenses. The Company received no proceeds from the sale of shares by selling stockholders in the secondary public offering. STOCK OPTION PLANS Incentive Stock Option Plan In 1996, the Company's Board of Directors adopted the Incentive Stock Option Plan. At December 31, 1999, there were 2,482 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 475, 928 and 524 shares were exercisable at December 31, 1999, 1998 and 1997 with a weighted average exercise price per share of $4.34, $0.53 and $0.40, respectively. Nonqualified Stock Option Plan In 1996, the Company's Board of Directors adopted the Nonqualified Stock Option Plan. At December 31, 1999, there were 1,105 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 540, 1,034 and 438 shares were exercisable at December 31, 1999, 1998 and 1997, with a weighted average exercise price per share of $0.76, $1.12 and $0.67, respectively. 1997 Employee Stock Option Plan In 1997, the Company's Board of Directors adopted the 1997 Employee Stock Option Plan. At December 31, 1999, there were 1,720 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 1,132 and 1,130 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $1.43 and $1.43, respectively. There were no options exercisable at December 31, 1997. 1998 Omnibus Incentive Plan In 1998, the Company's Board of Directors adopted the 1998 Omnibus Incentive Plan. At December 31, 1999, there were 3,541 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 245 and 58 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $9.29 and $2.44, respectively. There were no options exercisable at December 31, 1997. Non-Employee Director Plan In 1998, the Company's Board of Directors adopted the Non-Employee Director Plan. At December 31, 1999, there were 340 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 60 shares were exercisable at December 31, 1999, with a weighted average exercise price per share of $1.92. There were no options exercisable at December 31, 1998 or 1997. 45 47 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. At December 31, 1999, there were 88 shares of common stock reserved by the Board of Directors for issuance under these plans. Options on 14 and 20 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $2.25 and $2.25, respectively. In connection with the merger of Netect 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 disclosed herein. All Stock-Based Compensation Plans Substantially all options reserved under the Company's Incentive Stock Option Plan, the Nonqualified Stock Option Plan and the 1997 Employee Stock Option Plan have been issued. Options granted under the Incentive Stock Option Plan, Nonqualified Stock Option Plan, 1998 Omnibus Incentive Plan and Non- Employee Director Plan generally vest 20% per year over five years. Options granted under the International Employee Stock Option Plan and the Section 102 share Option Plan generally vest 25% per year over four years. Options granted under the 1997 Employee Stock Option Plan vest at varying rates through the year 2001. Options must be exercised no later than ten years from the date of grant. 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, 1999:
WEIGHTED AVERAGE PRICE OPTIONS PRICE PER SHARE PER SHARE ------- --------------- --------- Options outstanding, December 31, 1996............. 2,792 $0.38 - $ 1.24 $ 0.79 Options granted.................................. 6,782 $0.55 - $ 1.43 $ 1.01 Options lapsed or canceled....................... (426) $0.38 - $ 1.43 $ 0.49 Options exercised................................ (20) $ 0.38 $ 0.38 ------ Options outstanding, December 31, 1997............. 9,128 $0.38 - $ 1.43 $ 0.96 Options granted.................................. 3,192 $1.93 - $13.75 $ 5.35 Options lapsed or canceled....................... (232) $0.48 - $ 5.00 $ 1.52 Options exercised................................ (2,182) $0.38 - $ 5.00 $ 0.96 ------ Options outstanding, December 31, 1998............. 9,906 $0.38 - $13.75 $ 2.36 Options granted.................................. 3,662 $9.16 - $22.25 $11.25 Options lapsed or canceled....................... (1,400) $0.58 - $13.75 $ 3.25 Options exercised................................ (2,892) $0.38 - $11.50 $ 1.20 ------ Options outstanding, December 31, 1999............. 9,276 $0.38 - $22.25 $ 5.97 ======
46 48 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes significant ranges of outstanding and exercisable options at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES IN REMAINING EXERCISE SHARES IN EXERCISE THOUSANDS LIFE IN YEARS PRICE THOUSANDS PRICE --------- ------------- -------- --------- -------- under $1.25...................... 2,185 6.6 $ .64 962 $ 0.66 $1.26 - $2.50.................... 2,306 7.9 $ 1.63 1,310 $ 1.48 $2.51 - $5.00.................... 573 6.1 $ 4.99 52 $ 4.98 $5.01 - $10.00................... 1,322 9.5 $ 9.63 30 $ 8.93 $10.01 - $12.50.................. 2,535 9.1 $11.37 85 $11.11 Over $12.51...................... 355 9.5 $16.21 27 $13.75 ----- --- ------ ----- ------ 9,276 8.1 $ 5.97 2,466 $ 1.79 ===== === ====== ===== ======
Stock Based Compensation Disclosures For periods prior to the Company's initial public offering, the minimum value of stock based compensation was calculated in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The following weighted average assumptions using the Black- Scholes model were used to calculate pro forma stock based compensation for the three years ended December 31, 1999 (the minimum value method used in 1997 does not include volatility):
1999 1998 1997 ---- ---- ---- Expected life (in years).................................... 6 4 4 Interest rate............................................... 6% 5% 6% Volatility.................................................. 87% 77% N/A Dividend yield.............................................. 0% 0% 0%
Stock based compensation costs would have reduced pretax income by $8,355, $1,097 and $164 in 1999, 1998 and 1997, respectively ($5,430, $757 and $107 after tax and $0.11, $0.05 and $0.01 per diluted share in 1999, 1998 and 1997, respectively) if such compensation in that year had been recognized as compensation expense on a straight-line basis over the vesting period of the grant. 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company conducts its operations in leased facilities under operating leases expiring at various dates through 2004. The leases are cancelable upon payment of six months rent and reimbursement of the unamortized balance of the leasehold allowance. Total lease expense amounted to approximately $2,551, $795 and $642 at December 31, 1999, 1998 and 1997, respectively. The minimum rental commitments under operating leases at December 31, 1999 were: $3,905 in 2000, $3,648 in 2001, $3,661 in 2002, $2,645 in 2003 and $302 in 2004 and beyond. 10. 401(K) PLAN 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% of the participant's contribution up to a maximum of 6% of a participant's compensation. Additionally, the Company 47 49 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) may make a discretionary contribution as determined by the Board of Directors. Total Company contributions were $1,166, $546 and $174 in 1999, 1998 and 1997, respectively. 11. NET INCOME PER SHARE As a result of the Company's change from an S Corporation to a C Corporation in October 1997, presentation of pro forma net loss per share is necessary for the year ended December 31, 1997. Shares issued as a result of the 1,006 shares issued in 1997 to satisfy a 1993 acquisition liability have been treated as if they had been effective and outstanding as of January 1, 1996 and included in weighted average shares outstanding. Shares to be issued in connection with the Curasoft acquisition (Note 13) were not material to the weighted shares outstanding for 1998. For the years ended December 31, 1999, 1998 and 1997, options and warrants to acquire 239, 909 and 5,931 shares at weighted average exercise prices of $17.48, $10.73 and $1.68 per share, respectively were not included in the computations of diluted earnings per share because the exercise prices were greater than the average market price of the common shares. The computation of basic and diluted net income (loss) per share and pro forma basic and diluted net income (loss) per share follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------- --------- -------- Net income (loss).................................... $ 7,009 $ (1,864) ======= ========= Pro forma net loss................................... $ (9,613) ======== Shares used in basic calculation (in thousands): Total basic shares................................. 45,183 28,196 17,524 Additional shares for diluted computation: Effect of stock options............................ 5,150 6,518 1,186 Effect of warrants................................. 38 1,090 30 Effect of convertible debentures................... 111 666 74 Effect of convertible preferred stock.............. -- 7,074 2,638 Effect of phantom stock............................ -- -- 10,150 Exclusion of share equivalents that are anti-dilutive because a loss was incurred....... -- (15,348) (14,078) ------- --------- -------- Total diluted shares....................... 50,482 28,196 17,524 ======= ========= ======== Basic net income (loss) per share.................... $ 0.15 $ (0.07) Diluted net income (loss) per share.................. $ 0.14 $ (0.07) Pro forma basic net loss per share................... $ (0.55) Pro forma diluted net loss per share................. $ (0.55)
12. SEGMENT DATA The Company manages its business primarily on an overall products and services basis; the Company has one reportable segment. The reportable segment provides products and services as described in Note 1. The accounting policies of the segment are those described in the "Summary of Significant Accounting Policies" in Note 1. The Company evaluates the performance of its segment based on segment profit. Revenues related to operations in the United States totaled $56,397, $34,636, and $18,163 for the years ended December 31, 1999, 1998, and 1997, respectively. Revenues to customers located in other foreign countries totaled $11,551, $3,848, and $2,714 for the years ended December 31, 1999, 1998, and 1997, respectively. No single customer accounted for more than 10% of revenue in 1999, 1998, or 1997. Long-lived assets within the United States 48 50 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) totaled $9,007 and $5,534 at December 31, 1999 and 1998, respectively. Long-lived assets in other foreign countries totaled $177 and $143 at December 31, 1999 and 1998, respectively. 13. ACQUISITION OF CURASOFT, INC. In December 1998, the Company committed to deliver 350 shares of its common stock in exchange for all of the outstanding equity interests in Curasoft, Inc. in a transaction accounted for as a purchase. The aggregate consideration in the transaction was valued at $3,352. Incremental costs incurred and capitalized in connection with the acquisition were $140. The Company delivered the shares related to this acquisition in March of 1999. At December 31, 1999, the Company was obligated to make and expense an earnout payment of $1,200 to certain former owners of Curasoft based on the achievement of revenue targets related to an existing product, as well as their continued employment with the Company. The Company is not obligated to any other future earnout payments related to this acquisition. The Company allocated the purchase price to assets and liabilities acquired in the transaction based on their relative fair values as determined by an independent valuation firm. These acquired assets will be amortized over their estimated useful lives. The Company has allocated $1,381 of the purchase price to the existing Curasoft ENR product family which provides fully integrated event notification and response solutions for scheduling, notification, dispatch, escalation, and response. To determine the fair market value of the acquired net assets, the Company relied primarily on the income approach, whereupon fair market value is a function of the future revenues expected to be generated by an asset, net of all related expenses. The future net revenue stream was discounted to the present value at an 18% rate based on the estimated level of risk associated with achieving the forecasted revenues. The income approach focuses on the income producing capability of the acquired assets and represents the present value of the future economic benefits expected to be derived from these assets. The purchase price allocation resulted in an immediate write-off of $2,488 for purchased in-process research and development costs related to a Curasoft product ("CuraSLAM") undergoing development at the acquisition date. CuraSLAM has been designed as a stand-alone product by Curasoft and is not related to the Curasoft ENR product family. This product is currently being designed to enable customers to improve the service levels of their computing environments and will help customers better align business processes with their IT functions. This product is expected to be integrated with current and future BindView products. The Company determined that the purchased in-process technology had not reached technological feasibility and had no alternative future use based on the status of design and development activities. To determine the fair value of the purchased in-process research and development activities, the Company utilized values determined by an independent valuation firm, which applied the percentage of completion approach. Prior to the acquisition, Curasoft conducted in-depth market research, designed the product architecture, substantially completed the coding of the user interface and began the coding of the other modules. The Company has estimated that the development effort of this product was 50% complete at the date of acquisition. The percentage completed of 50% was applied to the estimated fair value of the completed product to determine the in-process research and development charge upon acquisition. The estimated fair value of the completed product was determined using the future revenue streams expected from the product, net of related expenses, discounted at a rate based upon the specific level of risk associated with achieving the forecasted revenues. The management of the Company conducted due diligence and performed an assessment of remaining tasks and risks to achieve completion. The development activities required to complete the acquired in-process technologies included additional design, coding, quality assurance procedures and customer beta testing. The challenges facing the Company to complete the development of this product on schedule include 1) the management of a development office away from its principle offices in Houston, Texas, 2) the ability to 49 51 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adequately staff this office, 3) the ability to effectively integrate the product with the Company's existing products and 4) the validation of the product and its features by potential customers. If the development of the product is delayed, this could adversely impact its availability date and time-to-market and therefore, its ability to market the product. If the product is available for general distribution during the first half of 2000, the Company anticipates generating material net cash inflows from this product in 2001. Allocation of the purchase price in the transaction is as follows: Common stock to be issued................................... $3,352 Transaction costs........................................... 140 ------ Total to be allocated............................. $3,492 ====== Allocation: Cash acquired............................................. $ 157 Other current assets...................................... 239 Capitalized software...................................... 1,381 Other non-current assets.................................. 41 Current liabilities....................................... (394) Deferred taxes............................................ (420) Purchased in-process technology........................... 2,488 ------ Total allocated................................... $3,492 ======
ACQUISITION OF NETECT, LTD. On March 1, 1999, the Company merged with Netect, Ltd. ("Netect") in a stock-for-stock transaction accounted for as a pooling of interests. Netect develops and markets corporate security solutions for Internet/ Intranet networks. In connection with the merger, the Company issued 2,322 shares of common stock, based upon an exchange ratio of 0.800044202 shares of BindView common stock for each share of Netect common stock. As a result of this merger, all of the outstanding convertible preferred stock and convertible debentures of Netect were exchanged for the Company's common stock. The historical financial data included herein has been restated to reflect the merger with Netect by combining the historical results for the Company and Netect for all periods presented. There were no material transactions between BindView and Netect during the periods prior to the merger. Transaction costs of $1,533 and restructuring cost of $991 were incurred as a result of this merger. The transaction costs related to the acquisition include investment banking fees of $590, accounting and legal expenses of $565, transfer fees of $138, and other miscellaneous transaction expenses of $240. At the time of the merger, management approved restructuring plans to eliminate duplicate senior management positions and to close the Israeli operations of Netect. The restructuring plans were based on management's best estimate of those costs based on the information available at that time. The restructuring expenses related to this plan include involuntary employee separation expenses for approximately 15 former Netect employees, the costs to close Netect's Israeli operations and other miscellaneous restructuring expenses. The restructuring expense adjustment relates to additional costs to close Netect's Israeli operations that exceeded management's initial estimate. The Company has completed substantially all of the actions related to the restructuring plans. The Company believes the remaining reserve is sufficient to complete the remaining actions under the plan. 50 52 BINDVIEW DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accrued restructuring expenses and amounts charged against the provision as of December 31, 1999, were as follows:
BEGINNING CASH ACCRUED EXPENSES AT RESTRUCTURING EXPENSES ACCRUAL ADJUSTMENT EXPENDITURES DECEMBER 31, 1999 - ---------------------- --------- ---------- ------------ ------------------- (IN THOUSANDS) Employee severance and related costs............................ $575 $238 $(780) $33 Israeli office closing............. 119 -- (119) -- Other restructuring costs.......... 59 -- (59) -- ---- ---- ----- --- Total.................... $753 $238 $(958) $33 ==== ==== ===== ===
14. SUBSEQUENT EVENTS On January 26, 2000 the Company announced a stock dividend. Stockholders of record as of the close of business on February 9, 2000 received one additional share of BindView common stock for each share of common stock held on the record date. All share amounts included within this document have been adjusted retroactively to give effect to this stock dividend. On February 9, 2000 the Company merged with Entevo Corporation in a stock for stock transaction accounted for as a pooling of interests. Entevo provides directory management solutions that help organizations deploy, integrate, administer and maintain enterprise directory services in Windows NT and Windows 2000 environments. In connection with the merger, the Company issued 4,181 shares of common stock, based upon an exchange ratio of 0.1205909 shares of BindView common stock for each share of Entevo common stock and 0.17210298 shares of BindView common stock for each share of Entevo Series C Preferred Stock. There were no material transactions between the Company and Entevo during the periods prior to the merger. 51 53 BINDVIEW DEVELOPMENT CORPORATION SUPPLEMENTAL COMBINED BALANCE SHEET (IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31, ------------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 72,150 $ 51,718 Short-term investments.................................... 4,834 10,187 Accounts receivable, net of allowance of $623 and $204, respectively............................................ 15,701 6,595 Deferred tax assets....................................... 3,069 3,245 Other current assets...................................... 1,142 1,796 -------- -------- Total current assets............................... 96,896 73,541 Property and equipment, net................................. 8,485 5,880 Capitalized software and related assets, net................ 1,177 1,400 Long-term investments....................................... 6,120 -- Other assets................................................ 564 624 -------- -------- Total assets....................................... $113,242 $ 81,445 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,077 $ 1,988 Accrued liabilities....................................... 2,721 2,080 Accrued compensation...................................... 3,757 1,185 Deferred revenue.......................................... 10,311 5,301 Current maturities of indebtedness........................ 176 56 -------- -------- Total current liabilities.......................... 20,042 10,610 -------- -------- Commitments and contingencies (Note 10) Convertible debentures...................................... -- 7,572 Indebtedness and other long-term liabilities................ 144 157 -------- -------- Total long-term liabilities........................ 144 7,729 -------- -------- Total liabilities.................................. 20,186 18,339 -------- -------- Shareholders' equity: Convertible preferred stock, $0.01 par value, 20,000 shares authorized, 0 and 2,528 shares issued and outstanding, respectively............................... -- -- Convertible preferred stock, $0.025 par value, 520 shares authorized, 7 and 4 shares issued and outstanding, respectively............................................ -- -- Series A convertible preferred stock, $0.0001 par value, 5,000 shares authorized, 5,000 and 5,000 shares issued and outstanding, respectively (liquidation value $2,500)................................................. 5 5 Series B convertible preferred stock, no par value, 8,000 shares authorized, 7,689 and 7,689 shares issued and outstanding, respectively (liquidation value $7,189).... 8 8 Series C convertible preferred stock, no par value, 10,030 shares authorized, 10,000 shares issued and outstanding (liquidation value $15,000)............................. 10 -- Common stock, no par value, 100,000 shares authorized, 47,535 and 43,020 shares issued and outstanding, respectively............................................ 1 1 Additional paid-in capital................................ 109,471 75,514 Common Stock to be issued, 350 shares..................... -- 3,352 Accumulated deficit....................................... (15,975) (15,534) Notes receivable, shareholders............................ (202) (202) Accumulated other comprehensive loss...................... (262) (38) -------- -------- Total shareholders' equity......................... 93,056 63,106 -------- -------- Total liabilities and shareholders' equity......... $113,242 $ 81,445 ======== ========
