<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM 8-K
ON
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 1, 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, 22ND FLOOR, HOUSTON, TX 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 561-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
================================================================================
<PAGE> 2
As discussed in its Current Report on Form 8-K dated March 1, 1999
(the "Current Report"), as filed with the Securities and Exchange Commission
(the "Commission") on March 16, 1999, BindView Development Corporation
("BindView") acquired all of the outstanding equity interests of Netect Ltd.
("Netect") on March 1, 1999, in exchange for an aggregate of 1,161,394 shares
of BindView's common stock. BindView also issued a warrant to purchase 61,963
shares of its common stock at a price of $16.14 in exchange for an outstanding
warrant to purchase Netect stock and issued stock options in substitution for
outstanding Netect employee stock options. The transaction was accounted for as
a pooling of interests.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
The following financial statements of Netect Ltd. and subsidiary
are attached hereto as exhibit 99.2 and are incorporated herein by reference.
Report of Independent Auditors
Consolidated Balance Sheets of Netect Ltd. and subsidiary at
December 31, 1997 and 1998
Consolidated Statements of Operations of Netect Ltd. and
subsidiary for the five months ended December 31,
1996 and the years ended December 31, 1997 and 1998
Statements of Changes in Shareholders' Deficiency of Netect
Ltd. and subsidiary for the five months ended
December 31, 1996 and the two years ended
December 31, 1998
Consolidated Statements of Cash Flows of Netect Ltd. and
subsidiary for the five months ended December 31,
1996 and the two years ended December 31, 1998
Notes to Consolidated Financial Statements of Netect Ltd. and
subsidiary
(b) Pro Forma Supplemental Financial Information
The following financial statements of BindView Development Corporation
and subsidiaries are attached hereto as exhibit 99.3 and are incorporated
herein by reference.
Report of Independent Accountants
Supplemental Consolidated Balance Sheet of BindView
Development Corporation and subsidiaries at
December 31, 1998 and 1997
Supplemental Consolidated Statement of Operations and
Comprehensive Income (Loss) of BindView Development
Corporation and subsidiaries for the three years
ended December 31, 1998
Supplemental Consolidated Statement of Shareholders'
Equity of BindView Development Corporation and
subsidiaries for the three years ended December
31, 1998
Supplemental Consolidated Statement of Cash Flows of BindView
Development Corporation and subsidiaries for the
three years ended December 31, 1998
Notes to Supplemental Consolidated Financial Statements of
BindView Development Corporation and subsidiaries
(c) Exhibits.
2.1** Share Purchase Agreement dated as of January 29,
1999, among BindView, Netect, the holders
of all of the share capital of Netect and
rights to acquire share capital of Netect
and Paul E. Blondin, as Shareholders'
Representative.
23.1* Consent of Independent Accountants
23.2* Consent of Independent Auditors
27.1* Financial Data Schedule - December 31, 1998
99.1** Press Release
99.2* Financial Statements of Netect Ltd. and subsidiary
99.3* Financial Statements of BindView Development
Corporation and subsidiaries.
* Filed herewith.
** Previously filed.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BINDVIEW DEVELOPMENT CORPORATION
Dated: May 7, 1999 By: /s/ Eric J. Pulaski
--------------------------------------
Eric J. Pulaski
Chairman of the Board, President and
Chief Executive Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1** Share Purchase Agreement dated as of January 29, 1999, among
BindView, Netect, the holders of all of the share capital
of Netect and rights to acquire share capital of Netect and
Paul E. Blondin, as Shareholders' Representative.
23.1* Consent of Independent Accountants
23.2* Consent of Independent Auditors
27.1* Financial Data Schedule - December 31, 1998
99.1** Press Release
99.2* Financial Statements of Netect Ltd. and subsidiary
99.3* Financial Statements of BindView Development Corporation and
subsidiaries.
</TABLE>
* Filed herewith.
** Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Form 8-K for BindView Development
Corporation of our report dated January 28, 1999, except as to Note 14 which is
as of March 1, 1999 relating to the supplemental consolidated financial
statements of BindView Development Corporation, which appears on page 1 of
Exhibit 99.3 of this Form 8-K. We hereby consent to the incorporation by
reference of said report in the Registration Statements of BindView Development
Corporation on Forms S-8 (File No. 333-59825, effective July 24, 1998, File No.
333-66331, effective October 29, 1998 and File No. 333-76527, effective
March 30, 1999).
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
May 5, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-76527, 333-59825, 333-66331) pertaining to the Employees' Stock
Option Plan of BindView Development Corporation, of our report dated February
25, 1999, except for note 14 as to which the date is March 1, 1999, with respect
to the consolidated financial statements of Netect Ltd. included in this Current
Report (Form 8-K) of BindView Development Corporation.
/s/ KOST, FORER and GABBAY
Certified Public Accountants (Israel)
A Member of Ernst & Young International
Tel-Aviv, Israel
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 48,010
<SECURITIES> 10,187
<RECEIVABLES> 5,915
<ALLOWANCES> 204
<INVENTORY> 0
<CURRENT-ASSETS> 68,829
<PP&E> 8,062
<DEPRECIATION> 2,720
<TOTAL-ASSETS> 76,037
<CURRENT-LIABILITIES> 9,835
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 58,535
<TOTAL-LIABILITY-AND-EQUITY> 76,037
<SALES> 38,484
<TOTAL-REVENUES> 38,484
<CGS> 2,081
<TOTAL-COSTS> 36,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,081
<INCOME-TAX> 2,945
<INCOME-CONTINUING> (1,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,864)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
<PAGE> 1
EXHIBIT 99.2
NETECT LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
IN U.S. DOLLARS
INDEX
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Auditors 2
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Shareholders' Deficiency 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 18
</TABLE>
-----------
<PAGE> 2
[ERNST & YOUNG
KOST FORER & GABBAY LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NETECT LTD.
We have audited the accompanying consolidated balance sheets of Netect
Ltd. ("the Company") and its subsidiary as of December 31, 1997 and 1998, and
the related consolidated statements of operations, changes in shareholders'
deficiency and cash flows for the five months ended December 31, 1996 and for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's board of directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiary as of December 31, 1997 and 1998, and
the consolidated results of their operations and cash flows for the five months
ended December 31, 1996 and for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles
in the United States.