The accompanying notes are an integral part of these supplemental combined financial statements. 52 54 BINDVIEW DEVELOPMENT CORPORATION SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ------- ------- -------- Revenues: Licenses.................................................. $53,200 $31,400 $ 17,821 Services.................................................. 18,539 8,427 3,451 ------- ------- -------- Total revenues.................................... 71,739 39,827 21,272 ------- ------- -------- Cost of revenues: Cost of licenses.......................................... 1,497 974 644 Cost of services.......................................... 2,357 1,233 729 ------- ------- -------- Total cost of revenues............................ 3,854 2,207 1,373 ------- ------- -------- Gross profit................................................ 67,885 37,620 19,899 ------- ------- -------- Costs and expenses: Sales and marketing....................................... 34,974 22,229 10,619 Research and development.................................. 19,298 11,706 4,975 General and administrative................................ 7,294 5,253 3,994 Acquisition related earnout............................... 1,200 -- -- Merger and restructuring.................................. 2,524 -- -- Purchased in-process research and development............. -- 2,488 -- Stock compensation expense................................ -- -- 15,262 ------- ------- -------- Operating income (loss)..................................... 2,595 (4,056) (14,951) Other income, net........................................... 3,263 1,236 95 ------- ------- -------- Income (loss) before income tax provision................... 5,858 (2,820) (14,856) Provision (benefit) for income taxes........................ 6,299 2,945 (3,150) ------- ------- -------- Net loss.................................................... (441) (5,765) (11,706) Other comprehensive income (loss), net of tax: Gain (loss) from foreign currency translation............. (224) 1 (39) ------- ------- -------- Comprehensive loss........................................ $ (665) $(5,764) $(11,745) ======= ======= ======== Basic loss per share........................................ $ (0.01) $ (0.19) Diluted loss per share...................................... $ (0.01) $ (0.19) Pro forma information: Net loss as reported................................... $(11,706) Pro forma benefit in lieu of income taxes.............. (765) -------- Pro forma net loss..................................... $(10,941) ======== Pro forma basic net loss per share..................... $ (0.60) Pro forma diluted net loss per share................... $ (0.60)
The accompanying notes are an integral part of these supplemental combined financial statements. 53 55 BINDVIEW DEVELOPMENT CORPORATION SUPPLEMENTAL COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED PREFERRED PREFERRED COMMON COMMON STOCK SERIES A SERIES B SERIES C STOCK --------------- --------------- --------------- --------------- TO BE SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DELIVERED ------ ------ ------ ------ ------ ------ ------ ------ --------- Balance at January 1, 1997..................... 16,700 $1 -- $-- -- $-- -- $-- $ -- Issuance of common stock...................... 222 -- -- -- -- -- -- -- -- S Corporation distributions................... -- -- -- -- -- -- -- -- -- Sale of Series A preferred stock at $0.50 per share (net of expenses)..................... -- -- 4,920 5 -- -- -- -- -- Issuance of common stock to satisfy 1993 employment and acquisition liability........ 1,006 -- -- -- -- -- -- -- -- Issuance of common stock pursuant to termination of Phantom Stock Plan........... 9,890 -- -- -- -- -- -- -- -- Transfer of S Corporation Accumulated deficit upon Conversion to C Corporation............ -- -- -- -- -- -- -- -- -- Issuance of convertible preferred Stock (2,532 shares).............................. -- -- -- -- -- -- -- -- -- Issuance of warrant to purchase Common stock (875 shares)................................ -- -- -- -- -- -- -- -- -- Purchase of treasury stock (9,844 shares)..... -- -- -- -- -- -- -- -- -- Exercise of stock options..................... 20 -- -- -- -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- -- -- -- -- -- Net loss...................................... -- -- -- -- -- -- -- -- -- ------ -- ----- --- ----- --- ------ --- ------- Balance at December 31, 1997................... 27,838 1 4,920 5 -- -- -- -- -- Exercise of stock options..................... 2,182 -- -- -- -- -- -- -- -- Exercise of stock warrants.................... 2,376 -- -- -- -- -- -- -- -- Sale of Series A preferred stock at $0.50 per share....................................... -- -- 80 -- -- -- -- -- -- Sale of Series B preferred stock at $0.935 per share (net of expenses)..................... -- -- -- -- 7,154 7 -- -- -- Conversion of notes payable to Series B preferred stock at $0.935 per share......... -- -- -- -- 535 1 -- -- -- Issuance of common stock in exchange for notes receivable.................................. 488 -- -- -- -- -- -- -- -- Issuance of convertible preferred stock (3 shares)..................................... -- -- -- -- -- -- -- -- -- Issuance of common stock and warrants......... 8 -- -- -- -- -- -- -- -- Tax benefit related to exercise of employee stock options............................... -- -- -- -- -- -- -- -- -- Conversion of preferred stock................. 12,640 -- -- -- -- -- -- -- -- Initial public offering....................... 6,642 -- -- -- -- -- -- -- -- Secondary offering............................ 690 -- -- -- -- -- -- -- -- Shares to be issued to acquire business (350 shares)................................ -- -- -- -- -- -- -- -- 3,352 Retirement of treasury stock.................. (9,844) -- -- -- -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- -- -- -- -- -- Net loss...................................... -- -- -- -- -- -- -- -- -- ------ -- ----- --- ----- --- ------ --- ------- Balance at December 31, 1998................... 43,020 1 5,000 5 7,689 8 -- -- 3,352 Exercise of stock options..................... 2,967 -- -- -- -- -- -- -- -- Issuance of stock warrants.................... -- -- -- -- -- -- -- -- -- Sale of Series C preferred stock at $1.50 per share (net of expenses)..................... -- -- -- -- -- -- 10,000 10 -- Tax benefit related to exercise of employee stock options............................... -- -- -- -- -- -- -- -- -- Issuance pursuant to business acquired........ 350 -- -- -- -- -- -- -- (3,352) Conversion of convertible debentures and preferred stock............................. 1,198 -- -- -- -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- -- -- -- -- -- Net income.................................... -- -- -- -- -- -- -- -- -- ------ -- ----- --- ----- --- ------ --- ------- Balance at December 31, 1999................... 47,535 $1 5,000 $ 5 7,689 $ 8 10,000 $10 $ -- ====== == ===== === ===== === ====== === ======= RETAINED ACCUMULATED ADDITIONAL COMMON EARNINGS OTHER PAID-IN SHAREHOLDER STOCK (ACCUMULATED COMPREHENSIVE TREASURY CAPITAL RECEIVABLE WARRANT DEFICIT) INCOME (LOSS) STOCK ---------- ----------- ------- ------------ -------------- ---------- Balance at January 1, 1997..................... $ 227 $ -- $ -- $ 2,621 $ -- $ -- Issuance of common stock...................... 902 -- -- -- -- -- S Corporation distributions................... -- -- -- (1,316) -- -- Sale of Series A preferred stock at $0.50 per share (net of expenses)..................... 2,439 -- -- -- -- -- Issuance of common stock to satisfy 1993 employment and acquisition liability........ 272 -- -- -- -- -- Issuance of common stock pursuant to termination of Phantom Stock Plan........... 14,092 -- -- -- -- -- Transfer of S Corporation Accumulated deficit upon Conversion to C Corporation............ (633) -- -- 633 -- -- Issuance of convertible preferred Stock (2,532 shares).............................. 18,024 -- -- -- -- -- Issuance of warrant to purchase Common stock (875 shares)................................ -- -- 550 -- -- -- Purchase of treasury stock (9,844 shares)..... -- -- -- -- -- (14,017) Exercise of stock options..................... 6 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (39) -- Net loss...................................... -- -- -- (11,706) -- -- -------- ----- ----- -------- ----- -------- Balance at December 31, 1997................... 35,329 -- 550 (9,768) (39) (14,017) Exercise of stock options..................... 2,076 -- -- -- -- -- Exercise of stock warrants.................... 4,796 -- (550) -- -- -- Sale of Series A preferred stock at $0.50 per share....................................... 40 -- -- -- -- -- Sale of Series B preferred stock at $0.935 per share (net of expenses)..................... 6,641 -- -- -- -- -- Conversion of notes payable to Series B preferred stock at $0.935 per share......... 500 -- -- -- -- -- Issuance of common stock in exchange for notes receivable.................................. 202 (202) -- -- -- -- Issuance of convertible preferred stock (3 shares)..................................... 39 -- -- -- -- -- Issuance of common stock and warrants......... 9 -- -- -- -- -- Tax benefit related to exercise of employee stock options............................... 3,462 -- -- -- -- -- Conversion of preferred stock................. -- -- -- -- -- -- Initial public offering....................... 30,025 -- -- -- -- -- Secondary offering............................ 6,412 -- -- -- -- -- Shares to be issued to acquire business (350 shares)................................ -- -- -- -- -- -- Retirement of treasury stock.................. (14,017) -- -- -- -- 14,017 Cumulative translation adjustment............. -- -- -- -- 1 -- Net loss...................................... -- -- -- (5,766) -- -- -------- ----- ----- -------- ----- -------- Balance at December 31, 1998................... 75,514 (202) -- (15,534) (38) -- Exercise of stock options..................... 2,688 -- -- -- -- -- Issuance of stock warrants.................... 30 -- -- -- -- -- Sale of Series C preferred stock at $1.50 per share (net of expenses)..................... 14,053 -- -- -- -- -- Tax benefit related to exercise of employee stock options............................... 6,176 -- -- -- -- -- Issuance pursuant to business acquired........ 3,352 -- -- -- -- -- Conversion of convertible debentures and preferred stock............................. 7,658 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (224) -- Net income.................................... -- -- -- (441) -- -- -------- ----- ----- -------- ----- -------- Balance at December 31, 1999................... $109,471 $(202) $ -- $(15,975) $(262) $ -- ======== ===== ===== ======== ===== ======== TOTAL SHAREHOLDERS' EQUITY ------------- Balance at January 1, 1997..................... $ 2,849 Issuance of common stock...................... 902 S Corporation distributions................... (1,316) Sale of Series A preferred stock at $0.50 per share (net of expenses)..................... 2,444 Issuance of common stock to satisfy 1993 employment and acquisition liability........ 272 Issuance of common stock pursuant to termination of Phantom Stock Plan........... 14,092 Transfer of S Corporation Accumulated deficit upon Conversion to C Corporation............ -- Issuance of convertible preferred Stock (2,532 shares).............................. 18,024 Issuance of warrant to purchase Common stock (875 shares)................................ 550 Purchase of treasury stock (9,844 shares)..... (14,017) Exercise of stock options..................... 6 Cumulative translation adjustment............. (39) Net loss...................................... (11,706) -------- Balance at December 31, 1997................... 12,061 Exercise of stock options..................... 2,076 Exercise of stock warrants.................... 4,246 Sale of Series A preferred stock at $0.50 per share....................................... 40 Sale of Series B preferred stock at $0.935 per share (net of expenses)..................... 6,648 Conversion of notes payable to Series B preferred stock at $0.935 per share......... 501 Issuance of common stock in exchange for notes receivable.................................. -- Issuance of convertible preferred stock (3 shares)..................................... 39 Issuance of common stock and warrants......... 9 Tax benefit related to exercise of employee stock options............................... 3,462 Conversion of preferred stock................. -- Initial public offering....................... 30,025 Secondary offering............................ 6,412 Shares to be issued to acquire business (350 shares)................................ 3,352 Retirement of treasury stock.................. -- Cumulative translation adjustment............. 1 Net loss...................................... (5,766) -------- Balance at December 31, 1998................... 63,106 Exercise of stock options..................... 2,688 Issuance of stock warrants.................... 30 Sale of Series C preferred stock at $1.50 per share (net of expenses)..................... 14,063 Tax benefit related to exercise of employee stock options............................... 6,176 Issuance pursuant to business acquired........ -- Conversion of convertible debentures and preferred stock............................. 7,658 Cumulative translation adjustment............. (224) Net income.................................... (441) -------- Balance at December 31, 1999................... $ 93,056 ========
The accompanying notes are an integral part of these supplemental combined financial statements. 54 56 BINDVIEW DEVELOPMENT CORPORATION SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net loss.................................................. $ (441) $ (5,765) $(11,706) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense................... 3,385 1,430 915 Loss on disposition of property and equipment........... 147 -- -- Stock compensation expense.............................. 48 3 14,642 Increase in provision for bad debts..................... 470 9 170 Purchased in-process research and development........... -- 2,488 -- Deferred income taxes................................... 6,299 2,945 (3,150) Interest payable........................................ -- 392 42 Changes in assets and liabilities, net of acquired business: (Increase) in accounts receivable..................... (9,404) (1,887) (2,604) (Increase) decrease in other current assets........... 686 (1,588) 365 Increase in accounts payable.......................... 1,001 901 790 Increase in accrued liabilities....................... 3,196 1,081 1,581 Increase in deferred revenue.......................... 4,982 3,151 1,459 -------- -------- -------- Net cash provided by operating activities.......... 10,369 3,160 2,504 -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (5,903) (5,441) (1,755) Purchase of investments................................... (160,659) (9,675) (512) Proceeds from investments................................. 159,892 -- -- Disposal of property and equipment........................ -- 201 -- Cash acquired in business acquisition..................... -- 156 -- Other..................................................... (69) (397) (221) -------- -------- -------- Net cash used by investing activities.............. (6,739) (15,156) (2,488) -------- -------- -------- Cash flows from financing activities: S Corporation distributions............................... -- -- (1,316) Notes payable and long-term debt.......................... -- 73 83 Loans payable, net........................................ 265 492 7 Restricted cash........................................... -- (10) (52) Payment of capital lease obligation....................... (56) (64) (5) Proceeds from issuance of convertible preferred stock and common stock warrants................................... 14,062 6,727 20,468 Proceeds from issuance of common stock.................... -- -- 559 Proceeds from issuance of debentures...................... -- 3,949 3,099 Purchases of treasury stock............................... -- -- (14,017) Proceeds from initial public offering..................... -- 30,025 -- Proceeds from secondary offering.......................... -- 6,412 -- Proceeds from exercise of stock warrants, net............. -- 4,246 Proceeds from exercise of stock options................... 2,656 2,076 6 -------- -------- -------- Net cash provided by financing activities.......... 16,927 53,926 8,832 Effect of exchange rate changes on cash..................... (125) 20 (9) -------- -------- -------- Net increase in cash and cash equivalents................... 20,432 41,950 8,839 Cash and cash equivalents at beginning of period............ 51,718 9,768 929 -------- -------- -------- Cash and cash equivalents at end of period.................. $ 72,150 $ 51,718 $ 9,768 ======== ======== ======== Supplemental disclosures for cash flow information: Cash paid during the year for interest.................... $ -- $ -- $ 9 Cash paid during the year for income taxes................ $ -- $ -- $ -- Noncash financing and investing activities: Issuance of 1,006 shares of common stock in 1997 to satisfy 1993 acquisition liability...................... $ -- $ -- $ 272 Issuance of warrant to purchase 876 shares of common stock in 1997 to satisfy bonus obligation..................... $ -- $ -- $ 550 Issuance of 350 shares of common stock related to the acquisition of Curasoft ................................ $ 3,352 -- -- Tax benefit related to the exercise of employee stock options................................................. $ 6,176 $ 3,462 -- Conversion of convertible debentures and preferred stock into common stock....................................... $ 7,658 -- --
The accompanying notes are an integral part of these supplemental combined financial statements. 55 57 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PAR VALUE) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS BindView Development Corporation (the Company), a Texas corporation, was incorporated in May 1990. Previous to 1995, the Company was known as The LAN Support Group, Inc. Pursuant to the sale of convertible preferred stock, the Company's Subchapter S election terminated on October 16, 1997. The Company develops, markets and supports a suite of systems and security management software products that manage the security and integrity of complex, distributed client/server networks operating on Microsoft Windows NT and Novell NetWare environments. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of BindView Development Corporation and its subsidiaries. All significant intercompany transactions have been eliminated. In December, 1998, the Company acquired Curasoft, Inc. in a purchase business combination. In March of 1999, BindView merged with Netect, Ltd. ("Netect") in a pooling of interests transaction. In February of 2000, BindView merged with Entevo Corporation ("Entevo") in a pooling of interests transaction (Note 15). These supplemental combined financial statements have been prepared to give effect to the restatement of the Company's financial statements to reflect the pooling of interest transaction with Entevo combining the historical financial data of the Company and Entevo for all periods presented, even though the merger with Entevo was consummated after December 31, 1999. These supplemental combined financial statements are expected to become the historical consolidated financial statements of the Company for periods after February 9, 2000. REVENUE RECOGNITION The Company licenses its software products under perpetual licenses and recognizes its license revenue upon meeting each of the following criteria: (i) execution of a written purchase order, license agreement or contract; (ii) delivery of software or, if the customer has previously received evaluation software, delivery of the software license authorization code; (iii) issuance of the related license, with no significant vendor obligations or customer acceptance rights outstanding; (iv) the license fee is fixed or determinable; and (v) collectibility is assessed as being probable. Revenues from perpetual licenses are recorded as license revenue in the accompanying Supplemental Combined Statement of Operations and Comprehensive Loss. Service revenues include subscription contracts and professional services. Customers are generally required to purchase a one year subscription agreement in conjunction with their initial licensing of the Company's products. Subscription contracts are purchased separately by customers at their discretion after the first anniversary of a license sale. Subscription revenues are recognized ratably over the contract term. Revenues from subscription contracts and other related services are reported as service revenue in the accompanying Supplemental Combined Statement of Operations and Comprehensive Loss. Deferred revenue is comprised primarily of subscription revenue and other services. The portion of subscription contract revenues that have not yet been recognized as revenues is reported as deferred revenue in the accompanying Supplemental Combined Balance Sheet. Deferred maintenance revenue which has not been collected is not recognized. Prior to January 1, 1998, postcontract customer support, consisting solely of telephone technical support, was included in the product sale to the Company's customers. During that period, the costs of providing this 56 58 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) support was accrued and charged to expense at the time the revenue was recognized. Subsequent to January 1, 1998, postcontract customer support is provided under subscription contracts. ADVERTISING COSTS Advertising costs are expensed as incurred. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations when incurred. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", the Company capitalizes costs incurred in the development of software once 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. Amortization of capitalized software development costs is based on a straight line basis over the product's useful life ranging between two and seven years. To date, costs incurred by the Company's development staff and capitalizable subsequent to the establishment of technological feasibility have not been material and are included in capitalized software in the accompanying Supplemental Combined Balance Sheet. Capitalized software also includes the cost of developed products obtained by the Company as a result of its business combinations with other companies. In December 1998, the Company completed its acquisition of Curasoft, Inc. and recorded $1,381 in capitalized software development costs as part of its purchase price allocation (Note 14). SOFTWARE DEVELOPED FOR INTERNAL USE The Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) in 1999. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. The adoption of SOP 98-1 did not result in the capitalization of costs during 1999. STOCK-BASED COMPENSATION The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method, as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock, and is recognized over the related vesting period. The Company provides supplemental disclosure of the effect on net income and earnings per share as if the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied in measuring compensation expense. OTHER INCOME Other income consists primarily of interest earned on cash and cash equivalents and short-term and long-term investments. 