KOST, FORER and GABBAY
Certified Public Accountants (Israel)
A Member of Ernst and Young International
Tel-Aviv, Israel
February 25, 1999
(Except for Note 14, as to which the date is March 1, 1999)
- 2 -
<PAGE> 3
NETECT LTD.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
------- -------
Note U.S. Dollars in thousands
------- -------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,994 $ 1,496
Inventories -- 9
Accounts receivable and prepaid expenses 3 156 211
------- -------
2,150 1,716
------- -------
SEVERANCE PAY FUND 14 29
------- -------
PROPERTY AND EQUIPMENT, NET 4 184 219
------- -------
OTHER ASSETS, NET 5 -- 23
------- -------
$ 2,348 $ 1,987
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current maturities of long-term bank loan 6 $ -- $ 21
Trade payables 104 319
Other accounts payable and accruals 7 352 540
Accrued severance pay 8 126 24
------- -------
Total current liabilities 582 904
------- -------
LONG-TERM LIABILITIES:
Long-term bank loan 6 -- 52
Accrued severance pay 8 55 42
Convertible debentures 9 3,219 7,572
------- -------
3,274 7,666
------- -------
SHAREHOLDERS' DEFICIENCY:
Preferred shares of NIS 0.1 par value; Authorized - 400,000
and 1,300,000 shares as of December 31, 1997 and 1998,
respectively; Issued and outstanding 10,800 and 17,700 shares
as of December 31, 1997 and 1998, respectively *) -- *) --
Ordinary shares of NIS 0.01 par value
Authorized - 4,000,000 shares as of December 31, 1997 and
1998, respectively; Issued and outstanding 1,393,800 as of
December 31, 1997 and 1,405,400 as of December 31, 1998,
respectively 13 4 4
Additional paid-in capital 1,119 1,164
Accumulated deficit (2,631) (7,751)
------- -------
Total shareholders' deficiency (1,508) (6,583)
------- -------
$ 2,348 $ 1,987
======= =======
</TABLE>
*) Represents an amount lower than $1 thousand.
The accompanying notes are an integral part of the financial statements.
- 3 -
<PAGE> 4
NETECT LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months Year ended
ended December 31,
December 31, ----------------------------
1996 1997 1998
----------- ----------- -----------
U.S. Dollars in thousands
---------------------------------------------
<S> <C> <C> <C>
Revenues $ 12 $ 39 $ 31
Cost of revenues -- 13 3
----------- ----------- -----------
Gross profit 12 26 28
Research and development costs 166 747 2,128
Selling and marketing expenses 70 1,112 2,001
General and administrative expenses 54 478 705
----------- ----------- -----------
Operating loss 278 2,311 4,806
Financial expenses, net 3 39 308
Other expenses -- -- 6
----------- ----------- -----------
Net loss $ 281 $ 2,350 $ 5,120
=========== =========== ===========
Basic and diluted net loss per share $ (1.26) $ (1.78) $ (3.66)
=========== =========== ===========
Number of shares for basic and diluted net
loss per share 223,260 1,323,886 1,399,600
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE> 5
NETECT LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Receivables Total
Preferred Ordinary paid-in on account Accumulated shareholders'
shares shares capital of shares deficit deficiency
--------- -------- ---------- ----------- ----------- -------------
U.S. Dollars in thousands
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of July 1, 1996 $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Ordinary shares, net -- 3 285 -- -- 288
Receivables on account of shares -- -- -- (89) -- (89)
Net loss -- -- -- -- (281) (281)
------- ------- ------- ------- ------- -------
Balance as of December 31, 1996 -- 3 285 (89) (281) (82)
Issuance of ordinary shares, net -- 1 818 -- -- 819
Issuance of Preferred shares, net *) -- *) -- 22 -- -- 22
Payment of receivables on
account of shares -- -- -- 83 -- 83
Net loss -- -- -- -- (2,350) (2,350)
------- ------- ------- ------- ------- -------
Balance as of December 31, 1997 *) -- 4 1,125 (6) (2,631) (1,508)
Issuance of Preferred and
Ordinary shares, net *) -- *) -- 39 -- -- 39
Payment of receivables on
account of shares -- -- -- 6 -- 6
Net loss -- -- -- -- (5,120) (5,120)
------- ------- ------- ------- ------- -------
Balance as of
December 31, 1998 $ *) -- $ 4 $ 1,164 $ -- $(7,751) $(6,583)
======= ======= ======= ======= ======= =======
</TABLE>
*) Represents an amount lower than $ 1 thousand.
The accompanying notes are an integral part of the financial statements.
- 5 -
<PAGE> 6
NETECT LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months Year ended
ended December 31,
December 31, --------------------
1996 1997 1998
------------ ------- -------
U.S. Dollars in thousands
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (281) $(2,350) $(5,120)
Adjustments to reconcile loss to net cash used in operating
activities
Depreciation and amortization -- 31 106
Increase (decrease) in accrued severance pay, net -- 167 (130)
Interest payable -- 42 392
Loss on sale of property and equipment -- -- 6
Increase in inventories -- -- (9)
Increase in accounts receivable and prepaid expenses (23) (133) (49)
Increase in trade payables -- 102 215
Increase (decrease) in related parties (26) 158 (3)
Increase in other accounts payable and accruals 77 273 191
------- ------- -------
Net cash used in operating activities (253) (1,710) (4,401)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (1) (215) (150)
Purchase of intangible assets -- -- (23)
Proceeds from sale of property and equipment -- 1 15
------- ------- -------
Net cash used in investing activities (1) (214) (158)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Ordinary shares 199 559 --
Proceeds from issuance of Preferred shares -- 22 39
Short-term notes - related party (50) 83 --
Proceeds from long-term bank loan -- -- 73
Shareholders loan received 260 -- --
Proceeds from issuance of convertible debentures -- 3,099 3,949
------- ------- -------
Net cash provided by financing activities 409 3,763 4,061
------- ------- -------
Increase (decrease) in cash and cash equivalents 155 1,839 (498)
Cash and cash equivalents at the beginning of the period -- 155 1,994
------- ------- -------
Cash and cash equivalents at the end of the period $ 155 $ 1,994 $ 1,496
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 6 -
<PAGE> 7
NETECT LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months Year ended
ended December 31,
December 31, --------------------
1996 1997 1998
------------ ------- -------
U.S. Dollars in thousands
-----------------------------------
<S> <C> <C> <C>
Non-cash transactions:
Receivables in respect of shares $ (89) $ -- $ 6
======= ======= =======
Conversion of a related party's balance into
convertible debentures $ -- $ 78 $ --
======= ======= =======
Conversion of shareholders' loan into ordinary shares $ -- $ 260 $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 7 -
<PAGE> 8
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1:- GENERAL
Netect Ltd. was incorporated in July 1996 under the laws of Israel.