57 59 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Prior to October 16, 1997, the Company had elected to be treated as an S Corporation for federal income tax purposes. Accordingly, all federal income tax liability prior to that date was the responsibility of the shareholders. The shareholders of Entevo terminated their S Corporation election effective July 11, 1997. The provision for income taxes is computed based on income earned from the termination dates of the Subchapter S elections. The asset and liability approach is used to account for income taxes. This approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the assets and liabilities. The pro forma results of operations of the Company reflect a pro forma charge in lieu of income taxes prior to C Corporation status becoming effective. EARNINGS PER SHARE The Company's earnings per share data is presented in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is 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 (Note 12). CASH AND CASH EQUIVALENTS The Company considers investments with original maturity dates of three months or less from the date of purchase to be cash equivalents. INVESTMENTS The Company's investments are classified as held to maturity as the Company has the intent and ability to hold the investments until maturity. These investments are reported at amortized cost. Short-term investments have original maturities of more than three months and a remaining maturity of less than one year. Long-term investments have original maturities of more than one year. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash equivalents, investments, accounts receivable, accounts payable and deferred revenues reflected in the December 31, 1999 and 1998 Supplemental Combined Balance Sheet approximate their carrying value due to their short maturities. The fair value of $7,572 related to convertible debentures reflected in the December 31, 1998 Consolidated Supplemental Balance Sheet was estimated using discounted cash flow analysis, based on incremental borrowing rates for similar types of borrowing arrangements. CONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-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 review its investment credit risk. 58 60 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. The Company performs ongoing credit evaluations of its customers to minimize credit risk. Approximately 17%, 10% and 13% of the Company's sales were made on an export basis, primarily to customers in Europe and the United Kingdom in 1999, 1998 and 1997, respectively. RECEIVABLES Trade finance receivables arise in the ordinary course of business. During 1999, the Company transferred $4,975 in trade finance receivables to a financing institution on a non-recourse basis. The Company records such transfers as sales of the related accounts receivable when the Company is considered to have surrendered control of such receivables under the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed by applying the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. LONG-LIVED ASSETS The Company reviews the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value amount. The Company has not identified any such impairment losses. FOREIGN CURRENCY Assets and liabilities of the Company's foreign operations are translated into United States dollars at the exchange rate in effect at the balance sheet date, and revenue and expenses are translated at the average exchange rate for the period. The functional currency of those subsidiaries is their local currency, which is the primary currency in which they operate. Cumulative translation adjustments are reported as a separate component of comprehensive income (loss). To date, adjustments resulting from the process of translating foreign subsidiaries financial statements into U.S. dollars have not been significant. COMPREHENSIVE LOSS The Company's only component of other comprehensive loss is foreign currency translation adjustments. Changes in the Company's cumulative translation adjustment have been characterized as other comprehensive income (loss) in the accompanying Supplemental Combined Statement of Operations and Comprehensive Loss. SEGMENT REPORTING The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998. The management approach required by SFAS 131 designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas and major customers. The Company believes it operated in one reportable segment as defined by SFAS 131 for the years ended December 31, 1999, 1998 and 1997. 59 61 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. RECENT PRONOUNCEMENTS In June 1998, the FASB issued (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities." The pronouncement establishes accounting and reporting standards for derivative instruments. The pronouncement was to become effective for fiscal years beginning after June 15, 1999. During June 1999, the FASB issued SFAS 137 -- an amendment of SFAS 133 which delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company has historically not engaged in significant derivative instrument activity. Adoption of SFAS 133 is not expected to have a material effect on the Company's financial position or operational results. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company will adopt SAB 101 as required in the second quarter of 2000 and is evaluating the effect that such adoption may have on its consolidated results of operations and financial position. 2. INVESTMENTS Investments considered held to maturity at December 31, 1999, consisted of the following:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED COST MARKET VALUE HOLDING LOSSES HOLDING GAINS -------------- ------------ -------------- ------------- Short-term corporate bonds....... $ 751 $ 749 $ 2 $ -- Government agency bonds.......... 2,020 2,013 7 -- Asset backed securities.......... 6,120 6,093 27 -- Certificate of deposit........... 2,063 2,061 2 -- ------- ------- --- ----- Total corporate $10,954 $10,916 $38 $ -- bonds................ ======= ======= === =====
All of the investments at December 31, 1999 are scheduled to mature in 2000 and 2001. Market value is based upon quoted market prices for the investments. Investments considered held to maturity at December 31, 1998, consisted of the following:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED COST MARKET VALUE HOLDING LOSSES HOLDING GAINS -------------- ------------ -------------- ------------- Government agency bonds.......... $ 2,019 $ 2,013 $ 6 $ -- Certificates of deposit.......... 2,063 2,061 2 -- Asset backed securities.......... 6,105 6,092 13 -- ------- ------- --- ----- $10,187 $10,166 $21 $ -- ======= ======= === =====
60 62 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment balances are summarized as follows:
DECEMBER 31, ESTIMATED ----------------- USEFUL LIVES 1999 1998 ------------ ------- ------- Computer equipment and software..................... 3 years $10,172 $ 6,485 Office furniture and other equipment................ 3-10 years 2,037 1,556 Leasehold improvements.............................. Lease terms 2,230 830 ------- ------- 14,439 8,871 Less -- accumulated depreciation.................... (5,954) (2,991) ------- ------- $ 8,485 $ 5,880 ======= =======
Depreciation expense totaled $3,162, $1,396 and $785 in 1999, 1998 and 1997, respectively. 4. CAPITALIZED SOFTWARE Capitalized software costs are summarized as follows:
DECEMBER 31, --------------- 1999 1998 ------ ------ Capitalized software........................................ $1,722 $1,722 Less -- accumulated amortization............................ (545) (322) ------ ------ $1,177 $1,400 ====== ======
Amortization expense for capitalized software totaled $223, $33 and $130, in 1999, 1998 and 1997 respectively. 5. CREDIT AGREEMENTS AND FINANCING ARRANGEMENTS On December 23, 1998, Entevo entered into a loan agreement with a commercial bank. The agreement established a $1,000 revolving line of credit (the "Revolving Line") and a $500 term loan facility for equipment financing (the "Equipment Line"). The availability of the Revolving Line and the Equipment Line expired on December 22, 1999 and was not renewed. As of December 31, 1999 the Company had borrowings totaling $176 under the Equipment Line. Subsequent to the Company's merger in February 2000 (Note 15), all amounts outstanding under the loan agreement were repaid, the agreement was terminated, and the bank's security interest in the Company's assets was terminated. Entevo's capital lease obligations approximate $50 at December 31, 1999. 6. CONVERTIBLE DEBENTURES Convertible debentures for $3,960 and $3,178 were issued by Netect in 1998 and 1997, respectively, to certain investors. These debentures earned interest at 8% accrued annually and payable upon conversion or redemption. In accordance to the terms set forth in the agreement, the debentures were converted into common stock of the Company at a rate of $7.24 per share in connection with the merger of Netect into the Company. 61 63 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES Effective October 16, 1997, the Company elected to be treated as a C Corporation for federal income tax purposes. Effective July 11, 1997, Entevo elected to be treated as a C Corporation for federal income tax purposes. Accordingly, no federal income tax expense was recorded by the companies through these dates because operating results are reported in the individual income tax returns of the shareholders. The components of income (loss) before income taxes are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------ -------- Continuing operations Domestic.............................................. $11,396 $1,199 $(13,214) Foreign............................................... (5,538) (4,019) (1,642) ------- ------ -------- Total income (loss) before income taxes....... 5,858 (2,820) $(14,856) ======= ====== ========
The Company's income tax provision (benefit) is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ------- Current income tax expense............................... -- -- -- Federal................................................ $ -- $ -- $ -- State.................................................. -- -- -- Foreign................................................ -- -- -- ------ ------ ------- Total current income tax expense............... -- -- -- Deferred income tax expense.............................. Federal................................................ $6,187 $3,140 $(3,060) State.................................................. 112 435 (90) Foreign................................................ -- (630) -- ------ ------ ------- Total deferred income tax expense.............. $6,299 $2,945 $(3,150) ------ ------ ------- Total income tax provision (benefit)........... $6,299 $2,945 $(3,150) ====== ====== =======
62 64 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The overall income tax provision (benefit) for 1999, 1998 and 1997 resulted in effective tax rates of 107.5%, (104.4)% and 21.2%, respectively. A reconciliation of the federal statutory rate and the Company's provision for income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ------ ------ ------- Income tax provision (benefit) at the applicable federal statutory rate.......................................... $2,050 $ (987) $(5,200) State income taxes, net of federal benefit................ 112 50 (68) Foreign tax (rate differential)........................... (9) (88) (74) Research and development credit........................... (700) (500) -- Non-deductible in-process research and development........ -- 870 -- Non-deductible transaction expenses....................... 349 -- -- Tax obligation allocated to S Corporation shareholders.... -- -- (765) S Corporation income from January 1, 1997 through October 16, 1997................................................ -- -- 1,595 Valuation allowance....................................... 4,434 3,741 1,438 Other..................................................... 63 (141) (76) ------ ------ ------- Total provision (benefit) for income taxes...... $6,299 $2,945 $(3,150) ====== ====== =======
Deferred tax assets and liabilities at December 31, 1998 and 1999 are comprised of the following (in thousands):
DECEMBER 31, ---------------- 1999 1998 ------- ------ Assets Net operating loss carryforwards.......................... $11,705 $8,103 Research and development credit carryforward.............. 1,075 500 Allowance for bad debts................................... 170 70 Other..................................................... 15 -- ------- ------ 12,965 8,673 Liabilities Accrued liabilites Differences in basis for long-lived assets................ (404) (370) ------- ------ Total............................................. 12,561 8,303 Less: Valuation allowance................................... (9,492) (5,058) ------- ------ Total deferred tax asset.................................... $ 3,069 $3,245 ======= ======
The Company has a federal net operating loss carryforward at December 31, 1999 of approximately $33,700 available to offset future taxable income that expires between 2003 and 2019 resulting in a deferred tax asset of $11,705. Based on the historical earnings generated by the Company and certain limitations that may limit the utilization of net operating loss carryforwards, management has provided a valuation allowance of $9,492 at December 31, 1999 against the net operating loss carryforwards. The Company's ability to utilize the net operating loss carryforwards related to its acquisitions may be subject to certain limitations. The Company does not provide for foreign withholding and income taxes on undistributed earnings amounting to approximately $656 through 1999, cumulatively, for a foreign subsidiary, as such earnings are intended to be permanently invested in those operations. The ultimate tax liability related to repatriation of 63 65 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) such earnings is dependent upon future tax planning opportunities and cannot be estimated at the present time. The earnings of that subsidiary are exempt from taxation under local laws. 8. STOCK COMPENSATION EXPENSE PHANTOM STOCK PLAN TERMINATION In 1996, the Company implemented a phantom stock plan which granted phantom stock units to certain employees. Each phantom stock unit provided the participant with the right to receive shares of Company common stock upon the occurrence of a change in control of the Company, an initial public offering of the Company's common stock, liquidation of the Company or a sale of substantially all of the Company's assets (the "Events"). Since the number of shares of Common Stock a participant might receive would not be known until one of the Events occurred, the Company had treated the Phantom Stock Plan in accordance with Financial Accounting Standards Board Interpretation No. 28 (FIN 28) and accordingly had not recognized stock compensation expense upon the grant of the units. Stock compensation expense was recognized by the Company in October 1997 when the plan participants voted to have the Company terminate the Plan in connection with the sale of Convertible Preferred Stock and Warrants and the number of shares to be issued under the Plan were known. The Company granted 6,598 phantom stock units during 1996. No grants were made during 1997. The Company terminated the Phantom Stock Plan in October 1997 and issued 3,514 shares of common stock on October 13, 1997 and 6,376 shares of common stock on October 16, 1997 to retire the Phantom Stock Plan. The Company recognized a related stock compensation charge of $14,712 in October 1997. On October 16, 1997, the Company issued 2,608 common stock options under the Company's 1997 Employee Stock Option Plan with an exercise price of $1.43 per share to former participants in the Phantom Stock Plan (Note 9). No compensation expense has been recorded related to these options as the exercise price is equal to the fair market value of the Company's common stock on the date of grant. OFFICER WARRANTS In November 1997, the Company issued a warrant to purchase 875 shares of common stock at a price of $1.43 per share to an officer to terminate a provision of the stock option agreement with that officer. The Company recognized compensation expense of $550 during the fourth quarter of 1997 based upon the fair value of the warrant issued. 9. SHAREHOLDERS' EQUITY ISSUANCE OF COMMON STOCK TO SATISFY ACQUISITION LIABILITY In April 1997, the Company issued 1,006 shares to satisfy its 1993 obligation incurred related to an employment agreement and the acquisition of certain technology rights. ISSUANCE OF CONVERTIBLE PREFERRED STOCK, WARRANTS AND RESTRICTED STOCK In October 1997, the Company issued 2,528 shares of $0.01 par value convertible preferred stock and warrants to purchase 1,500 shares of common stock, at $2.00 per share in exchange for $18,002 of cash. The warrants were immediately exercisable and had an expiration date of April 16, 2000. In the event of a liquidation of the Company, the Company's preferred stock had a liquidation preference over its common stock. The preferred stock had a liquidation value of $7.12 per preferred share and was convertible at the option of the holder into common stock on a 5-for-1 basis. As a result of the Company's initial public offering in July of 1998, the Company's preferred stock automatically converted into common stock. In February 1997, Netect issued to a certain investor a warrant to purchase 124 shares of common stock, at $8.07 per share. 64 66 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In October 1997 and July 1998, Netect issued 4 and 3 shares of $0.025 par value convertible preferred stock and warrants to purchase 114 and 12 shares of common stock, at less than $0.01 per share in exchange for $22 and $39, respectively. In the event of a liquidation of the Company, the Company's preferred stock had a liquidation preference over its common stock. The preferred stock had a liquidation value of $14.48 per preferred share and was convertible at the option of the holder into common stock on a 2-for-1 basis. These preferred shares had a preferred compound annual dividend of 8% based on the original purchase price of $14.48 per share. In November 1997, Netect issued a warrant to purchase 72 shares of common stock at a price of less than $0.01 per share to its former Chief Executive Officer. This warrant was issued in conjunction with the termination agreement with that officer. In 1998, Entevo issued an aggregate of 488 shares of common stock to two founders of Entevo pursuant to the terms of restricted stock purchase agreements which vested fully in 1998. The common stock was issued at $0.415 per share in consideration of full recourse promissory notes from the founders. The promissory notes bear interest at an annual rate of 6% and are due in five years. In July 1999, a loan agreement was amended to provide Entevo with a $1,500 revolving line of credit without covenant restrictions for the period from July 1, 1999, through the earlier of the sale of Entevo's Series C Preferred Stock or September 30, 1999. In consideration for the covenant waiver provisions of the amendment, Entevo issued to the bank a warrant to purchase 30 shares of the Company's Series C Preferred Stock at an exercise price of $1.50 per share. The fair value of these warrants were treated as interest expense during the period. The warrant expires on September 27, 2004. In January 1998, Entevo issued a common stock purchase warrant covering 75 shares of common stock at an exercise price of $0.415 per share. The warrant was issued in connection with a Master License Agreement through which the Company acquired certain license rights to various software products owned by the warrant holder, which was also a significant customer during 1997. The fair value of the warrant was $52, which has been reflected in the accompanying Supplemental Combined Balance Sheet as capitalized software development costs. The holder exercised this warrant on January 26, 2000 by payment of the exercise price of $31. In October 1999, Entevo issued a warrant to purchase 26 shares of the Company's common stock, at an exercise price of $12.44 per share. The warrant is immediately exercisable and has an expiration date of April 22, 2004. ISSUANCE OF ENTEVO SERIES A, B AND C CONVERTIBLE PREFERRED STOCK During 1998 and 1997, Entevo issued a total of 5,000 shares of Series A convertible preferred stock (the "Series A Preferred Stock") to various investors for $2,500 ($.50 per share) (the "Series A Preferred Stockholders"). On April 28, 1998, Entevo received loans totaling $500 from two of its Series A Preferred Stockholders. The loans were for $250 each and bore interest at 8.5%, and matured on May 28, 1998. The loans were convertible into convertible preferred stock. On June 3, 1998, Entevo sold 7,689 shares of Series B convertible preferred stock (the "Series B Preferred Stock") to various investors ("Series B Preferred Stockholders") for a total of $7,189 ($0.935 per share). In connection with the sale of the Series B Preferred Stock, the $500 of loans received in April 1998 was converted into Series B Preferred Stock. The Series B Preferred Stock was sold pursuant to the terms of the Series B Preferred Stock Purchase Agreement, other related agreements, and certain amendments to Entevo's Articles of Incorporation. In October 1999, Entevo completed the sale of 10,000 shares of Series C convertible preferred stock (the "Series C Preferred Stock") to various investors ("Series C Preferred Stockholders") for a total of $15,000 65 67 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) ($1.50 per share). The Series C Preferred Stock was sold pursuant to the terms of the Series C Preferred Stock Purchase Agreement, other related agreements, and certain amendments to Entevo's Certificate of Incorporation ("Purchase Agreements"). The Series A Preferred Stockholders, the Series B Preferred Stockholders, and Series C Preferred Stockholders are referred to collectively as the "Preferred Stockholders" and the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock is collectively referred to as the "Preferred Stock." Each Series of Preferred Stock had the right as a separate class, to convert into commons stock or the receive proceeds equal to three times their original investment upon a change of control of Entevo. The Preferred Stockholders also had certain other rights and privileges under the respective Purchase Agreements, including voting rights, the right to Board representation, antidilution protection, registration rights, participation rights and co-sale rights. TREASURY STOCK TRANSACTIONS The Company repurchased 9,844 shares of common stock for $1.43 per share in October 1997. These treasury shares were retired by the Company in September 1998. INITIAL PUBLIC OFFERING On May 15, 1998, the Company filed a registration statement permitting the Company to sell 5,518 shares of its common stock to the public and 1,124 additional shares to cover over-allotments. The registration statement also permitted certain stockholders of the Company to sell 1,982 shares to the public. The registration statement became effective on July 23, 1998. With the exercise of the over-allotment, the initial public offering resulted in proceeds to the Company of approximately $30,025, net of approximately $3,189 in underwriting fees and offering expenses. The Company received no proceeds from the sale of shares by selling stockholders in the initial public offering. SECONDARY OFFERING On November 25, 1998, the Company filed a registration statement permitting the Company to sell 600 shares of its common stock to the public and 90 additional shares to cover over-allotments. The registration statement also permitted certain stockholders of the Company to sell 5,400 shares to the public and 810 additional shares to cover over-allotments. The registration statement became effective on December 4, 1998. With the exercise of the over-allotment, the secondary offering resulted in proceeds to the Company of approximately $6,412, net of approximately $833 in underwriting fees and offering expenses. The Company received no proceeds from the sale of shares by selling stockholders in the secondary public offering. STOCK OPTION PLANS Incentive Stock Option Plan In 1996, the Company's Board of Directors adopted the Incentive Stock Option Plan. At December 31, 1999, there were 2,482 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 475, 928 and 524 shares were exercisable at December 31, 1999, 1998 and 1997 with a weighted average exercise price per share of $4.34, $0.53 and $0.40, respectively. Nonqualified Stock Option Plan In 1996, the Company's Board of Directors adopted the Nonqualified Stock Option Plan. At December 31, 1999, there were 1,105 shares of common stock reserved by the Board of Directors for issuance under 66 68 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) this plan. Options on 540, 1,034 and 438 shares were exercisable at December 31, 1999, 1998 and 1997, with a weighted average exercise price per share of $0.76, $1.12 and $0.67, respectively. 1997 Employee Stock Option Plan In 1997, the Company's Board of Directors adopted the 1997 Employee Stock Option Plan. At December 31, 1999, there were 1,720 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 1,132 and 1,130 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $1.43 and $1.43, respectively. There were no options exercisable at December 31, 1997. 1998 Omnibus Incentive Plan In 1998, the Company's Board of Directors adopted the 1998 Omnibus Incentive Plan. At December 31, 1999, there were 3,541 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 245 and 58 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $9.29 and $2.44, respectively. There were no options exercisable at December 31, 1997. Non-Employee Director Plan In 1998, the Company's Board of Directors adopted the Non-Employee Director Plan. At December 31, 1999, there were 340 shares of common stock reserved by the Board of Directors for issuance under this plan. Options on 60 shares were exercisable at December 31, 1999, with a weighted average exercise price per share of $1.92. There were no options exercisable at December 31, 1998 or 1997. 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. At December 31, 1999, there were 88 shares of common stock reserved by the Board of Directors for issuance under these plans. Options on 14 and 20 shares were exercisable at December 31, 1999 and 1998, with a weighted average exercise price per share of $2.25 and $2.25, respectively. In connection with the merger of Netect 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 herein. 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. At December 31, 1999, there were 249 shares of common stock reserved by the Board of Directors for issuance under these plans. Options on 65 shares were exercisable at December 31, 1999, with a weighted average exercise price per share of $.50. 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 disclosed herein. All Stock-Based Compensation Plans Substantially all options reserved under the Company's Incentive Stock Option Plan, the Nonqualified Stock Option Plan and the 1997 Employee Stock Option Plan have been issued. Options granted under the Incentive Stock Option Plan, Nonqualified Stock Option Plan, 1998 Omnibus Incentive Plan and Non- Employee Director Plan generally vest 20% per year over five years. Options granted under the International 67 69 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Employee Stock Option Plan, the Section 102 Share Option Plan, 1997 Entevo Stock Plan and 1998 Indian Stock Option Plan generally vest 25% per year over four years. Options granted under the 1997 Employee Stock Option Plan vest at varying rates through the year 2001. Options must be exercised no later than ten years from the date of grant. 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, 1999:
WEIGHTED AVERAGE PRICE PER PRICE PER OPTIONS SHARE SHARE ------- ------------ --------- Options outstanding, January 1, 1997.................... 2,792 $0.38-$ 1.24 $ 0.79 Options granted....................................... 6,835 $0.41-$ 1.43 $ 1.01 Options lapsed or canceled............................ (427) $0.41-$ 1.43 $ 0.49 Options exercised..................................... (20) $0.38-$ 0.41 $ 0.38 ------ Options outstanding, December 31, 1997.................. 9,180 $0.38-$ 1.43 $ 0.96 Options granted....................................... 3,356 $0.41-$13.75 $ 5.12 Options lapsed or canceled............................ (286) $0.41-$ 5.00 $ 1.31 Options exercised..................................... (2,183) $0.38-$ 5.00 $ 0.96 ------ Options outstanding, December 31, 1998.................. 10,067 $0.38-$13.75 $ 2.33 Options granted....................................... 3,839 $0.83-$22.25 $10.82 Options lapsed or canceled............................ (1,463) $0.41-$13.75 $ 3.13 Options exercised..................................... (2,918) $0.38-$11.50 $ 1.20 ------ Options outstanding, December 31, 1999.................. 9,525 $0.38-$22.25 $ 5.85 ======
The following table summarizes significant ranges of outstanding and exercisable options at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES IN REMAINING EXERCISE SHARES IN EXERCISE THOUSANDS LIFE IN YEARS PRICE THOUSANDS PRICE --------- ------------- -------- --------- -------- under $1.25........................... 2,337 6.6 $ 0.64 1,027 $ 0.65 $1.26-$2.50........................... 2,359 7.9 $ 1.69 1,311 $ 1.48 $2.51-$5.00........................... 617 06.4 $ 4.87 52 $ 4.98 $5.01-$10.00.......................... 1,322 9.5 $ 9.63 30 $ 8.93 $10.01-$12.50......................... 2,535 9.1 $11.37 84 $11.11 Over $12.51........................... 355 9.5 $16.21 27 $13.75 ----- --- ------ ----- ------ 9,525 8.1 $ 5.85 2,531 $ 1.75 ===== === ====== ===== ======
Stock Based Compensation Disclosures For periods prior to the Company's initial public offering, the minimum value of stock based compensation was calculated in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The following weighted average assumptions using the Black-Scholes model 68 70 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) were used to calculate stock based compensation for the three years ended December 31, 1999 (the minimum value method used in 1997 does not include volatility):
1999 1998 1997 ---- ---- ---- Expected life (in years).................................... 6 4 4 Interest rate............................................... 6% 5% 6% Volatility.................................................. 87% 77% N/A Dividend yield.............................................. 0% 0% 0%
Stock based compensation costs would have reduced pretax income by $8,387, $1,097 and $164 in 1999, 1998 and 1997, respectively ($5,680, $757 and $107 after tax and $0.12, $0.05 and $0.01 per diluted share in 1999, 1998 and 1997, respectively) if such compensation in that year had been recognized as compensation expense on a straight-line basis over the vesting period of the grant. 10. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company conducts its operations in leased facilities under operating leases expiring at various dates through 2001. The leases are cancelable upon payment of six months rent and reimbursement of the unamortized balance of the leasehold allowance. Total lease expense amounted to approximately $2,677, $795 and $642 at December 31, 1999, 1998 and 1997, respectively. The minimum rental commitments under operating leases at December 31, 1999 were: $4,230 in 2000, $3,648 in 2001, $3,661 in 2002, $2,645 in 2003 and $302 in 2004 and beyond. 11. 401(k) PLAN 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% of the participant's contribution up to a maximum of 6% of a participant's compensation. Additionally, the Company may make a discretionary contribution as determined by the Board of Directors. Total Company contributions were $1,166, $546 and $174 in 1999, 1998 and 1997, respectively. 12. NET INCOME PER SHARE As a result of the Company's change from an S Corporation to a C Corporation in October 1997, presentation of pro forma net income per share is necessary for the year ended December 31, 1997. Shares issued as a result of the 1,006 shares issued in 1997 to satisfy a 1993 acquisition liability have been treated as if they had been effective and outstanding as of January 1, 1996 and included in weighted average shares outstanding. Shares to be issued in connection with the Curasoft acquisition (Note 14) are not material to the weighted shares outstanding for 1998. For the years ended December 31, 1999, 1998 and 1997, options and warrants to acquire 239, 909 and 5,931 shares at weighted average exercise prices of $17.48, $10.73 and $1.68 per share, respectively were not included in the computations of diluted earnings per share because the exercise prices were greater than the average market price of the common shares. 69 71 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The computation of basic and diluted loss per share and pro forma basic and diluted net loss per share follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- -------- -------- Net loss.............................................. $ (441) $ (5,765) ======= ======== Pro forma net loss.................................. $(10,941) ======== Shares used in basic calculation (in thousands): Total basic shares.................................. 48,095 30,096 18,138 Additional shares for diluted computation: Effect of stock options............................. 5,259 6,582 1,186 Effect of warrants.................................. 111 1,160 30 Effect of convertible debentures.................... 111 666 74 Effect of convertible preferred stock............... -- 7,074 2,638 Effect of phantom stock............................. -- -- 10,150 Exclusion of share equivalents that are anti-dilutive because a loss was incurred........ (5,481) (15,482) (14,078) ------- -------- -------- Total diluted shares........................ 48,095 30,096 18,138 ======= ======== ======== Basic net loss per share.............................. $ (0.01) $ (0.19) Diluted net loss per share............................ $ (0.01) $ (0.19) Pro forma basic net loss per share.................... $ (0.60) Pro forma diluted net loss per share.................. $ (0.60)
13. SEGMENT DATA: The Company manages its business primarily on an overall products and services basis; the Company has one reportable segment. The reportable segment provides products and services as described in Note 1. The accounting policies of the segment are those described in the "Summary of Significant Accounting Policies" in Note 1. The Company evaluates the performance of its segment based on segment profit. Revenues related to operations in the United States totaled $59,543, $35,844, and $18,507 for the years ended December 31, 1999, 1998, and 1997, respectively. Revenues to customers located in other foreign countries totaled $11,551, $3,848, and $2,714 for the years ended December 31, 1999, 1998, and 1997, respectively. No single customer accounted for more than 10% of revenue in 1999, 1998, or 1997. Long-lived assets within the United States totaled $9,403 and $5,937 at December 31, 1999 and 1998, respectively. Long-lived assets in other foreign countries totaled $477 and $546 for the years ended December 31, 1999 and 1998, respectively. 14. ACQUISITIONS ACQUISITION OF CURASOFT, INC. In December 1998, the Company committed to deliver 350 shares of its common stock in exchange for all of the outstanding equity interests in Curasoft, Inc. in a transaction accounted for as a purchase. The aggregate consideration in the transaction was valued at $3,352. Incremental costs incurred and capitalized in connection with the acquisition were $140. The Company delivered the shares related to this acquisition in March of 1999. At December 31, 1999, the Company expensed an obligation to make an earnout payment of $1,200 to certain former owners of Curasoft based on the achievement of revenue targets related to an existing product, as well as their continued employment with the Company. The Company is not obligated to any other future earnout payments related to this acquisition. 70 72 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company allocated the purchase price to assets and liabilities acquired in the transaction based on their relative fair values as determined by an independent valuation firm. The Company has allocated $1,381 of the purchase price to the existing Curasoft ENR product family which provides fully integrated event notification and response solutions for scheduling, notification, dispatch, escalation, and response. To determine the fair market value of the acquired net assets, the Company relied primarily on the income approach, whereupon fair market value is a function of the future revenues expected to be generated by an asset, net of all related expenses. The future net revenue stream was discounted to the present value at an 18% rate based on the estimated level of risk associated with achieving the forecasted revenues. The income approach focuses on the income producing capability of the acquired assets and represents the present value of the future economic benefits expected to be derived from these assets. The purchase price allocation resulted in an immediate write-off of $2,488 for purchased in-process research and development costs related to a Curasoft product ("CuraSLAM") undergoing development at the acquisition date. CuraSLAM has been designed as a stand-alone product by Curasoft and is not related to the Curasoft ENR product family. This product is currently being designed to enable customers to improve the service levels of their computing environments and will help customers better align business processes with their IT functions. This product is expected to be integrated with current and future BindView products. The Company determined that the purchased in-process technology had not reached technological feasibility and had no alternative future use based on the status of design and development activities. To determine the fair value of the purchased in-process research and development activities, the Company utilized values determined by an independent valuation firm, which applied the percentage of completion approach. Prior to the acquisition, Curasoft conducted in-depth market research, designed the product architecture, substantially completed the coding of the user interface and began the coding of the other modules. The Company has estimated that the development effort of this product was 50% complete at the date of acquisition. The percentage completed of 50% was applied to the estimated fair value of the completed product to determine the in-process research and development charge upon acquisition. The estimated fair value of the completed product was determined using the future revenue streams expected from the product, net of related expenses, discounted at a rate based upon the specific level of risk associated with achieving the forecasted revenues. The management of the Company conducted due diligence and performed an assessment of remaining tasks and risks to achieve completion. The development activities required to complete the acquired in-process technologies included additional design, coding, quality assurance procedures and customer beta testing. The challenges facing the Company to complete the development of this product on schedule include 1) the management of a development office away from its principle offices in Houston, Texas, 2) the ability to adequately staff this office, 3) the ability to effectively integrate the product with the Company's existing products and 4) the validation of the product and its features by potential customers. If the development of the product is delayed, this could adversely impact its availability date and time-to-market and therefore, its ability to market the product. If the product is available for general distribution during the first half of 2000, the Company anticipates generating material net cash inflows from this product in 2001. 71 73 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Allocation of the purchase price in the transaction is as follows: Common stock to be issued................................... $3,352 Transaction costs........................................... 140 ------ Total to be allocated............................. $3,492 ====== Allocation: Cash acquired............................................. $ 157 Other current assets...................................... 239 Capitalized software...................................... 1,381 Other non-current assets.................................. 41 Current liabilities....................................... (394) Deferred taxes............................................ (420) Purchased in-process technology........................... 2,488 ------ Total allocated................................... $3,492 ======
ACQUISITION OF NETECT, LTD. On March 1, 1999, the Company merged with Netect, Ltd. ("Netect") in a stock-for-stock transaction accounted for as a pooling of interests. Netect develops and markets corporate security solutions for Internet/ Intranet networks. In connection with the merger, the Company issued 2,322 shares of common stock, based upon an exchange ratio of 0.800044202 shares of BindView common stock for each share of Netect common stock. As a result of this merger, all of the outstanding convertible preferred stock and convertible debentures of Netect were exchanged for the Company's common stock. The historical financial data included herein has been restated to reflect the merger with Netect by combining the historical results for the Company and Netect for all periods presented. There were no material transactions between BindView and Netect during the periods prior to the merger. Transaction costs of $1,533 and restructuring cost of $991 were incurred as a result of this merger. The transaction costs related to the acquisition include investment banking fees of $590, accounting and legal expenses of $565, transfer fees of $138, and other miscellaneous transaction expenses of $240. At the time of the merger, management approved restructuring plans to eliminate duplicate senior management positions and to close the Israeli operations of Netect. The restructuring plans were based on management's best estimate of those costs based on the information available at that time. The restructuring expenses related to this plan include involuntary employee separation expenses for approximately 15 former Netect employees, the costs to close Netect's Israeli operations and other miscellaneous restructuring expenses. The restructuring expense adjustment relates to additional costs to close Netect's Israeli operations that exceeded management's initial estimate. The Company has completed substantially all of the actions related to the restructuring plans. The Company believes the remaining reserve is sufficient to complete the remaining actions under the plan. The accrued restructuring expenses and amounts charged against the provision as of December 31, 1999, were as follows:
BEGINNING CASH ACCRUED EXPENSES AT RESTRUCTURING EXPENSES ACCRUAL ADJUSTMENT EXPENDITURES DECEMBER 31, 1999 - ---------------------- --------- ---------- ------------ ------------------- (IN THOUSANDS) Employee severance and related costs $575 $238 $(780) $33 Israeli office closing 119 -- (119) -- Other restructuring costs 59 -- (59) -- ---- ---- ----- --- Total $753 $238 $(958) $33 ==== ==== ===== ===
72 74 BINDVIEW DEVELOPMENT CORPORATION NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 15. SUBSEQUENT EVENTS On January 26, 2000 the Company announced a stock dividend. Stockholders of record as of the close of business on February 9, 2000 received one additional share of BindView Common Stock for each share of Common Stock held on the record date. All share amounts included within this document have been adjusted retroactively to give effect to this stock dividend. On February 9, 2000 the Company merged with Entevo Corporation in a stock for stock transaction accounted for as a pooling of interests. Entevo provides directory management solutions that help organizations deploy, integrate, administer and maintain enterprise directory services, in Windows NT and Windows 2000 environments. In connection with the merger, the Company issued 4,181 shares of common stock, based upon an exchange ratio of 0.1205909 shares of BindView common stock for each share of Entevo common stock and 0.17210298 shares of BindView common stock for each share of Entevo Series C Preferred Stock. There were no material transactions between the Company and Entevo during the periods prior to the merger. 73 75 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/ RICHARD P. GARDNER ------------------------------------ President and Chief Executive Officer March 30, 2000 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 Chairman of the Board and March 30, 2000 - ----------------------------------------------------- Chief Technology Officer Eric J. Pulaski /s/ RICHARD P. GARDNER Director, President and March 30, 2000 - ----------------------------------------------------- Chief Executive Officer Richard P. Gardner (Principal Executive Officer) /s/ SCOTT R. PLANTOWSKY Director, Vice President March 30, 2000 - ----------------------------------------------------- and Chief Financial Scott R. Plantowsky Officer (Principal Financial and Accounting Officer) /s/ PETER L. BLOOM Director March 30, 2000 - ----------------------------------------------------- Peter L. Bloom /s/ RICHARD A. HOSLEY II Director March 30, 2000 - ----------------------------------------------------- Richard A. Hosley II /s/ JOHN J. MOORES Director March 30, 2000 - ----------------------------------------------------- John J. Moores /s/ LELAND D. PUTTERMAN Director March 30, 2000 - ----------------------------------------------------- Leland D. Putterman
74 76 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions - Charges Balance at January 1 Charged to expense against reserve December 31 ---------- ------------------ --------------- ----------- Accounts receivable - allowance for doubtful accounts: 1997 $ 25 $ 170 $ - $ 195 1998 195 9 - 204 1999 204 370 51 523 Deferred tax asset valuation allowance: 1997 $ - $ 100 $ - $ 100 1998 100 900 - 1,000 1999 1,000 2,330 - 3,330
77 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Share Purchase Agreement dated as of January 29, 1999, among BindView, Netect, Ltd. the holders of all of the share capital of Netect, Ltd. and rights to acquire share capital of Netect, Ltd. and Paul E. Blondin, as Shareholders' Representative (incorporated by reference to Exhibit 2.1 to BindView's Current Report on form 8-K (File No. 000-24677), dated March 1, 1999). 3.1 -- Amended and Restated Articles of Incorporation of BindView (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of BindView (Reg. No. 333-52883), filed with the Commission on July 23, 1998 (the "Form S-1")). 3.2 -- Bylaws of BindView (incorporated by reference to Exhibit 3.1 to the Form S-1). 4.1 -- Reference is hereby made to Exhibits 3.1 and 3.2 (incorporated by reference to Exhibit 4.1 to the Form S-1). 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. 10.5*+ -- 1998 Non-Employee Director Stock Option Plan, as amended. 10.6 -- Agreement to Sublease dated June 25, 1998 between BindView and Halliburton Energy Services, Inc. 10.7 -- 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). 10.8+ -- 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"). 10.9+ -- 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). 10.10 -- Registration Rights Agreement dated October 16, 1997 among BindView, General Atlantic Partners 44 L.P., GAP Coinvestment Partners, L.P., JMI Equity Fund III, L.P. and Eric J. Pulaski (incorporated by reference to Exhibit 10.10 to the Form S-1). 10.11 -- Registration Rights Agreement dated November 7, 1997 among BindView and Scott R. Plantowsky (incorporated by reference to Exhibit 10.11 to the Form S-1). 10.12+ -- 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). 10.13 -- Form of Indemnification Agreement (incorporated by reference to Exhibit 10.16 to the Form S-1). 23.1* -- Consent of PricewaterhouseCoopers LLP. 27.1* -- Financial Data Schedule.
EX-10.4 2 OMNIBUS INCENTIVE PLAN 1 EXHIBIT 10.4 BINDVIEW DEVELOPMENT CORPORATION OMNIBUS INCENTIVE PLAN (INCLUDING AMENDMENTS THROUGH OCTOBER 1999 AND GIVING EFFECT TO THE ONE-FOR-ONE STOCK DIVIDEND PAID ON FEBRUARY 17, 2000) 2 BINDVIEW DEVELOPMENT CORPORATION OMNIBUS INCENTIVE PLAN TABLE OF CONTENTS ARTICLE I - PLAN Section Purpose......................................................1.1 Effective Date of Plan.......................................1.2 ARTICLE II - DEFINITIONS Affiliate....................................................2.1 Board of Directors or Board..................................2.2 Change of Control............................................2.3 Code.........................................................2.4 Commission...................................................2.5 Committee....................................................2.6 Company......................................................2.7 Corporate Plan...............................................2.8 Corporate Plan Options.......................................2.9 Employee....................................................2.10 Exchange Act................................................2.11 Fair Market Value...........................................2.12 Incentive Option............................................2.13 1996 ISO Plan...............................................2.14 1996 ISO Plan Options.......................................2.15 1997 Incentive Plan.........................................2.16 1997 Incentive Plan Options.................................2.17 1998 Incentive Plan Options.................................2.18 Non-Employee Director.......................................2.19 Nonqualified Option.........................................2.20 Option......................................................2.21 Option Agreement............................................2.22 Outside Director............................................2.23 Plan........................................................2.24 Plan Year...................................................2.25 Reload Option...............................................2.26 Restricted Stock............................................2.27 Restricted Stock Agreement..................................2.28 Restricted Stock Purchase Price.............................2.29 Stock.......................................................2.30 Stock Award.................................................2.31 -i- 3 10% Stockholder.............................................2.32 Voting Stock................................................2.33 ARTICLE III - ELIGIBILITY ARTICLE IV - GENERAL PROVISIONS RELATING TO OPTIONS AND STOCK AWARDS Authority to Grant Options and Stock Awards...................4.1 Dedicated Shares..............................................4.2 Non-Transferability...........................................4.3 Requirements of Law...........................................4.4 Changes in the Company's Capital Structure....................4.5 Election Under Section 83(b) of the Code......................4.6 ARTICLE V - OPTIONS Type of Option................................................5.1 Option Price..................................................5.2 Duration of Options...........................................5.3 Amount Exercisable--Incentive Options.........................5.4 Exercise of Options...........................................5.5 Exercise on Termination of Employment.........................5.6 Exercise of Options Under the Corporate Plan, the 1996 ISO Plan and the 1997 Incentive Plan...............5.7 Reload Options................................................5.8 Substitution Options..........................................5.9 No Rights as Stockholder.....................................5.10 ARTICLE VI - STOCK AWARDS Stock Awards..................................................6.1 Restrictions..................................................6.2 Stock Certificate.............................................6.3 Rights as Stockholder.........................................6.4 Lapse of Restrictions.........................................6.5 Restriction Period............................................6.6 ARTICLE VII - ADMINISTRATION ARTICLE VIII - AMENDMENT OR TERMINATION OF PLAN -ii- 4 ARTICLE IX - MISCELLANEOUS No Establishment of a Trust Fund..............................9.1 No Employment Obligation......................................9.2 Forfeiture ...................................................9.3 Tax Withholding...............................................9.4 Written Agreement.............................................9.5 Indemnification of the Committee and the Board of Directors...................................9.6 Gender........................................................9.7 Headings......................................................9.8 Other Compensation Plans......................................9.9 Other Options or Awards......................................9.10 Governing Law................................................9.11 No Modification, Extension, or Renewal of Corporate Plan Options, 1996 ISO Plan Options, and 1997 Incentive Plan Options..............................9.12 Conforming Amendments to Options Issued Under the Corporate Plan, 1996 ISO Plan and 1997 Incentive Plan on and After the Effective Date of this Section 9.13......................9.13 -iii- 5 ARTICLE I PLAN 1.1 PURPOSE. This Plan is a plan for key employees (including officers and employee directors) of the Company and its Affiliates and is intended to advance the best interests of the Company, its Affiliates, and its stockholders by providing those persons who have substantial responsibility for the management and growth of the Company and its Affiliates with additional incentives and an opportunity to obtain or increase their proprietary interest in the Company, thereby encouraging them to continue in the employ of the Company or any of its Affiliates. For administrative purposes, and subject to Section 9.12 hereof, this Plan incorporates the BindView Development Corporation Stock Option Plan (the "Corporate Plan"), the BindView Development Corporation Incentive Stock Option Plan (the "1996 ISO Plan and the BindView Development Corporation 1997 Incentive Plan (the "1997 Incentive Plan"). 1.2 EFFECTIVE DATE OF PLAN. The Plan is effective January 1, 1998, if within one year of that date it shall have been approved by at least a majority vote of stockholders voting in person or by proxy at a duly held stockholders' meeting, or if the provisions of the corporate charter, by-laws or applicable state law prescribes a greater degree of stockholder approval for this action, the approval by the holders of that percentage, at a duly held meeting of stockholders. No Incentive Option, Nonqualified Option, Reload Option or Stock Award shall be granted pursuant to the Plan after December 31, 2007. ARTICLE II DEFINITIONS The words and phrases defined in this Article shall have the meaning set out in these definitions throughout this Plan, unless the context in which any such word or phrase appears reasonably requires a broader, narrower, or different meaning. 2.1 "AFFILIATE" means any parent corporation and any subsidiary corporation. The term "parent corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the action or transaction, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. The term "subsidiary corporation" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the action or transaction, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2.2 "BOARD OF DIRECTORS" or "BOARD" means the board of directors of the Company. -1- 6 2.3 "CHANGE OF CONTROL." A "Change in Control" shall have occurred if, after the Effective Date of the Plan: (i) a report on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) shall be filed with the Commission pursuant to the Exchange Act and that report discloses that any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), is the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 20 percent or more of the outstanding Voting Stock; (ii) any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), shall purchase securities pursuant to a tender offer or exchange offer to acquire any Voting Stock (or any securities convertible into Voting Stock) and, immediately after consummation of that purchase, that person is the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 20 percent or more of the outstanding Voting Stock (such person's beneficial ownership to be determined, in the case of rights to acquire Voting Stock, pursuant to paragraph (d) of Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act); (iii) the consummation of: (x) a merger, consolidation or reorganization of the Company with or into any other person if (a) the Company is not the surviving entity or (b) as a result of such merger, consolidation or reorganization, 50 percent or less of the combined voting power of the then-outstanding securities of such other person immediately after such merger, consolidation or reorganization are held in the aggregate by the holders of Voting Stock immediately prior to such merger, consolidation or reorganization; (y) any sale, lease, exchange or other transfer of all or substantially all the assets of the Company and its consolidated subsidiaries to any other person if as a result of such sale, lease, exchange or other transfer, 50 percent or less of the combined voting power of the then-outstanding securities of such other person immediately after such sale, lease, exchange or other transfer are held in the aggregate by the holders of Voting Stock immediately prior to such sale, lease, exchange or other transfer; or -2- 7 (z) a transaction immediately after the consummation of which any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act) would be the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of more than 50 percent of the outstanding Voting Stock; (iv) the stockholders of the Company approve the dissolution of the Company; or (v) during any period of 12 consecutive months, the individuals who at the beginning of that period constituted the Board of Directors shall cease to constitute a majority of the Board of Directors, unless the election, or the nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least a two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. 2.4 "CODE" means the Internal Revenue Code of 1986, as amended. 2.5 "COMMISSION" means the United States Securities and Exchange Commission or any successor agency. 2.6 "COMMITTEE" means the Compensation Committee of the Board of Directors or such other committee designated by the Board of Directors. The Committee shall be comprised solely of at least two members who are both Non-Employee Directors and Outside Directors. 2.7 "COMPANY" means BindView Development Corporation. 2.8 "CORPORATE PLAN" means the BindView Development Corporation Stock Option Plan. 2.9 "CORPORATE PLAN OPTIONS" means options granted under the Corporate Plan to purchase stock. 2.10 "EMPLOYEE" means a person employed by the Company or any Affiliate to whom an Option or a Stock Award is granted. 2.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time. 2.12 "FAIR MARKET VALUE" of the Stock as of any date means (a) the average of the high and low sale prices of the Stock on that date on the principal securities exchange on which the Stock is listed; or (b) if the Stock is not listed on a securities exchange, the average of the high and low sale prices of the Stock on that date as reported on the NASDAQ National Market System; or (c) if the Stock is not listed on the NASDAQ National Market System, the average of the high and low bid quotations for the Stock on that date as reported by the National Quotation Bureau Incorporated; or (d) if none of the foregoing is applicable, an amount at the election of the Committee equal to (x), -3- 8 the average between the closing bid and ask prices per share of stock on the last preceding date on which those prices were reported or (y) that amount as determined by the Committee. 2.13 "INCENTIVE OPTION" means an option granted under this Plan which is designated as an "Incentive Option" and satisfies the requirements of Section 422 of the Code. 2.14 "1996 ISO PLAN" means the BindView Development Corporation Incentive Stock Option Plan. 2.15 "1996 ISO PLAN OPTIONS" mean Options granted under the 1996 ISO Plan. 2.16 "1997 INCENTIVE PLAN" means the BindView Development Corporation 1997 Incentive Plan. 2.17 "1997 INCENTIVE PLAN OPTIONS" mean Options granted under the 1997 Incentive Plan. 2.18 "1998 INCENTIVE PLAN OPTIONS" mean Options granted pursuant to Section 4.2 of the Plan. 2.19 "NON-EMPLOYEE DIRECTOR" means a "Non-Employee Director" as that term is defined in Rule 16b-3 under the Securities Exchange Act of 1934. 2.20 "NONQUALIFIED OPTION" means an option granted under this Plan other than an Incentive Option. 2.21 "OPTION" means an Incentive Option, Nonqualified Option and/or Reload Option granted under this Plan to purchase shares of Stock. Option shall also include a reference to each Corporate Plan Option, 1996 ISO Plan Option, 1997 Incentive Plan Option and 1998 Plan Option, except to the extent otherwise indicated or to the extent set forth in Section 9.12 of the Plan. 2.22 "OPTION AGREEMENT" means the written agreement which sets out the terms of an Option, as amended from time to time. 2.23 "OUTSIDE DIRECTOR" means a member of the Board of Directors serving on the Committee who satisfies the definition of outside director in Section 162(m) of the Code. 2.24 "PLAN" means the BindView Development Corporation Omnibus Incentive Plan, as set out in this document and as it may be amended from time to time. 2.25 "PLAN YEAR" means the Company's fiscal year. 2.26 "RELOAD OPTION" shall mean a 1998 Incentive Plan Option or a 1997 Incentive Plan Option which the Board may, in its sole discretion, grant in connection with the issuing of a 1998 Incentive -4- 9 Plan Option or a 1997 Incentive Plan Option if the exercise price of the 1998 Incentive Plan Option or the 1997 Incentive Plan Option is paid in whole or in part, by exchanging Stock owned by the Employee. A Reload Option shall be an Incentive Option or Nonqualified Option depending on the type of 1998 Incentive Plan Option or 1997 Incentive Plan Option exercised under the Option Agreement containing the Reload Option feature. The Reload Options will be subject to the same restrictions and provisions of the Plan as the original 1998 Incentive Plan Option or 1997 Incentive Plan Option, except when specific changes are set out in the Option Agreement. 2.27 "RESTRICTED STOCK" means Stock awarded or purchased under a Restricted Stock Agreement entered into pursuant to this Plan, together with (i) all rights, warranties or similar items attached or accruing thereto or represented by the certificate representing the Stock and (ii) any stock or securities into which or for which the Stock is thereafter converted or exchanged. The terms and conditions of the Restricted Stock Agreement shall be determined by the Committee consistent with the terms of the Plan. 2.28 "RESTRICTED STOCK AGREEMENT" means an agreement between the Company or any Affiliate and the Employee pursuant to which the Employee receives a Stock Award subject to Article VI. 2.29 "RESTRICTED STOCK PURCHASE PRICE" means the purchase price, if any, per share of Restricted Stock subject to an Award. The Restricted Stock Purchase Price shall be determined by the Committee. It may be greater than or less than the Fair Market Value of the Stock on the date of the Stock Award. 2.30 "STOCK" means the common stock of the Company, no par value or, in the event that the outstanding shares of common stock are later changed into or exchanged for a different class of stock or securities of the Company or another corporation, that other stock or security. 2.31 "STOCK AWARD" means an award of Restricted Stock. 2.32 "10% STOCKHOLDER" means an individual who, at the time the Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Affiliate. An individual shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its stockholders, partners, or beneficiaries. 2.33 "VOTING STOCK" means shares of the capital stock of the Company the holders of which are entitled to vote for the election of directors, but excluding shares entitled to so vote only upon the occurrence of a contingency unless that contingency shall have occurred. ARTICLE III ELIGIBILITY -5- 10 The individuals who shall be eligible to receive Incentive Options, Nonqualified Options, and Stock Awards shall be those key employees of the Company or any of its Affiliates as the Committee shall determine from time to time. However, no member of the Committee shall be eligible to receive any Option, or Stock Award or to receive stock, stock options, or stock appreciation rights under any other plan of the Company or any of its Affiliates, if to do so would cause the individual not to be a Non-Employee Director or Outside Director. The Board of Directors may designate one or more individuals who shall not be eligible to receive any Option or Stock Award under this Plan or under other similar plans of the Company. ARTICLE IV GENERAL PROVISIONS RELATING TO OPTIONS AND STOCK AWARDS 4.1 AUTHORITY TO GRANT OPTIONS AND STOCK AWARDS. The Committee may grant to those key Employees of the Company or any of its Affiliates, as it shall from time to time determine, Options or Stock Awards under the terms and conditions of this Plan. Subject only to any applicable limitations set out in this Plan, the number of shares of Stock to be covered by any Option or Stock Award to be granted to an Employee shall be as determined by the Committee. 4.2 DEDICATED SHARES. The total number of shares of Stock with respect to which 1998 Incentive Plan Options and Stock Awards may be granted under the Plan shall be 8,000,000 shares. The maximum number of shares subject to Options which may be issued to any Employee under the Plan during each Plan Year is 2,500,000 shares. The shares may be treasury shares or authorized but unissued shares. The number of shares stated in this Section 4.2 shall be subject to adjustment in accordance with the provisions of Section 4.5. In the event that any outstanding Option or Stock Award shall expire or terminate for any reason or any Option or Stock Award is surrendered, the shares of Stock allocable to the unexercised portion of that Option or Stock Award may again be subject to an Option or Stock Award under the Plan. If Stock is used by the Employee pursuant to Section 5.6 of this Plan to pay the exercise price of an Option, only the net number of shares of Stock issued by the Company shall be considered utilized under this Plan. If shares of Stock are withheld by the Company to pay tax withholding due from the Employee, the number of such shares withheld shall not be considered utilized under this Plan. 4.3 NON-TRANSFERABILITY. Options shall not be transferable by the Employee otherwise than by will or under the laws of descent and distribution, and shall be exercisable, during the Employee's lifetime, only by him. Restricted Stock shall be purchased by and/or become vested under a Restricted Stock Agreement during the Employee's lifetime, only by him. Any attempt to transfer a Stock Award other than under the terms of the Plan and the Restricted Stock Agreement shall terminate the Stock Award and all rights of the Employee to that Restricted Stock. Notwithstanding any provision in this Plan to the contrary, an Employee may transfer any Nonqualified Option to an Immediate Family Member or an entity controlled by the Employee or an Immediate Family Member, provided, however, no further transfer shall be made except for a -6- 11 transfer back to such Employee or such other transfer which may be approved by the President of the Company. For this purpose "Immediate Family Member" means an Employee's children, grandchildren or spouse, or a trust for the benefit of such Immediate Family Members. 4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any Stock under any Option or Stock Award if issuing that Stock would constitute or result in a violation by the Employee or the Company of any provision of any law, statute, or regulation of any governmental authority. Specifically, in connection with any applicable statute or regulation relating to the registration of securities, upon exercise of any Option or pursuant to any Stock Award, the Company shall not be required to issue any Stock unless the Committee has received evidence satisfactory to it to the effect that the holder of that Option or Stock Award will not transfer the Stock except in accordance with applicable law, including receipt of an opinion of counsel satisfactory to the Company to the effect that any proposed transfer complies with applicable law. The determination by the Board on this matter shall be final, binding and conclusive. The Company may, but shall in no event be obligated to, register any Stock covered by this Plan pursuant to applicable securities laws of any country or any political subdivision. In the event the Stock issuable on exercise of an Option or pursuant to a Stock Award is not registered, the Company may imprint on the certificate evidencing the Stock any legend that counsel for the Company considers necessary or advisable to comply with applicable law. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option or vesting under a Stock Award, or the issuance of shares under either of them, to comply with any law or regulation of any governmental authority. 