The Company operates in one reportable segment, the development and
marketing of corporate security solutions for Internet/Intranet
networks. Those solutions are implemented on top of currently
available products, such as fire walls and Secure Operating Systems.
The Company operates in the United States (U.S.) through its
wholly-owned U.S. subsidiary.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States.
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in U.S. dollars:
The majority of the Company's sales are made outside Israel in
U.S. dollars, and a substantial portion of the Company's costs
are incurred in U.S. dollars. Accordingly, the Company has
determined the U.S. dollar as the currency of its primary
economic environment and thus its functional and reporting
currency.
The Company's transactions and balances denominated in U.S.
dollars are presented at their original amounts. Non-dollar
transactions and balances have been remeasured to U.S. dollars in
accordance with Statement No. 52 of the Financial Accounting
Standards Board ("FASB"). All transaction gains and losses from
remeasurement of monetary balance sheet items denominated in
non-dollar currencies are reflected in the statements of
operations.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned U.S. subsidiary, Netect Inc., which
commenced operations in 1997. Inter-company transactions and
balances, have been eliminated in consolidation.
d. Property and equipment:
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives at the following annual rates:
<TABLE>
<CAPTION>
%
------
<S> <C>
Computers and peripheral equipment 33
Motor vehicles 15
Office furniture and equipment 6 - 15
</TABLE>
- 8 -
<PAGE> 9
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
e. Cash and cash equivalents:
The Company considers all highly liquid investments originally
purchased with maturity of three months or less, to be cash
equivalents.
f. Income taxes:
Income taxes are provided for in accordance with Statement 109 of
the FASB, "Accounting for Income Taxes", which requires
recognition of deferred income taxes under the asset and
liability method.
g. Research and development costs:
Research and development costs are charged to the statement of
operations as incurred. Statement of Financial Accounting
Standard ("SFAS") No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", requires
capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility
is established upon completion of a working model. In 1998, costs
incurred by the Company between completion of the working model
and the point at which the product is ready for general release,
have been immaterial.
h. Advertising expenses:
Advertising expenses are charged to the statement of operations
as incurred. Advertising expenses for the five month ended
December 31, 1996, and for the years 1997 and 1998 were
immaterial.
i. Revenue recognition:
The Company generates revenues from licensing its software
products indirectly through distributors. The Company also
generates revenues from maintenance contracts. Revenues from
software licenses agreements are recognized upon delivery of the
software: (I) when collection is probable; (ii) all license
payments are due within one year` (iii) the license fee is fixed
or determinable; (iv) persuasive evidence of an arrangement
exists. Maintenance revenue is recognized ratably over the term
of the maintenance period.
g. Basic and diluted earnings (loss) per share
Basic earnings (loss) per share is computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted earnings per share is computed based on the weighted
average number of Ordinary shares outstanding during each year,
plus dilutive potential Ordinary shares considered outstanding
during the year, in accordance with FASB Statement No. 128,
"Earnings Per Share".
- 9 -
<PAGE> 10
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
k. Accounting for shares issued to employees:
The Company has elected to follow Accounting Principles Board
Opinion 25 "Accounting for Stock issued to Employees" ("APB 25")
in accounting for its employee stock options plans. Under APB 25,
when the exercise price of the Company's employee stock options
equals or is above the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
l. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables and cash and cash equivalents. The majority of the
Company's cash and cash equivalents are invested in dollar and
dollar linked instruments with major Israeli banks. Management
believes that the financial institutions that hold the Company's
investments are financially sound, and accordingly, minimal
credit risk exists with respect to these investments.
The Company's trade receivables are derived from sales to
customers located primarily in North America and Israel. The
Company performs ongoing credit evaluations of its customers and
to date has not experienced any material losses. An allowance for
doubtful accounts is provided with respect to those debts that
are doubtful of collection. No allowance was deemed necessary for
the years ended December 31, 1996, 1997 and 1998.
m. Severance pay:
The Company's liability for severance pay is calculated pursuant
to Israeli severance pay law based on the most recent salary of
the employees multiplied by the number of years of employment as
of the balance sheet date. Employees are entitled to one month's
salary for each year of employment, or a portion thereof. The
Company's liability is fully provided by monthly deposits with
severance pay funds, insurance policies and by an accrual.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay
law or labor agreements. The value of the deposited funds are
based on the cash surrendered value of these policies, and
include immaterial profits.
n. Fair value of financial instruments:
1. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents - the carrying amounts of these
items approximate their fair value due to the short-term
maturity of such instruments.
Long term bank loan and convertible debentures - The
carrying amounts of these items approximate their fair
value. Fair values were estimated using discounted cash flow
analyses, based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.
- 10 -
<PAGE> 11
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. The carrying amounts and fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
Carrying amount Fair value
------------------- -------------------
December 31, December 31,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- ---------
U.S. Dollars in thousands
-----------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,994 $ 1,496 $ 1,994 $ 1,496
======== ======== ======== ========
Current maturities of long-term
bank loan $ -- $ 21 $ -- $ 21
======== ======== ======== ========
Long-term bank loan $ -- $ 52 $ -- $ 52
======== ======== ======== ========
Convertible debentures $ 3,219 $ 7,572 $ 3,219 $ 7,572
======== ======== ======== ========
</TABLE>
o. Future adoption of new accounting standards:
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). This Statement establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
Statement also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related
results of the hedged item in the statement of operations, and
requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and cannot be applied retroactively. The
Company does not expect the impact of this new Statement on the
Company's consolidated balance sheets or results of operations to
be material.
p. Comprehensive income
As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". Statement No. 130 establishes
new rules for the reporting and display of comprehensive income
and its components, however, the adoption of this Statement had
no impact on the financial statements.
q. Segments and geographic operating information
In 1998 the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for an
enterprises business segments and related disclosure about its
products, services, geographic areas and major customers. The
information required by this Statement is not material to the
Company's financial statements and therefore has not been
provided.