4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding Options or Stock Awards shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock or its rights, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Stock outstanding, without receiving compensation for it in money, services or property, then (a) the number, class, and per share price of shares of Stock subject to outstanding Options under this Plan shall be appropriately adjusted in such a manner as to entitle an Employee to receive upon exercise of an Option, for the same aggregate cash consideration, the equivalent total number and class of shares he would have received had he exercised his Option in full immediately prior to the event requiring the adjustment; and (b) the number and class of shares of Stock then reserved to be issued under the Plan shall be adjusted by substituting for the total number and class of shares of Stock then reserved, that number and class of shares of Stock that would have been received by the owner of an equal number of outstanding shares of each class of Stock as the result of the event requiring the adjustment. -7- 12 If while unexercised Options remain outstanding under the Plan (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than an entity that was wholly-owned by the Company immediately prior to such merger, consolidation or other reorganization), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than an entity wholly-owned by the Company), (iii) the Company is to be dissolved, or (iv) the Company is a party to any other corporate transaction (as defined under Section 424(a) of the Code and applicable Treasury Regulations) that is not described in clauses (i), (ii) or (iii) of this sentence (each such event is referred to herein as a "Corporate Change"), then (x) except as otherwise provided in an Option Agreement or as a result of the Board's effectuation of one or more of the alternatives described below, there shall be no acceleration of the time at which any Option then outstanding may be exercised, and (y) no later than ten (10) days after the approval by the stockholders of the Company of such Corporate Change, the Board, acting in its sole and absolute discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which some or all of the Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Board, after which specified date all such Options that remain unexercised and all rights of Optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by all or selected Optionees of some or all of the then outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of this Plan or the Option Agreements evidencing such Options) as of a date, before or after such Corporate Change, specified by the Board, in which event the Board shall thereupon cancel such Options and the Company shall pay to each such Optionee an amount of cash per share equal to the excess, if any, of the per share price offered to stockholders of the Company in connection with such Corporate Change over the exercise price(s) under such Options for such shares, (3) with respect to all or selected Optionees, have some or all of their then outstanding Options (whether vested or unvested) assumed or have a new Option substituted for some or all of their then outstanding Options (whether vested or unvested) by an entity which is a party to the transaction resulting in such Corporate Change and which is then employing him, or a parent or subsidiary of such entity, provided that (A) such assumption or substitution is on a basis where the excess of the aggregate fair market value of the shares subject to the Option immediately after the assumption or substitution over the aggregate exercise price of such shares is equal to the excess of the aggregate fair market value of all shares subject to the Option immediately before such assumption or substitution over the aggregate exercise price of such shares, and (B) the assumed rights under such existing Option or the substituted rights under such new Option as the case may be will have the -8- 13 same terms and conditions as the rights under the existing Option assumed or substituted for, as the case may be, (4) provide that the number and class of shares of Stock covered by an Option (whether vested or unvested) theretofore granted shall be adjusted so that such Option when exercised shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement and/or plan relating to such Corporate Change if, immediately prior to such Corporate Change, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option, or (5) make such adjustments to Options then outstanding as the Board deems appropriate to reflect such Corporate Change (provided, however, that the Board may determine in its sole and absolute discretion that no such adjustment is necessary)." In effecting one or more of alternatives (3), (4) or (5) above, and except as otherwise may be provided in an Option Agreement, the Board, in its sole and absolute discretion and without the consent or approval of any Optionee, may accelerate the time at which some or all Options then outstanding may be exercised. In the event of changes in the outstanding Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Option and not otherwise provided for by this Section 4.5, any outstanding Options and any agreements evidencing such Options shall be subject to adjustment by the Board in its sole and absolute discretion as to the number and price of shares of stock or other consideration subject to such Options. In the event of any such change in the outstanding Stock, the aggregate number of shares available under this Plan may be appropriately adjusted by the Board, whose determination shall be conclusive. After a merger of one or more corporations into the Company or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, each Employee shall be entitled to have his Restricted Stock appropriately adjusted based on the manner the Stock was adjusted under the terms of the agreement of merger or consolidation. The issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe for them, or upon conversion of shares or obligations of the Company convertible into shares or other securities, shall not affect, and no adjustment by reason of such issuance shall be made with respect to, the number, class, or price of shares of Stock then subject to outstanding Options or Stock Awards. -9- 14 4.6 ELECTION UNDER SECTION 83(B) OF THE CODE. No Employee shall exercise the election permitted under Section 83(b) of the Code under this Plan without written approval of the Committee. ARTICLE V OPTIONS 5.1 TYPE OF OPTION. The Committee shall specify whether a given option shall constitute an Incentive Option or a Nonqualified Option. Options previously granted under the Corporate Plan, the 1996 ISO Plan and the 1997 Incentive Plan shall retain the designation as either an incentive stock option that satisfies the requirements of Section 422 of the Code or as a nonqualified stock option that does not satisfy the requirements of Section 422 of the Code. 5.2 OPTION PRICE. The price at which Stock may be purchased under an Incentive Option shall not be less than the greater of: (a) 100% of the Fair Market Value of the shares of Stock on the date the Option is granted or (b) the aggregate par value of the shares of Stock on the date the Option is granted. The Committee in its discretion may provide that the price at which shares of Stock may be purchased under an Incentive Option shall be more than 100% of Fair Market Value. In the case of any 10% Stockholder, the price at which shares of Stock may be purchased under an Incentive Option shall not be less than 110% of the Fair Market Value of the Stock on the date the Incentive Option is granted. The price at which shares of Stock may be purchased under a Nonqualified Option may be less than the Fair Market Value of the shares of Stock on the date the Option is granted. The Committee in its discretion may provide that the price at which shares of Stock may be purchased under a Nonqualified Option shall be more than 100% of Fair Market Value. 5.3 DURATION OF OPTIONS. No Option shall be exercisable after the expiration of 10 years from the date the Option is granted. A Reload Option shall have a term which is no longer than the original term of the underlying Option unless it is expressly provided otherwise in the Option Agreement. In the case of a 10% Stockholder, no Incentive Option shall be exercisable after the expiration of five years from the date the Incentive Option is granted. 5.4 AMOUNT EXERCISABLE. Each Option is exercisable, in whole or in part, in the manner and subject to the conditions the Committee, in its sole discretion, may provide in the Option Agreement, as long as the Option is valid and outstanding. To the extent that the aggregate Fair Market Value (determined as of the time an Incentive Option is granted) of the Stock with respect to which Incentive Options first become exercisable by the Employee during any calendar year (under this Plan and any other incentive stock option plan(s) of the Company or any Affiliate) exceeds $100,000, the Incentive Options shall be treated as Nonqualified Options. In making this determination, Incentive Options shall be taken into account in the order in which they were granted. If an Incentive Option is not exercised within -10- 15 specified time limits prescribed by the Code, it shall become a Nonqualified Option by operation of law. Solely with respect to the 1997 Incentive Plan Options, unless otherwise provided by the Board in a 1997 Incentive Plan Option Agreement, all conditions and restrictions relating to a 1997 Incentive Plan Option, including limitations on exercisability, risks of forfeiture and conditions and restrictions requiring the continued performance of services or the achievement of performance objectives with respect to the exercisability or settlement of such 1997 Incentive Plan Option, shall immediately lapse upon a Change of Control. Solely with respect to 1997 Incentive Plan Options, a Change of Control shall be deemed to have occurred if any person, other than the Company or an employee benefit plan of the Company, acquires directly or indirectly, the beneficial ownership, as defined in Section 13(d) of the Exchange Act, of any voting security of the Company and immediately after such acquisition, such person is directly or directly the beneficial owner of voting securities representing 50% or more of the total voting power of all of the then-outstanding voting securities of the Company. In addition, all shares of Stock granted pursuant to the exercise of the 1997 Incentive Plan Option shall be subject to the terms of any shareholder's agreement entered into by the Company concurrent with, or prior to the grant of any 1997 Incentive Plan Option. Furthermore, no fractional shares of stock shall be issued or delivered pursuant to any 1997 Incentive Plan Option. The Committee shall determine whether cash or other Options or other property shall be issued or paid in lieu of such fractional shares or whether such fractional or any rights thereto shall be forfeited or otherwise eliminated. 5.5 EXERCISE OF OPTIONS. Each Option shall be exercised by the delivery of written notice to the Committee setting forth the number of shares of Stock with respect to which the Option is to be exercised, together with: (a) cash, certified check, bank draft, or postal or express money order payable to the order of the Company for an amount equal to the option price of the shares, (b) Stock at its Fair Market Value on the date of exercise, (c) an election to have shares of Stock, which otherwise would be issued on exercise, withheld in payment of the exercise price and/or to satisfy any income tax withholding obligation, (d) any combination of (a), (b), or (c), and/or (e) any other form of payment which is acceptable to the Committee, and specifying the address to which the certificates for the shares are to be mailed. With respect to the exercise of Corporate Plan Options and 1996 ISO Plan Options, the Employee must pay the option price solely with cash. With respect to 1997 Incentive Plan Options, the Board shall determine the time or times at which a 1997 Incentive Plan Option may be exercised in whole or in part, the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including, without limitation, cash, Stock, other options or awards granted under other Company plans or other property, including notes or other contractual obligations of employees to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law, and the methods by which Stock will be delivered or deemed to be delivered to employees. As promptly as practicable after receipt of written notification and payment, the Company shall deliver to the Employee certificates for the number of shares with respect to which the Option has been exercised, issued in the Employee's name. If shares of Stock are used in -11- 16 payment, the aggregate Fair Market Value of the shares of Stock tendered must be equal to or less than the aggregate exercise price of the shares being purchased upon exercise of the Option, and any difference must be paid by cash, certified check, bank draft, or postal or express money order payable to the order of the Company. Delivery of the shares shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Employee, at the address specified by the Employee. Whenever an Option is exercised by exchanging shares of Stock owned by the Employee, the Employee shall deliver to the Company certificates registered in the name of the Employee representing a number of shares of Stock legally and beneficially owned by the Employee, free of all liens, claims, and encumbrances of every kind, accompanied by stock powers duly endorsed in blank by the record holder of the shares represented by the certificates (with signature guaranteed by a commercial bank or trust company or by a brokerage firm having a membership on a registered national stock exchange). The delivery of certificates upon the exercise of Options is subject to the condition that the person exercising the Option provide the Company with the information the Company might reasonably request pertaining to exercise, sale or other disposition. The Committee may provide that a legend or restriction be printed on the certificate as the Committee determines is necessary, in its discretion, to comply with applicable laws. 5.6 EXERCISE ON TERMINATION OF EMPLOYMENT. Unless it is expressly provided otherwise in the Option Agreement, Options shall terminate one day less than three months after severance of employment of the Employee from the Company and all Affiliates for any reason, with or without cause, other than death, retirement under the then established rules of the Company, or severance for disability. Whether authorized leave of absence or absence on military or government service shall constitute severance of the employment of the Employee shall be determined by the Committee at that time. In determining the employment relationship between the Company and the Employee, employment by any Affiliate shall be considered employment by the Company, as shall employment by a corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies, or by a parent corporation or subsidiary corporation of the corporation issuing or assuming a stock option (and for this purpose, the phrase "corporation issuing or assuming a stock option" shall be substituted for the word "Company" in the definitions of parent corporation and subsidiary corporation in Section 2.1, and the parent-subsidiary relationship shall be determined at the time of the corporate action described in Section 424(a) of the Code). DEATH. If, before the expiration of an Option, the Employee, whether in the employ of the Company or after he has retired or was severed for disability, dies, the Option shall become fully vested and shall continue until the earlier of the Option's expiration date or one year following the date of his death, unless it is expressly provided otherwise in the Option Agreement. After the death of the Employee, his executors, administrators or any persons to whom his Option may be transferred by will or by the laws of descent and distribution shall have the right, at any time prior to the Option's expiration or termination, whichever is earlier, to exercise the Option in full unless it is expressly provided otherwise in the Option Agreement. -12- 17 RETIREMENT. Unless it is expressly provided otherwise in the Option Agreement, before the expiration of an Incentive Option, the Employee shall be retired in good standing from the employ of the Company under the then established rules of the Company, the Incentive Option shall terminate on the earlier of the Option's expiration date or one year after his retirement; provided, if an Incentive Option is not exercised within specified time limits prescribed by the Code, it shall become a Nonqualified Option by operation of law. Unless it is expressly provided otherwise in the Option Agreement, if before the expiration of a Nonqualified Option, the Employee shall be retired in good standing from the employ of the Company under the then established rules of the Company, the Nonqualified Option shall terminate on the earlier of the Nonqualified Option's expiration date or one year after his retirement. In the event of retirement, the Employee shall have the right prior to the termination of the Option to exercise the Option, to the extent to which he was entitled to exercise it immediately prior to his retirement, unless it is expressly provided otherwise in the Option Agreement. DISABILITY. If, before the expiration of an Option, the Employee shall be severed from the employ of the Company for disability, the Option shall terminate on the earlier of the Option's expiration date or one year after the date he was severed because of disability, unless it is expressly provided otherwise in the Option Agreement. In the event that the Employee shall be severed from the employ of the Company for disability, the Employee shall become fully vested in his Option and have the right prior to the termination of the Option to exercise the Option in full unless it is expressly provided otherwise in the Option Agreement. If an Incentive Option is not exercised within specified time limits prescribed by the Code, it shall become a Nonqualified Option by operation of law. Notwithstanding the above, an Option may be amended by the Committee, with the consent of the Employee, to extend the termination date of the Option, provided such extension shall not exceed a period of 10 years from the date of the initial grant of the Option. 5.7 EXERCISE OF OPTIONS UNDER THE CORPORATE PLAN, THE 1996 ISO PLAN AND THE 1997 INCENTIVE PLAN. (a) CORPORATE PLAN OPTION PROVISIONS. Notwithstanding any other provision in this Plan, solely with respect to Corporate Plan Options, upon the death of the optionee, while still employed by Company, or upon the termination of the Optionee's employment with Company, any Option exercisable on the date of death or termination may be exercised by the Optionee or the Optionee's estate, as the case may be, provided that such exercise occurs within both the remaining option term of the Option and no later than 24 months after the date of the Optionee's death, or the date of Optionee's termination of employment with the Company, whichever occurs first. (b) 1996 ISO PLAN. Solely with respect to Options exercisable under the 1996 ISO Plan, upon the Employee's death while still employed by the Company, -13- 18 any 1996 ISO Plan Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such 1996 ISO by bequest or inheritance by reason of the death of the Optionee, provided that such exercise occurs within both the remaining option term of the 1996 ISO Plan Option and six months after the Optionee's death. Except as provided in the immediately preceding sentence, all 1996 ISO Plan Options shall immediately terminate on the date of termination of the Employee's employment with the Company. (c) 1997 INCENTIVE PLAN. See Section 5.5 of the Plan. 5.8 RELOAD OPTIONS. From time to time, the Committee may grant Reload Options to Employees. The time of grant of a Reload Option shall be the time the Employee surrenders the shares of Stock with respect to which the Reload Option is granted. The Reload Option shall be for the number of shares of Stock surrendered by the Employee as payment upon the exercise of the previously granted Option. The Reload Option shall be subject to the following restrictions: (a) the Reload Option shall be subject to the same restrictions on exercise and other Plan rules that are imposed on the underlying Option which contained the Reload Option feature; and (b) the Reload Option shall not be exercisable until the expiration of any retention holding period imposed on the disposition of any shares of Stock covered by the underlying Option which contained the Reload Option Feature unless it is expressly provided otherwise in the Option Agreement. 5.9 SUBSTITUTION OPTIONS. Options may be granted under this Plan from time to time in substitution for stock options held by employees of other corporations who are about to become employees of or affiliated with the Company or any Affiliate as the result of a merger or consolidation of the employing corporation with the Company or any Affiliate, or the acquisition by the Company or any Affiliate of the assets of the employing corporation, or the acquisition by the Company or any Affiliate of stock of the employing corporation as the result of which it becomes an Affiliate of the Company. The terms and conditions of the substitute Options granted may vary from the terms and conditions set out in this Plan to the extent the Committee, at the time of grant, may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 5.10 NO RIGHTS AS STOCKHOLDER. No Employee shall have any rights as a stockholder with respect to Stock covered by his Option until the date a stock certificate is issued for the Stock. ARTICLE VI STOCK AWARDS 6.1 STOCK AWARDS. The Committee may issue shares of Restricted Stock to an eligible employee subject to the terms of a Restricted Stock Agreement. The Restricted Stock may be issued for no payment by the Employee or for a payment below the Fair Market Value on the date of grant. Restricted Stock shall be subject to restrictions as to sale, transfer, alienation, pledge or other encumbrance and generally will be subject to vesting over a period of time specified in the Restricted -14- 19 Stock Agreement. The Committee shall determine the period of vesting, the number of shares, the price, if any, of Stock included in a Stock Award, and the other terms and provisions which are included in a Restricted Stock Agreement. In the discretion of the Committee, a Restricted Stock Award may be made as a grant of Restricted Stock or as a right to receive stock (or their cash equivalent or a combination of both) in the future. 