- 11 -
<PAGE> 12
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3:- ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
U.S. Dollars in thousands
-------------------------
<S> <C> <C>
Prepaid expenses $ 51 $ 62
Employees 7 --
Government authorities 35 128
Others 63 21
-------- --------
$ 156 $ 211
======== ========
</TABLE>
NOTE 4:- PROPERTY AND EQUIPMENT
<TABLE>
<S> <C> <C>
Cost:
Computers and peripheral equipment $ 97 $ 187
Motor vehicles 68 42
Office furniture and equipment 50 109
-------- --------
215 338
-------- --------
Accumulated depreciation:
Computers and peripheral equipment 21 69
Motor vehicles 7 11
Office furniture and equipment 3 39
-------- --------
31 119
-------- --------
Depreciated cost $ 184 $ 219
======== ========
</TABLE>
As for charges, see Note 10.
Depreciation expenses amounted to $ 1 thousand, $ 31 thousand and
$ 94 thousand for the five months ended December 31, 1996, and
for the years ended December 31, 1997 and 1998, respectively.
NOTE 5:- OTHER ASSETS:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
U.S. Dollars in thousands
-------------------------
<S> <C> <C>
Original amount $ -- $ 35
-------- --------
Accumulated amortization -- 12
-------- --------
$ -- $ 23
======== ========
</TABLE>
- 12 -
<PAGE> 13
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6: - LONG TERM BANK LOAN
On November 30, 1998, the Company's subsidiary received a long-term
bank loan. The loan bears interest of prime + 1% per annum and is
dollar linked. The loan is comprised of two separate withdrawals, $ 39
thousand and $ 34 thousand. The repayment periods are 30 months from
April, 1999 and 36 months from July 99, respectively.
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUALS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
U.S. Dollars in thousands
-------------------------
<S> <C> <C>
Employees and payroll accruals $ 196 $ 104
Accrued expenses 141 396
Others 15 40
-------- --------
$ 352 $ 540
======== ========
</TABLE>
NOTE 8:- ACCRUED SEVERANCE PAY
The Company's liability for severance pay is fully provided by an
accrual. Part of the liability is funded through insurance policies.
The cash value of these policies is recorded as an asset in the
Company's balance sheets.
In 1997, a reorganization in the Company's management took place and
the senior management was replaced. As a result of the reorganization,
the Company recorded a provision for accrued severance pay which is
reflected in short-term severance pay.
NOTE 9:- CONVERTIBLE DEBENTURES
Convertible debentures for $ 3.2 million and $ 4 million were issued
in 1997 and 1998, respectively, to certain investors. The debentures
bear interest of 8% per annum, and may be converted into preferred
Shares of the Company, in accordance with the terms set forth in the
agreement. If not converted, the debentures shall be redeemed in a one
time payment on November 30, 2001. The redemption date can be
deferred, at the holder request, until November 30, 2002.
NOTE 10:- ASSETS PLEDGED AS COLLATERAL
As collateral for the Company's convertible debentures, a floating
charge unlimited in amount has been placed on the Company's machinery
and computer equipment.
As collateral for the subsidiary's bank credit, a floating charge
unlimited in amount has been placed on the Company's assets.
- 13 -
<PAGE> 14
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
Lease commitments:
Future minimum lease commitments under non-cancelable operating leases
for the years ended December 31, are as follows:
<TABLE>
<S> <C>
1999 $ 207
2000 117
2001 89
2002 93
2003 70
--------
$ 576
========
</TABLE>
Lease expenses for the five months ended December 31, 1996, and for
the years ended December 31, 1997 and 1998 were approximately $ 25, $
67 and $ 139, respectively.
NOTE 12:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the law"):
In June 1997, the Company has been granted, the status of an
"Approved Enterprise" under the Law.
According to the provisions of the law, the Company has chosen
the "alternative benefits" and has waived government grants in
return for a tax exemption. Income derived from the first program
will be tax-exempt for a period of two years, commencing with the
first year it earns taxable income, after utilizing its
carryforwards losses, and subject to a corporate tax at the
reduced rate of 25%, for an additional period of eight years.
In the future event of a distribution of such tax exempt income
as cash dividend in a manner other than in the complete
liquidation of the Company, the Company will have to pay tax at
the rate of 25% on the amount distributed. The tax exempt income
attributable to the "Approved Enterprise" can be distributed to
shareholders without subjecting the Company to taxes only upon
the complete liquidation of the Company.
The law also grants entitlement to claim accelerated depreciation
on equipment used by the "Approved Enterprise" during five tax
years.
The period of tax benefits detailed above is subject to limits of
the earlier of 12 years from the commencement of production or 14
years from receiving the approval (June 2011).
If the Company derives income from sources other than an
"Approved Enterprise" during the relevant period of benefits,
such income will be taxable at the regular corporate tax rate of
36%.
- 14 -
<PAGE> 15
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
b. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969:
The Company currently qualifies as an "industrial company" under
the above law and as such is entitled to certain tax benefits,
including accelerated depreciation and the deduction of public
offering expenses in three equal annual installments.
c. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- -------
<S> <C> <C>
Operating loss carryforwards $ 888 $ 2,732
Reserves and allowances 68 109
------- -------
Net deferred tax asset before
valuation allowance 956 2,841
Valuation allowance (956) (2,841)
------- -------
Net deferred tax asset $ -- $ --
======= =======
</TABLE>
No utilization of the Company's and it's subsidiary's tax loss
carryforwards is expected in the foreseeable future, because of
its history of operating losses. In 1996, 1997 and 1998, the
Company provided a 100% valuation allowance against the deferred
tax assets in respect of these tax loss carryforwards and other
temporary differences because of the uncertainty to realize these
deferred tax assets.
d. A reconciliation between the theoretical tax expense, assuming
all income is taxed at the statutory tax rate applicable to the
income of the Company and the actual tax expense as reported in
the statements of operations, is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1997 1998
------- ------- -------
U.S. Dollars in thousands
---------------------------------
<S> <C> <C> <C>
Theoretical tax expense (benefit) computed
at the Statutory rate (36%) $ (101) $ (846) $(1,843)
Tax adjustments in respect of inflation in
Israel -- 26 323
Deferred taxes on loss and other items for
which valuation allowance was recorded 86 674 1,400
Other non-deductible expenses 15 146 120
------- ------- -------
Income tax expense $ -- $ -- $ --
======= ======= =======
</TABLE>
- 15 -
<PAGE> 16
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
e. Loss before taxes on income consists on the following:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------ ------ ------
U.S. Dollars in thousands
----------------------------
<S> <C> <C> <C>
Domestic $ 281 $1,852 $2,687
Foreign -- 498 2,433
------ ------ ------
$ 281 $2,350 $5,120
====== ====== ======
</TABLE>
Carryforward tax losses:
1. Domestic
a) The net operating loss carryforward amounted to
approximately $ 4,688 thousand as of December 31, 1998,
and can be carried forward indefinitely.
b) The Company has not received final tax assessments
since its establishment.
2) Foreign:
As of December 31, 1998, the U.S. subsidiary operating loss
carryforward amounted to approximately $2.9 million, that
can be carried forward and offset against taxable income for
15 years no later than 2011 to 2014.
NOTE 13:- SHARE CAPITAL
a. (1) Each Ordinary share shall confer upon the holder
thereof the right to receive notices of the general
meetings of the Company, participate in all the
meetings and vote, while each Ordinary share shall have
one vote at the meeting.
Each Ordinary share shall confer upon the holder
thereof the right to participate in the profits of the
Company, either by way of receiving dividends or by way
of receiving bonus shares.
(2) During 1998, the Company issued 6,900 Preferred shares
of NIS 0.1 par value in return for $39 thousand. Each
Preferred share, will take preference over all other
existing shares. The Preferred shares shall bear a
preferred compound dividend of 8% per annum based on
the original purchase price.
- 16 -
<PAGE> 17
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) During 1998, the Company's shareholders approved a
stock split of 100 to 1. All share and per share data
included in these financial statements have been
retroactively adjusted to give effect to the 100 to 1
stock split.
Preferred shares shall be convertible at any time into
Ordinary shares at a conversion ratio of one to one.
The Preferred shares shall entitle their holders to
participate in each general meeting of the Company's
shareholders and shall entitle their holder to one vote
per each share held.
b. Stock options granted under the Company's 1998 Stock Option
Plan are exercisable at the fair market value at the date of
grant and, subject to termination of employment, expire ten
years from the date of grant and are generally vested over
four years, commencing one year from the date of the grant.
A summary of the Company's stock option activity and related
information:
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------
Weighted
average
exercise
Amount price
-------- --------
<S> <C> <C>
Outstanding at the beginning of the year -- --
Granted 583,450 $ 1.8
Cancelled 31,890 $ 1.8
-------- --------
Outstanding at the end of the year 551,560 $ 1.8
======== ========
</TABLE>
The number of options exercisable as of December 31, 1998
was 24,992, at a weighted average exercise price of $ 1.8
per share.
The options outstanding as of December 31, 1998, have been
separated into exercise price, as follows:
<TABLE>
<CAPTION>
Weighted average
Options outstanding number of years
as of Exercise remaining Weighted average
December 31,1998 price contractual life exercise price
------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
551,560 $ 1.8 4.48 $ 1.8
</TABLE>
- 17 -
<PAGE> 18
NETECT LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Pro forma information regarding net income (loss) and
earnings (loss) per share is required (for grants issued
after December 1994) by SFAS No. 123, and has been
determined, under the assumption that the Company has
accounted for its employee option under the fair value
method prescribed by that statement. The fair value for
these options was estimated at the date of the grant using a
Black-Scholes option pricing model, with the following
weighted-average assumptions for 1998, respectively average
risk-free interest rates of 5.5%, dividend yields of 0%,
volatility factors of the expected market price of the
Company's ordinary shares of 0.8 and a weighted average
expected life of the options of ten years.
The Black-Scholes option pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In
addition, option valuation models require subjective
assumptions, including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from traded options,
and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock
options.
The options granted in 1998 have an exercise price equal to
the fair market value at the grant date, the weighted
average fair value of the options granted was $ 1.22.
Pro forma information under FAS 123:
<TABLE>
<CAPTION>
Year ended
December 31,
1998
----------
<S> <C>
Net loss as reported $ 5,120
==========
Pro forma net loss for the year $ 2,932
==========
Pro forma basic and diluted loss per share $ 2.09
==========
</TABLE>
NOTE 14:- SUBSEQUENT EVENTS
On March 1, 1999, the Company has signed an agreement with BindView
Development Corporation.
According to the agreement, BindView will issue ordinary stock in
exchange for substantially all of the voting ordinary stock interest
of Netect. As part of this agreement, the Company has converted all
the convertible debentures to equity and all the preferred shares to
ordinary shares.
The business combination has been accounted for as a pooling of
interest.