6.2 RESTRICTIONS. Restricted Stock shall be subject to the terms and conditions as determined by the Committee, including without limitation any or all of the following: (a) a prohibition against the sale, transfer, alienation, pledge or other encumbrance of the shares of Restricted Stock, such prohibition to lapse at such time or times as the Committee shall determine (whether in annual or more frequent installments, at the time of the death, disability or retirement of the holder of such shares, or otherwise); (b) a requirement that the holder of shares of Restricted Stock forfeit, or in the case of shares sold to an Employee, resell back to the Company at his cost, all or a part of such shares in the event of termination of the holder's employment during any period in which the shares remain subject to restrictions; (c) a prohibition against employment of the holder of Restricted Stock by any competitor of the Company or its Affiliates, or against such holder's dissemination of any secret or confidential information belonging to the Company or an Affiliate; (d) unless stated otherwise in the Restricted Stock Agreement, (i) if restrictions remain at the time of severance of employment with the Company and all Affiliates, other than for reason of disability or death, the Restricted Stock shall be forfeited; and (ii) if severance of employment is by reason of disability or death, the restrictions on the shares shall lapse and the Employee or his heirs or estate shall be 100% vested in the shares subject to the Restricted Stock Agreement. Notwithstanding (a) above, an Employee may transfer Restricted Stock to an Immediate Family Member (as defined in Section 4.3) or an entity controlled by the Employee or an Immediate Family Member provided, however, no further transfer shall be made except for a transfer back to such Employee or such other transfer which may be approved by the President of the Company. For this purpose, "Immediate Family Member" means an Employee's children, grandchildren or spouse, or a trust for the benefit of such Immediate Family Member. 6.3 STOCK CERTIFICATE. Shares of Restricted Stock shall be registered in the name of the Employee receiving the Stock Award and deposited, together with a stock power endorsed in blank, with the Company. Each such certificate shall bear a legend in substantially the following form: The transferability of this certificate and the shares of Stock represented by it is restricted by and subject to the terms and conditions (including conditions of forfeiture) contained in the BindView Development Corporation Omnibus Incentive Plan, and an agreement entered into between the registered owner and the Company, -15- 20 including any shareholders agreement. A copy of the Plan and agreement is on file in the office of the Secretary of the Company. 6.4 RIGHTS AS STOCKHOLDER. Subject to the terms and conditions of the Plan, each Employee receiving a certificate for Restricted Stock shall have all the rights of a stockholder with respect to the shares of Stock included in the Stock Award during any period in which such shares are subject to forfeiture and restrictions on transfer, including without limitation, the right to vote such shares. Dividends paid with respect to shares of Restricted Stock in cash or property other than stock in the Company or rights to acquire stock in the Company shall be paid to the Employee currently. Dividends paid in stock in the Company or rights to acquire stock in the Company shall be added to and become a part of the Restricted Stock. 6.5 LAPSE OF RESTRICTIONS. At the end of the time period during which any shares of Restricted Stock are subject to forfeiture and restrictions on sale, transfer, alienation, pledge, or other encumbrance, such shares shall vest and will be delivered in a certificate, free of all restrictions, to the Employee or to the Employee's legal representative, beneficiary or heir; provided the certificate shall bear such legend, if any, as the Committee determines is reasonably required by applicable law. By accepting a Stock Award and executing a Restricted Stock Agreement, the Employee agrees to remit when due any federal and state income and employment taxes required to be withheld. 6.6 RESTRICTION PERIOD. No Stock Award may provide for restrictions continuing beyond 10 years from the date of the Stock Award. ARTICLE VII ADMINISTRATION This Plan shall be administered by the Committee. All questions of interpretation and application of the Plan, Options or Stock Awards shall be subject to the determination of the Committee. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be as effective as if it had been made by a majority vote at a meeting properly called and held. This Plan shall be administered in such a manner as to permit the Options granted under it which are designated to be Incentive Options to qualify as Incentive Options. In carrying out its authority under this Plan, the Committee shall have full and final authority and discretion, including but not limited to the following rights, powers and authorities, to: (a) determine the Employees to whom and the time or times at which Options or Stock Awards will be made, (b) determine the number of shares and the purchase price of Stock covered in each Option or Stock Award, subject to the terms of the Plan, -16- 21 (c) determine the terms, provisions and conditions of each Option and Stock Award, which need not be identical, (d) accelerate the time at which any outstanding Option may be exercised, (e) define the effect, if any, on an Option or Stock Award of the death, disability, retirement, or termination of employment of the Employee, (f) prescribe, amend and rescind rules and regulations relating to administration of the Plan, and (g) make all other determinations and take all other actions deemed necessary, appropriate, or advisable for the proper administration of this Plan. The actions of the Committee in exercising all of the rights, powers, and authorities set out in this Article and all other Articles of this Plan, when performed in good faith and in its sole judgment, shall be final, conclusive and binding on all parties. ARTICLE VIII AMENDMENT OR TERMINATION OF PLAN The Board of Directors of the Company may amend, terminate or suspend this Plan at any time, in its sole and absolute discretion; provided, however, that to the extent required to qualify this Plan under Rule 16b-3 promulgated under Section 16 of the Exchange Act, no amendment that would (a) materially increase the number of shares of Stock that may be issued under this Plan, (b) materially modify the requirements as to eligibility for participation in this Plan, or (c) otherwise materially increase the benefits accruing to participants under this Plan, shall be made without the approval of the Company's stockholders; provided further, however, that to the extent required to maintain the status of any Incentive Option under the Code, no amendment that would (a) change the aggregate number of shares of Stock which may be issued under Incentive Options, (b) change the class of employees eligible to receive Incentive Options, or (c) decrease the Option price for Incentive Options below the Fair Market Value of the Stock at the time it is granted, shall be made without the approval of the Company's stockholders. Subject to the preceding sentence, the Board shall have the power to make any changes in the Plan and in the regulations and administrative provisions under it or in any outstanding Incentive Option as in the opinion of counsel for the Company may be necessary or appropriate from time to time to enable any Incentive Option granted under this Plan to continue to qualify as an incentive stock option or such other stock option as may be defined under the Code so as to receive preferential federal income tax treatment. -17- 22 ARTICLE IX MISCELLANEOUS 9.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set aside nor shall a trust fund of any kind be established to secure the rights of any Employee under this Plan. All Employees shall at all times rely solely upon the general credit of the Company for the payment of any benefit which becomes payable under this Plan. 9.2 NO EMPLOYMENT OBLIGATION. The granting of any Option or Stock Award shall not constitute an employment contract, express or implied, nor impose upon the Company or any Affiliate any obligation to employ or continue to employ any Employee. The right of the Company or any Affiliate to terminate the employment of any person shall not be diminished or affected by reason of the fact that an Option or Stock Award has been granted to him. 9.3 FORFEITURE. Notwithstanding any other provisions of this Plan, if the Committee finds by a majority vote after full consideration of the facts that the Employee, before or after termination of his employment with the Company or an Affiliate for any reason (a) committed or engaged in fraud, embezzlement, theft, commission of a felony, or proven dishonesty in the course of his employment by the Company or an Affiliate, which conduct damaged the Company or Affiliate, or disclosed trade secrets of the Company or an Affiliate, or (b) participated, engaged in or had a material, financial or other interest, whether as an employee, officer, director, consultant, contractor, stockholder, owner, or otherwise, in any commercial endeavor which is competitive with the business of the Company or an Affiliate without the written consent of the Company or Affiliate, the Employee shall forfeit all outstanding Options and all outstanding Restricted Stock, and including all exercised Options and other situations pursuant to which the Company has not yet delivered a stock certificate. Clause (b) shall not be deemed to have been violated solely by reason of the Employee's ownership of stock or securities of any publicly owned corporation, if that ownership does not result in effective control of the corporation. The decision of the Committee as to the cause of the Employee's discharge, the damage done to the Company or an Affiliate, and the extent of the Employee's competitive activity shall be final. No decision of the Committee, however, shall affect the finality of the discharge of the Employee by the Company or an Affiliate in any manner. 9.4 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to deduct from other compensation payable to each Employee any sums required by federal, state, or local tax law to be withheld with respect to the grant or exercise of an Option or lapse of restrictions on Restricted Stock. In the alternative, the Company may require the Employee (or other person exercising the Option or receiving the Restricted Stock) to pay the sum directly to the employer corporation. If the Employee (or other person exercising the Option or receiving the Restricted Stock) is required to pay the sum directly, payment in cash or by check of such sums for taxes shall be delivered within 10 days after the date of exercise or lapse of restrictions. The Company shall have no obligation upon exercise of any Option or lapse of restrictions on Restricted Stock until payment has been received, -18- 23 unless withholding (or offset against a cash payment) as of or prior to the date of exercise or lapse of restrictions is sufficient to cover all sums due with respect to that exercise. The Company and its Affiliates shall not be obligated to advise an Employee of the existence of the tax or the amount which the employer corporation will be required to withhold. 9.5 WRITTEN AGREEMENT. Each Option and Stock Award shall be embodied in a written Option Agreement or Restricted Stock Agreement which shall be subject to the terms and conditions of this Plan and shall be signed by the Employee and by a member of the Committee on behalf of the Board and the Company or an executive officer of the Company other than the Employee on behalf of the Company. The Option Agreement or Restricted Stock Agreement may contain any other provisions that the Committee in its discretion shall deem advisable which are not inconsistent with the terms of this Plan. This Plan and all shares of stock or stock equivalents granted pursuant hereto shall be subject to the terms of any shareholders agreement entered into by the Company concurrent, or prior to, the grant of any Option hereunder. 9.6 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With respect to administration of this Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further act on his part to indemnity from the Company for, all expenses (including attorney's fees, the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his being or having been a member of the Committee and/or the Board of Directors, whether or not he continues to be a member of the Committee and/or the Board of Directors at the time of incurring the expenses -- including, without limitation, matters as to which he shall be finally adjudged in any action, suit or proceeding to have been found to have been negligent in the performance of his duty as a member of the Committee or the Board of Directors. However, this indemnity shall not include any expenses incurred by any member of the Committee and/or the Board of Directors in respect of matters as to which he shall be finally adjudged in any action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as a member of the Committee and the Board of Directors. In addition, no right of indemnification under this Plan shall be available to or enforceable by any member of the Committee and the Board of Directors unless, within 60 days after institution of any action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at its own expense. This right of indemnification shall inure to the benefit of the heirs, executors or administrators of each member of the Committee and the Board of Directors and shall be in addition to all other rights to which a member of the Committee and the Board of Directors may be entitled as a matter of law, contract, or otherwise. 9.7 GENDER. If the context requires, words of one gender when used in this Plan shall include the others and words used in the singular or plural shall include the other. 9.8 HEADINGS. Headings of Articles and Sections are included for convenience of reference only and do not constitute part of the Plan and shall not be used in construing the terms of the Plan. -19- 24 9.9 OTHER COMPENSATION PLANS. The adoption of this Plan shall not affect any other stock option, incentive or other compensation or benefit plans in effect for the Company or any Affiliate, nor shall the Plan preclude the Company from establishing any other forms of incentive or other compensation for employees of the Company or any Affiliate. 9.10 OTHER OPTIONS OR AWARDS. The grant of an Option or Stock Award shall not confer upon the Employee the right to receive any future or other Options or Stock Awards under this Plan, whether or not Options or Stock Awards may be granted to similarly situated Employees, or the right to receive future Options or Stock Awards upon the same terms or conditions as previously granted. 9.11 GOVERNING LAW. The provisions of this Plan shall be construed, administered, and governed under the laws of the State of Texas. 9.12 NO MODIFICATION, EXTENSION, OR RENEWAL OF CORPORATE PLAN OPTIONS, 1996 ISO PLAN OPTIONS, AND 1997 INCENTIVE PLAN OPTIONS. Notwithstanding any provision in this Plan to the contrary, no provision of this Plan is intended to modify, extend or renew any Corporate Plan Option, 1996 ISO Plan Option and 1997 Incentive Plan Option. Any provision in this Plan that is contrary to a provision in the Corporate Plan Option, 1996 ISO Plan Option and 1997 Incentive Plan Option that would create a modification, extension or renewal of such option is hereby incorporated into this Plan. All terms, conditions and limitations, if any, that are set forth in any previously granted option agreement shall remain in full force and effect under the terms of the Plan pursuant to which it was issued. 9.13 CONFORMING AMENDMENTS TO OPTIONS ISSUED UNDER THE CORPORATE PLAN, 1996 ISO PLAN AND 1997 INCENTIVE PLAN ON AND AFTER THE EFFECTIVE DATE OF THIS SECTION 9.13. Notwithstanding any provision in this Plan to the contrary, all options issued under the Corporate Plan, the 1996 ISO Plan and the 1997 Incentive Plan on and after the effective date of this Section 9.13 shall be subject to the same terms and conditions to those options that are issued under Section 4.2 of the Plan. -20- EX-10.5 3 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1 EXHIBIT 10.5 BINDVIEW DEVELOPMENT CORPORATION 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 2 BINDVIEW DEVELOPMENT CORPORATION 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN TABLE OF CONTENTS Page ---- 1. Purpose......................................................1 2. Effective Date of Plan.......................................1 3. Administration...............................................1 4. Dedicated Shares.............................................1 5. Grant of Options.............................................1 6. Eligibility..................................................1 7. Option Grant Size and Grant Dates............................2 8. Option Price; Fair Market Value..............................2 9. Duration of Options..........................................2 10. Amount Exercisable...........................................2 11. Exercise of Options..........................................3 12. Non-Transferability of Options...............................3 13. Termination of Directorship of Optionee......................3 14. Requirements of Law..........................................4 15. No Rights as Stockholder.....................................4 16. No Obligation to Retain Optionee.............................4 17. Changes in the Company's Capital Structure...................4 18. Termination and Amendment of Plan............................6 19. Written Agreement............................................6 20. Indemnification of Board.....................................6 21. Forfeitures..................................................7 22. Gender.......................................................7 23. Headings.....................................................7 24. Governing Law................................................7 -i- 3 BINDVIEW DEVELOPMENT CORPORATION 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. PURPOSE. The BindView Development Corporation 1998 Non-Employee Director Stock Option Plan (the "Plan") of BindView Development Corporation (the "Company") is for the benefit of members of the Board of Directors of the Company who, at the time of their service, are not employees of the Company or any of its affiliates, by providing them an opportunity to become owners of the Common Stock, no par value, of the Company (the "Stock"), thereby advancing the best interests of the Company by increasing their proprietary interest in the success of the Company and encouraging them to continue in their present capacity. 2. EFFECTIVE DATE OF PLAN. The Plan is effective January 5, 1998, if within one year of that date it shall have been approved by the holders of at least a majority of the outstanding shares of voting stock of the Company voting in person or by proxy at a duly held shareholders' meeting, or if the provisions of the corporate charter, bylaws or applicable state law prescribes a greater degree of shareholder approval for this action, the approval by the holders of that percentage, at a duly held meeting of shareholders, or in either case by a consent in lieu of a meeting if permitted by the corporate charter, bylaws and applicable law. 3. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board"). Subject to the terms of the Plan, the Board shall have the power to construe the provisions of the Plan, Options, and Stock issued hereunder, to determine all questions arising hereunder, and to adopt and amend such rules and regulations for administering the Plan as the Board deems desirable. 4. DEDICATED SHARES. The total number of shares of Stock with respect to which initial grants (collectively, the "Options") may be granted under this Plan shall not exceed, in the aggregate, 100,000 shares; provided, that the class and aggregate number of shares of Stock which may be granted hereunder shall be subject to adjustment in accordance with the provisions of Paragraph 17. The shares of Stock may be treasury shares or authorized but unissued shares of Stock. In the event that any outstanding Option shall expire or is terminated or canceled for any reason, the shares of Stock allocable to the unexercised portion of that Option may again be subject to an Option or Options under the Plan. 5. GRANT OF OPTIONS. All Options granted under the Plan shall be Nonqualified Options which are not intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended. No options shall be granted under the Plan subsequent to January 4, 2008. 6. ELIGIBILITY. The individuals who shall be eligible to receive Options under the Plan shall be each member of the Board who is not an employee of the Company or any affiliate of the Company ("Eligible Director"). -1- 4 7. OPTION GRANT SIZE AND GRANT DATES. On the day the Eligible Director is first elected or appointed to be a director (whichever is applicable), the Eligible Director shall be granted an Option to purchase 20,000 shares of stock on the terms and conditions set forth herein. Notwithstanding the provisions of Section 17, the number of shares which may subsequently be awarded pursuant to this Section 7 shall not increase but may be decreased if appropriate under Section 17. If service of an Eligible Director who previously received an initial grant terminates and the Director is subsequently elected or appointed to the Board, that Director shall not be eligible to receive a second grant. If the General Counsel of the Company determines, in his sole discretion, that the Company is in possession of material, nonpublic information about the Company or any of its subsidiaries, he may suspend granting of the initial grant to each Eligible Director until the second trading day after public dissemination of that information, and the determination by the General Counsel that issuance of the Options is then appropriate. 