------------------
- 18 -
<PAGE> 1
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of BindView Development Corporation
We have audited the supplemental consolidated balance sheet of BindView
Development Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related supplemental consolidated statements of operations and comprehensive
income (loss), changes in shareholders' equity and cash flows for each of the
two years in the period ended December 31, 1998. 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 did not audit
the financial statements of Netect Ltd. which statements reflect total assets
and revenues constituting 2 percent and less than 1 percent, respectively, of
the related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Netect Ltd., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental financial statements give retroactive effect to the merger
of BindView Development Corporation and Netect Ltd. on March 1, 1999, which has
been accounted for as a pooling of interests as described in the Notes 1 and 14
to the supplemental consolidated financial statements. Generally accepted
accounting principles 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 subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of BindView Development
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
The consolidated financial statements of BindView Development Corporation
and subsidiaries for the year ended December 31, 1996, prior to the restatement
for the March 1, 1999 pooling of interests, and the separate financial
statements of Netect Ltd. included in the 1996 supplemental consolidated
financial statements were audited by other auditors whose reports expressed
unqualified opinions on those statements. We audited the combination of the
accompanying supplemental consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1996 after
restatement for the March 1, 1999 pooling of interests, and in our opinion, such
supplemental consolidated financial statements have been properly combined on
the basis described in Note 1 to the financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
January 28, 1999, except as to Note 14, which is as of March 1, 1999
<PAGE> 2
BINDVIEW DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(in thousands, except par value)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 48,010 $ 9,197
Short-term Investments .................................................... 10,187 --
Accounts receivable, net .................................................. 5,711 4,729
Deferred tax assets ....................................................... 3,245 3,150
Other current assets ...................................................... 1,676 156
-------- --------
Total current assets .............................................. 68,829 17,232
Property and equipment, net ................................................. 5,342 1,554
Capitalized software, net ................................................... 1,374 --
Other assets ................................................................ 492 71
-------- --------
Total assets ...................................................... $ 76,037 $ 18,857
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 1,954 $ 889
Accrued liabilities ....................................................... 1,903 987
Accrued compensation ...................................................... 984 936
Deferred revenue .......................................................... 4,994 2,029
-------- --------
Total current liabilities ......................................... 9,835 4,841
-------- --------
Commitments and contingencies (Note 10)
Convertible debentures ...................................................... 7,572 3,219
Other long-term liabilities ................................................. 94 55
-------- --------
Total long-term liabilities ....................................... 7,666 3,274
-------- --------
Shareholders' equity:
Convertible preferred stock, $0.01 par value, 20,000 shares
authorized, 0 and 2,528 shares issued and outstanding, respectively..... -- 25
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,
21,103 and 13,756 shares issued an outstanding, respectively ........... 1 1
Additional paid-in capital ................................................ 65,675 32,851
Common Stock to be issued, 175 shares ..................................... 3,352 --
Common Stock Warrant to purchase 438 shares ............................... -- 550
Accumulated deficit ....................................................... (10,532) (8,668)
Cumulative translation adjustment ......................................... 40 --
Treasury stock, 0 and 4,922 shares ........................................ -- (14,017)
-------- --------
Total shareholders' equity ........................................ 58,536 10,742
-------- --------
Total liabilities and shareholders' equity ........................ $ 76,037 $ 18,857
======== ========
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
<PAGE> 3
BINDVIEW DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses ......................................... $ 30,209 $ 17,821 $ 9,720
Services ......................................... 8,275 3,056 1,294
-------- -------- --------
Total revenues ........................... 38,484 20,877 11,014
-------- -------- --------
Cost of revenues:
Cost of licenses ................................. 958 644 465
Cost of services ................................. 1,123 637 362
-------- -------- --------
Total cost of revenues ................... 2,081 1,281 827
-------- -------- --------
Gross profit ....................................... 36,403 19,596 10,187
-------- -------- --------
Costs and expenses:
Sales and marketing .............................. 19,096 10,200 4,267
Research and development ......................... 10,513 4,320 2,254
General and administrative ....................... 4,311 3,421 1,526
Purchased in-process research and development .... 2,488 -- --
Stock compensation expense ....................... -- 15,262 436
-------- -------- --------
Operating income (loss) ............................ (5) (13,607) 1,704
Other income, net .................................. 1,086 79 5
-------- -------- --------
Income (loss) before income tax provision .......... 1,081 (13,528) 1,709
Provision (benefit) for income taxes ............... 2,945 (3,150) --
-------- -------- --------
Net income (loss) .................................. $ (1,864) $(10,378) $ 1,709
Other comprehensive income, net of tax:
Gain from foreign currency translation .......... 40 -- --
-------- -------- --------
Comprehensive income (loss) ..................... $ (1,824) $(10,378) $ 1,709
======== ======== ========
Basic loss per share............................... $ (0.13)
Diluted loss per share............................. $ (0.13)
Pro forma information:
Net income (loss) as reported................... $(10,378) $ 1,709
Pro forma charge (benefit) in lieu of income
taxes......................................... (765) 697
-------- --------
Pro forma net income (loss)..................... $ (9,613) $ 1,012
======== ========
Pro forma basic net income (loss) per share..... $ (1.10) $ 0.12
Pro forma diluted net income (loss) per share... $ (1.10) $ 0.09
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
<PAGE> 4
BINDVIEW DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON RETAINED
COMMON STOCK STOCK ADDITIONAL COMMON EARNINGS CUMULATIVE TOTAL
----------------- TO BE PAID-IN STOCK (ACCUMULATED TRANSLATION TREASURY SHAREHOLDERS'
SHARES AMOUNT DELIVERED CAPITAL WARRANT DEFICIT) ADJUSTMENT STOCK EQUITY
-------- ------- --------- ---------- ------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........ 7,740 $ 1 $ -- $ 14 $ -- $ 1,199 $ -- $ -- $ 1,214
S Corporation distributions ..... -- -- -- -- -- (557) -- -- (557)
Issuance of common stock ........ 447 -- -- 199 -- -- -- -- 199
Net income ...................... -- -- -- -- -- 1,709 -- -- 1,709
-------- ------- --------- ---------- ------- ----------- ---------- -------- -----------
Balance at December 31, 1996 ...... 8,187 1 -- 213 -- 2,351 -- -- 2,565
Issuance of common stock ........ 111 -- -- 902 -- -- -- -- 902
S Corporation distributions ..... -- -- -- -- -- (1,274) -- -- (1,274)
Issuance of common stock to
satisfy 1993 employment and
acquisition liability ........ 503 -- -- 272 -- -- -- -- 272
Issuance of common stock
pursuant to termination of
Phantom Stock Plan ........... 4,945 -- -- 14,092 -- -- -- -- 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 -- -- -- -- 18,024
Issuance of warrant to purchase
common stock (438 shares) .... -- -- -- -- 550 -- -- -- 550
Purchase of treasury stock
(4,922 shares) ............... -- -- -- -- -- -- -- (14,017) (14,017)
Exercise of stock options ....... 10 -- -- 6 -- -- -- -- 6
Net loss ........................ -- -- -- -- -- (10,378) -- -- (10,378)
-------- ------- --------- ---------- ------- ----------- ---------- -------- -----------
Balance at December 31, 1997 ...... 13,756 1 -- 32,876 550 (8,668) -- (14,017) 10,742
Exercise of stock options ....... 1,091 -- -- 2,076 -- -- -- -- 2,076
Exercise of stock warrants ...... 1,188 -- -- 4,796 (550) -- -- -- 4,246
Issuance of convertible preferred
stock (3 shares).............. -- -- -- 39 -- -- -- -- 39
Issuance of common stock ........ 4 -- -- 6 -- -- -- -- 6
Tax benefit related to exercise
of employee stock options .... -- -- -- 3,462 -- -- -- -- 3,462
Conversion of preferred stock ... 6,320 -- -- -- -- -- -- -- --
Initial public offering ......... 3,321 -- -- 30,025 -- -- -- -- 30,025
Secondary offering .............. 345 -- -- 6,412 -- -- -- -- 6,412
Shares to be issued to acquire
business (175 shares) ........ -- -- 3,352 -- -- -- -- -- 3,352
Retirement of treasury stock .... (4,922) -- -- (14,017) -- -- -- 14,017 --
Cumulative translation
adjustment ................... -- -- -- -- -- -- 40 -- 40
Net loss ........................ -- -- -- -- -- (1,864) -- -- (1,864)
-------- ------- --------- ---------- ------- ----------- ---------- -------- -----------
Balance at December 31, 1998 ...... 21,103 $ 1 $ 3,352 $ 65,675 $ -- $ (10,532) $ 40 $ -- $ 58,536
======== ======= ========= ========== ======= =========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
<PAGE> 5
BINDVIEW DEVELOPMENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (1,864) $(10,378) $1,709
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization expense.......... 1,205 846 427
Stock compensation expense..................... -- 14,642 --
Increase in provision for bad debts............ 9 170 --
Purchased in-process research and development.. 2,488 -- --
Deferred income taxes.......................... 2,798 (3,150) --
Interest payable............................... 392 42 --
Changes in assets and liabilities, net of
acquired business:
(Increase) in accounts receivable............ (909) (2,762) (925)
(Increase) decrease in other current assets.. (1,485) 408 (75)
Increase in accounts payable................. 1,043 614 37
Increase in accrued liabilities.............. 800 1,464 128
Increase in deferred revenue................. 2,843 1,459 86
-------- -------- ------
Net cash provided by operating activities. 7,320 3,355 1,387
-------- -------- ------
Cash flows from investing activities:
Purchase of property and equipment................ (5,140) (1,465) (584)
Purchase of short-term investments................ (10,187) -- --
Disposal of property and equipment................ 201 -- --
Cash acquired in business acquisition............. 156 -- --
Other............................................. (397) (94) (130)
--------- --------- -------
Net cash used by investing activities..... (15,367) (1,559) (714)
--------- --------- -------
Cash flows from financing activities:
S Corporation distributions....................... -- (1,274) (557)
Notes payable and long-term debt.................. 73 83 (16)
Proceeds from issuance of convertible preferred
stock and common stock warrants........... 39 18,024 --
Proceeds from issuance of common stock............ -- 559 199
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........... 2,076 6 --
-------- -------- ------
Net cash provided (used) by financing
activities.............................. 46,820 6,480 (374)
Effect of exchange rate changes on cash............. 40 -- --
-------- -------- ------
Net increase in cash and cash equivalents........... 38,813 8,276 299
Cash and cash equivalents at beginning of period.... 9,197 921 622
-------- -------- ------
Cash and cash equivalents at end of period.......... $ 48,010 $ 9,197 $ 921
======== ======== ======
Supplemental disclosures for cash flow information:
Cash paid during the year for interest............ $ -- $ 9 $ 15
Cash paid during the year for income taxes........ $ -- $ -- $ --
Noncash financing and investing activities:
Issuance of 503 shares of common stock in 1997
to satisfy 1993 acquisition liability.......... $ -- $ 272 $ --
Issuance of warrant to purchase 438 shares of
common stock in 1997 to satisfy bonus
obligation..................................... $ -- $ 550 $ --
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
<PAGE> 6
BINDVIEW DEVELOPMENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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
In October 1997 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition," which the Company adopted effective as of January 1, 1997. Such
adoption had no effect on the Company's method of recognizing revenue from its
license and subscription contract activities. Prior to 1997, the Company
recognized revenue in accordance with SOP No. 91-1, "Software Revenue
Recognition". The Company sells its 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 code; and (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 Supplemental Consolidated Statement of
Operations and Comprehensive Income. Service revenues include subscription
contracts and professional services. Subscription contracts are purchased
separately by customers at their discretion and related revenues are recognized
ratably over the contract term. The portion of subscription contract revenues
that have not yet been recognized as revenues is reported as deferred revenue in
the accompanying Supplemental Consolidated Balance Sheet.
In March 1998 the AICPA issued SOP No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition," to extend the
deferral of the application of certain passages of SOP 97-2. In December 1998
the AICPA issued SOP No. 98-9, "Modification of SOP 97-2, `Software Revenue
Recognition,' with Respect to Certain Transactions," to require recognition of
revenue by means of the `residual method' under certain conditions. These
Statements do not have any impact on the Company's revenue recognition based
upon the Company's current business practices.
Postcontract Customer Support
Prior to January 1, 1998, the Company provided postcontract customer
support, consisting solely of telephone technical support, to its customers. The
costs of providing this support was accrued and charged to expense at the time
the revenue was recognized. Accrued liabilities at December 31, 1997 included
$78, related to providing this support.
Advertising Costs
Advertising costs are expensed as incurred.
<PAGE> 7
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 the ratio of actual revenues
to expected revenues for a product or a straight line basis over the product's
useful life, whichever is greater. 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 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).
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.
Severance Pay
The Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment, or a portion
thereof. The Company's liability is fully provided by monthly deposits with
severance pay funds, insurance policies and by an accrual.
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 Subchapter S election on October 16, 1997. The
asset and liability approach is used to recognize deferred 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 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 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.
<PAGE> 8
Short-Term Investments
Short term investments have original maturities of more than three months
and a remaining maturity of less than one year. These investments are stated at
cost, which approximates market, as it is the intent of the Company to hold
these securities until maturity. At December 31, 1998, the Company had short
term investments in Commercial Paper, Corporate and Euro dollar bonds and Medium
and Short Term Notes of $3,917, $3,948 and $2,322, respectively.
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 Israeli 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 10%, 13% and
10% of the Company's sales were made on an export basis, primarily to customers
in Europe and the United Kingdom in 1998, 1997 and 1996, respectively.
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.
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.
Fair Value of Financial Instruments
The fair value of cash equivalents, investments, accounts receivable,
accounts payable and deferred revenues reflected in the December 31, 1998 and
1997 Supplemental Consolidated Balance Sheet approximate their carrying value
due to their short maturities.