8. OPTION PRICE; FAIR MARKET VALUE. The price at which shares of Stock may be purchased by each Eligible Director (the "Optionee") pursuant to his initial grant, shall be 100% of the "Fair Market Value" of the shares of Stock on the date of grant of the initial grant. For all purposes of this Plan, the "Fair Market Value" of the Stock as of any date means (a) the average of the high and low sale prices of the Stock on that date on the principal securities exchange on which the Stock is listed; or (b) if the Stock is not listed on a securities exchange, the average of the high and low sale prices of the Stock on that date as reported on the NASDAQ National Market System; or (c) if the Stock is not listed on the NASDAQ National Market System, the average of the high and low bid quotations for the Stock on that date as reported by the National Quotation Bureau Incorporated; (d) for any Options issued prior to the initial public offering of the Stock, the initial public offering price; or (e) if none of the foregoing is applicable, the average between the closing bid and ask prices per share of stock on the last preceding date on which those prices were reported or that amount as determined by the Board. 9. DURATION OF OPTIONS. The term of each Option shall be ten years from the date of grant. No Option shall be exercisable after the expiration of ten years from the date the Option is granted. 10. AMOUNT EXERCISABLE. Each Option hereunder shall become exercisable on a cumulative basis in 20% increments on and after each annual anniversary of the grant of the Option. However, upon a Change of Control, each Option shall become immediately exercisable. For this purpose, a "Change in Control" shall have occurred if, after the Effective Date of the Plan: (i) a report on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) shall be filed with the Commission pursuant to the Exchange Act and that report discloses that any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), is the beneficial owner -2- 5 (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 20 percent or more of the outstanding Voting Stock; (ii) any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other than the Company (or one of its subsidiaries) or any employee benefit plan sponsored by the Company (or one of its subsidiaries), shall purchase securities pursuant to a tender offer or exchange offer to acquire any Voting Stock (or any securities convertible into Voting Stock) and, immediately after consummation of that purchase, that person is the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of 20 percent or more of the outstanding Voting Stock (such person's beneficial ownership to be determined, in the case of rights to acquire Voting Stock, pursuant to paragraph (d) of Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act); (iii) the consummation of: (x) a merger, consolidation or reorganization of the Company with or into any other person if (a) the Company is not the surviving entity or (b) as a result of such merger, consolidation or reorganization, 50 percent or less of the combined voting power of the then-outstanding securities of such other person immediately after such merger, consolidation or reorganization are held in the aggregate by the holders of Voting Stock immediately prior to such merger, consolidation or reorganization; (y) any sale, lease, exchange or other transfer of all or substantially all the assets of the Company and its consolidated subsidiaries to any other person if as a result of such sale, lease, exchange or other transfer, 50 percent or less of the combined voting power of the then-outstanding securities of such other person immediately after such sale, lease, exchange or other transfer are held in the aggregate by the holders of Voting Stock immediately prior to such sale, lease, exchange or other transfer; or (z) a transaction immediately after the consummation of which any person (within the meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act) would be the beneficial owner (as that term is defined in Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act), directly or indirectly, of more than 50 percent of the outstanding Voting Stock; (iv) the stockholders of the Company approve the dissolution of the Company; or -3- 6 (v) during any period of 12 consecutive months, the individuals who at the beginning of that period constituted the Board of Directors shall cease to constitute a majority of the Board of Directors, unless the election, or the nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least a two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. "Voting Stock" means shares of the capital stock of the Company the holders of which are entitled to vote for the election of directors, but excluding shares entitled to so vote only upon the occurrence of a contingency unless that contingency shall have occurred. 11. EXERCISE OF OPTIONS. Options shall be exercised by the delivery of written notice to the Company setting forth the number of shares with respect to which the Option is to be exercised, together with: (a) cash, certified check, bank draft, or postal or express money order payable to the order of the Company for an amount equal to the option price of the shares, (b) Stock at its Fair Market Value on the date of exercise, (c) an election to have shares of Stock, which otherwise would be issued on exercise, withheld in payment of the exercise price, (d) any combination of (a), (b), or (c), and/or (e) any other form which is acceptable to the Board, and specifying the address to which the certificates for the shares are to be mailed. As promptly as practicable after receipt of written notification and payment, the Company shall deliver to the Eligible Director certificates for the number of shares with respect to which the Option has been exercised, issued in the Eligible Director's name. If shares of Stock are used in payment, the Fair Market Value of the shares of Stock tendered must be less than the option price of the shares being purchased, and the difference must be paid by check. Delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Eligible Director, at the address specified by the Eligible Director. Whenever an Option is exercised by exchanging shares of Stock owned by the Optionee, the Optionee shall deliver to the Company certificates registered in the name of the Optionee representing a number of shares of Stock legally and beneficially owned by the Optionee, free of all liens, claims, and encumbrances of every kind, accompanied by stock powers duly endorsed in blank by the record holder of the shares represented by the certificates, (with signature guaranteed by a commercial bank or trust company or by a brokerage firm having a membership on a registered national stock exchange). The delivery of certificates upon the exercise of Options is subject to the condition that the person exercising the Option provide the Company with the information the Company might reasonably request pertaining to exercise, sale or other disposition. 12. NON-TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the Optionee other than by will or under the laws of descent and distribution, and shall be exercisable, during the Optionee's lifetime, only by him. Notwithstanding any provision in this Plan to the contrary, an Eligible Director may transfer an Option to an Immediate Family Member or an entity controlled by an Eligible Director or an Immediate Family Member, provided, however, no further transfer shall be made except by operation of law or a transfer back to such Eligible Director or such other transfer which may be approved by the Board. For this purpose "Immediate Family Member" means an -4- 7 Eligible Director's children, grandchildren or spouse, or a trust for the benefit of such Immediate Family Members. 13. TERMINATION OF DIRECTORSHIP OF OPTIONEE. If, before the date of expiration of the Option, the Optionee shall cease to be a director of the Company, the Option shall terminate on the earlier of the date of expiration or 90 days after the date of ceasing to serve as a director. In this event, the Optionee shall have the right, prior to the termination of the Option, to exercise the Option if he was entitled to exercise immediately prior to ceasing to serve as a director. Upon the death or disability of the Optionee while serving as a director, his options shall become fully vested and, in the case of death his executors, administrators, or any person or persons to whom his Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to the earlier of the date of expiration of the Option or 12 months following the date of his death, to exercise the Option, in whole or in part. 14. REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any Stock under any Option if issuing that Stock would constitute or result in a violation by the Optionee or the Company of any provision of any law, statute, or regulation of any governmental authority. Specifically, in connection with any applicable statute or regulation relating to the registration of securities, upon exercise of any Option, the Company shall not be required to issue any Stock unless the Company has received evidence satisfactory to it to the effect that the holder of that Option will not transfer the Stock except in accordance with applicable law, including receipt of an opinion of counsel satisfactory to the Company to the effect that any proposed transfer complies with applicable law. The determination by the Company on this matter shall be final, binding and conclusive. The Company may, but shall in no event be obligated to, register any Stock covered by this Plan pursuant to applicable securities laws of any country or any political subdivision. In the event the Stock issuable on exercise of an Option is not registered, the Company may imprint on the certificate evidencing the Stock any legend that counsel for the Company considers necessary or advisable to comply with applicable law. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option, or the issuance of shares under it, to comply with any law or regulation of any governmental authority. 15. NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a stockholder with respect to Stock covered by any Option until the date a stock certificate is issued for the Stock, and, except as otherwise provided in Paragraph 17 hereof, no adjustment for dividends, or otherwise, shall be made if the record date thereof is prior to the date of issuance of such certificate. 16. NO OBLIGATION TO RETAIN OPTIONEE. The granting of any Option shall not impose upon the Company or its stockholders any obligation to retain or continue to retain any Optionee or nominate any Optionee for election to continue in his capacity as a director of the Company. The right of the Company, the Board of Directors, and the Stockholders to terminate the service of any Optionee as a director shall not be diminished or affected by reason of the fact that one or more Options have been or would be granted to him. -5- 8 17 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock or its rights, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Stock outstanding, without receiving compensation for it in money, services or property, then (a) the number, class, and per share price of shares of Stock subject to outstanding Options under this Plan shall be appropriately adjusted in such a manner as to entitle an Optionee to receive upon exercise of an Option, for the same aggregate cash consideration, the equivalent total number and class of shares he would have received had he exercised his Option in full immediately prior to the event requiring the adjustment; and (b) the number and class of shares of Stock with respect to which Options may be granted under the Plan shall be adjusted by substituting for the total number and class of shares of Stock then available for grant, that number and class of shares of Stock that would have been received by the owner of an equal number of outstanding shares of each class of Stock as the result of the event requiring the adjustment. If while unexercised Options remain outstanding under the Plan (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than an entity that was wholly-owned by the Company immediately prior to such merger, consolidation or other reorganization), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than an entity wholly-owned by the Company), (iii) the Company is to be dissolved, or (iv) the Company is a party to any other corporate transaction (as defined under Section 424(a) of the Code and applicable Treasury Regulations) that is not described in clauses (i), (ii) or (iii) of this sentence (each such event is referred to herein as a "Corporate Change"), then (x) except as otherwise provided in an Option Agreement or as a result of the Board's effectuation of one or more of the alternatives described below, there shall be no acceleration of the time at which any Option then outstanding may be exercised, and (y) no later than ten (10) days after the approval by the stockholders of the Company of such Corporate Change, the Board, acting in its sole and absolute discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which some or all of the Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Board, after which specified date all such Options that remain unexercised and all rights of Optionees thereunder shall terminate, -6- 9 (2) require the mandatory surrender to the Company by all or selected Optionees of some or all of the then outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of this Plan or the Option Agreements evidencing such Options) as of a date, before or after such Corporate Change, specified by the Board, in which event the Board shall thereupon cancel such Options and the Company shall pay to each such Optionee an amount of cash per share equal to the excess, if any, of the per share price offered to stockholders of the Company in connection with such Corporate Change over the exercise price(s) under such Options for such shares, (3) with respect to all or selected Optionees, have some or all of their then outstanding Options (whether vested or unvested) assumed or have a new Option substituted for some or all of their then outstanding Options (whether vested or unvested) by an entity which is a party to the transaction resulting in such Corporate Change and which is then employing him, or a parent or subsidiary of such entity, provided that (A) such assumption or substitution is on a basis where the excess of the aggregate fair market value of the shares subject to the Option immediately after the assumption or substitution over the aggregate exercise price of such shares is equal to the excess of the aggregate fair market value of all shares subject to the Option immediately before such assumption or substitution over the aggregate exercise price of such shares, and (B) the assumed rights under such existing Option or the substituted rights under such new Option as the case may be will have the same terms and conditions as the rights under the existing Option assumed or substituted for, as the case may be, (4) provide that the number and class of shares of Stock covered by an Option (whether vested or unvested) theretofore granted shall be adjusted so that such Option when exercised shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement and/or plan relating to such Corporate Change if, immediately prior to such Corporate Change, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option, or (5) make such adjustments to Options then outstanding as the Board deems appropriate to reflect such Corporate Change (provided, however, that the Board may determine in its sole and absolute discretion that no such adjustment is necessary)." In effecting one or more of alternatives (3), (4) or (5) above, and except as otherwise may be provided in an Option Agreement, the Board, in its sole and absolute discretion and without the consent or approval of any Optionee, may accelerate the time at which some or all Options then outstanding may be exercised. -7- 10 In the event of changes in the outstanding Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Option and not otherwise provided for by this Section 4.5, any outstanding Options and any agreements evidencing such Options shall be subject to adjustment by the Board in its sole and absolute discretion as to the number and price of shares of stock or other consideration subject to such Options. In the event of any such change in the outstanding Stock, the aggregate number of shares available under this Plan may be appropriately adjusted by the Board, whose determination shall be conclusive. The issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe for them, or upon conversion of shares or obligations of the Company convertible into shares or other securities, shall not affect, and no adjustment by reason of such issuance shall be made with respect to, the number, class, or price of shares of Stock then subject to outstanding Options. 18. TERMINATION AND AMENDMENT OF PLAN. The Board of Directors of the Company may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion; provided, however, to the extent required to qualify the Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended, no amendment shall be made more than once every six months that would change the amount, price or timing of the initial grants, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder; and provided, further, to the extent required to qualify the Plan under Rule 16b-3, no amendment that would (a) materially increase the number of shares of the Stock that may be issued under the Plan, (b) materially modify the requirements as to eligibility for participation in the Plan, or (c) otherwise materially increase the benefits accruing to participants under the Plan, shall be made without the approval of the Company's stockholders. 19. WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied in a written agreement, which shall be subject to the terms and conditions of this Plan and shall be signed by the Optionee and by the Chairman of the Board, the Vice Chairman, the President or any Vice President of the Company for and in the name and on behalf of the Company. 20. INDEMNIFICATION OF BOARD. With respect to administration of the Plan, the Company shall indemnify each present and future member of the Board of Directors against, and each member of the Board of Directors shall be entitled without further act on his part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his being or having been a member of the Board of Directors, whether or not he continues to be a member of the Board of Directors at the time of incurring the expenses. However, this indemnity shall not include any expenses incurred by any member of the Board of Directors (a) in respect of matters as to which he shall be finally adjudged in any action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the -8- 11 performance of his duty as a member of the Board of Directors, or (b) in respect of any matter in which any settlement is effected, to an amount in excess of the amount approved by the Company on the advice of its legal counsel. In addition, no right of indemnification under this Plan shall be available to or enforceable by any member of the Board of Directors unless, within 60 days after institution of any action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at its own expense. This right of indemnification shall inure to the benefit of the heirs, executors or administrators of each member of the Board of Directors and shall be in addition to all other rights to which a member of the Board of Directors may be entitled as a matter of law, contract, or otherwise. 21. FORFEITURES. Notwithstanding any other provision of this Plan, if, before or after termination of the Optionee's capacity as a director of the Company, there is an adjudication by a court of competent jurisdiction that the Optionee committed fraud, embezzlement, theft, commission of felony, or proven dishonesty in the course of his advisory relationship to the Company and its affiliates which conduct materially damaged the Company or its affiliates, or disclosed trade secrets of the Company or its affiliates, then any outstanding options which have not been exercised by Optionee shall be forfeited. In order to provide the Company with an opportunity to enforce this Section, an Option may not be exercised if a lawsuit alleging that an action described in the preceding sentence has taken place until a final resolution of the lawsuit favorable to the Optionee. 22. GENDER. If the context requires, words of one gender when used in this Plan shall include the others and words used in the singular or plural shall include the other. 23. HEADINGS. Headings are included for convenience of reference only and do not constitute part of the Plan and shall not be used in construing the terms of the Plan. 24. GOVERNING LAW. The provisions of this Plan shall be construed, administered, and governed under the laws of the State of Texas. EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-59825, effective July 24, 1998, File No. 333-66331, effective October 29, 1998, Amendment No. 1 thereto dated February 22, 1999, File No. 333-76527, effective April 19, 1999, File No. 333-79919, effective June 3, 1999 and File No. 333-31330, effective February 29, 2000) of BindView Development Corporation of our report dated January 26, 2000, except as to Note 14, which is as of February 9, 2000 and except as to the pooling of interests with Entevo Corporation which is as of March 29, 2000, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP Houston, Texas March 30, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 61,329 4,834 15,010 523 0 84,619 12,959 5,389 99,923 18,093 0 0 0 1 81,829 99,923 67,948 67,948 3,470 54,249 0 0 0 13,308 6,299 7,009 0 0 0 7,009 0.15 0.14
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