The fair value of convertible debentures reflected in the December 31, 1998
and 1997 Supplemental Consolidated Balance Sheet were estimated using
discounted cash flow analyses, based on Netect's incremental borrowing rates
for similar types of borrowing arrangements.
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 the primary
currency in which they operate. Cumulative translation adjustments are reported
as a separate component of shareholders' equity. To date, all adjustments
resulting from the process of translating foreign subsidiaries financial
statements into U.S. dollars have not been significant.
<PAGE> 9
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income". This standard requires the disclosure
of comprehensive income and its components for all years presented. The
Company's only component of other comprehensive income is foreign currency
translation adjustments. The Company's cumulative translation adjustment is now
characterized as accumulated other comprehensive income.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". This standard is effective for fiscal years
beginning after December 15, 1997. The Company currently operates in a single
industry and geographic segment and does not expect this standard to have a
material impact on disclosures with respect to the Company's financial condition
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard, which is effective for all
quarters of fiscal years beginning after June 15, 1999, addresses the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. The Company must adopt this standard by October 1, 1999.
The Company does not anticipate that this standard will have an effect on its
financial statements as it conducts no hedging activities and does not hold or
issue any derivatives.
2. Accounts Receivable
Accounts receivable balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Trade accounts receivable .................. $ 5,915 $ 4,911
Other accounts receivable .................. -- 13
------- -------
5,915 4,924
Less -- allowance for doubtful accounts .... (204) (195)
------- -------
$ 5,711 $ 4,729
======= =======
</TABLE>
Bad debt expense totaled $9, $170 and $0 in 1998, 1997 and 1996 respectively.
3. Property and Equipment
Property and equipment balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ESTIMATED
USEFUL LIVES 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Computer equipment and software....... 3 years $ 6,042 $ 2,393
Office furniture and other equipment.. 3-7 years 1,259 496
Leasehold improvements................ Lease terms 761 206
-------- --------
8,062 3,095
Less -- accumulated depreciation. (2,720) (1,541)
-------- --------
$ 5,342 $ 1,554
======== ========
</TABLE>
Depreciation expense totaled $1,198, $716 and $327 in 1998, 1997 and 1996,
respectively.
4. Capitalized Software
Capitalized software costs are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- ------
<S> <C> <C>
Capitalized software............. $ 1,669 $ 288
Less - accumulated amortization.. (295) (288)
------- ------
$ 1,374 $ --
======= ======
</TABLE>
<PAGE> 10
Capitalized software is being amortized on the basis of the estimated life
determined to be between three and seven years. Amortization expense totaled $7,
$130 and $100, in 1998, 1997 and 1996 respectively.
5. Credit Agreements and Financing Arrangements
On June 10, 1998, the Company secured a $2,000 line of credit and a $500 line of
credit. Any principal draws on the $2,000 line of credit mature on June 10,
1999. Any principal draws on the $500 line of credit mature 30 months after the
date of such advances. These lines of credit are collateralized by certain
accounts receivable, property and equipment and other assets. There have been no
borrowings under these facilities.
In November 1998, the Company secured a $250 line of credit. Any principal draws
on this line between January 1, 1998 and June 30, 1998 mature on September 1,
2001 and any principal draws on this line between July 1, 1998 and July 30, 1999
mature on June 1, 2002. This line of credit is collateralized by certain
property and equipment and other assets. At December 31, 1998, $73 was borrowed
under this facility.
6. Convertible Debentures
Convertible debentures for $3,960 and $3,178 were issued in 1998 and 1997,
respectively, to certain investors. These debentures bear interest at 8% accrued
annually and payable upon conversion or redemption. In accordance to the terms
set forth in the agreement, the debentures may be converted into common stock of
the Company at a rate of $14.48 per share. If the debentures are not converted,
they shall be redeemed on November 30, 2001. The redemption date can be
deferred, at the holder's request, until November 30, 2002. Certain assets of
the Company have been pledged as collateral for these debentures.
7. 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 for the years ended December 31, 1996 and from January
1, 1997 through October 16, 1997 because operating results are reported in the
individual income tax returns of the shareholders.
The Company's income tax provision (benefit) was comprised of the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 16,
YEAR ENDED 1997 TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current:
Federal .......... $ -- $ --
State ............ -- --
International .... -- --
Deferred:
Federal .......... 2,910 (3,060)
State ............ 435 (90)
International .... (400) --
------- -------
Total ...... $ 2,945 $(3,150)
======= =======
</TABLE>
A reconciliation of the federal statutory tax rate and the Company's
provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Income taxes at the applicable federal statutory $ 370 $(3,217) $ 577
rates........................................
State income taxes, net of federal benefit..... 50 (68) 20
Research and development credit................ (500) -- --
Non-deductible purchased in-process research
and development.............................. 870 -- --
Tax obligation allocated to S Corporation
shareholders................................. -- (765) (697)
Valuation allowance............................ 2,330 900 100
Other.......................................... (175) -- --
------ ------- ------
Provision (benefit) for income taxes........... $2,945 $(3,150) $ --
====== ======= ======
</TABLE>
<PAGE> 11
Deferred tax assets and liabilities at December 31, 1998 are comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
Assets:
Net operating loss carryforward................ $ 6,375 $ 3,849
Research and development credit carryforward... 500 --
Allowance for bad debts........................ 70 68
Other.......................................... -- 61
Liabilities
Accrued liabilities............................ -- 172
Differences in basis for long-lived assets..... (370) --
------- -------
Total............................................ $ 6,575 $ 4,150
Less: Valuation allowance........................ (3,330) (1,000)
------- -------
3,245 3,150
======= =======
</TABLE>
The Company's net operating loss carryforward at December 31, 1997 was
primarily attributable to the stock compensation expense realized during the C
Corporation period related to the termination of the Company's phantom stock
plan (Note 8) and the losses of Netect. The Company's net operating loss
carryforward at December 31, 1998 of approximately $15,500 for federal income
tax purposes expires between 2010 - 2012 and is primarily attributable to
deductions generated by the exercise of employee stock options and the losses of
Netect. The Company's ability to utilize the net operating loss carryforwards
related to its acquisitions may be subject to certain limitations. Based on the
historical earnings generated by the Company, management believes it is more
likely than not that the tax benefits related to the net operating loss
carryforward will be realized and has, therefore, provided no valuation
allowance for the related deferred tax asset, with the exception of $3,330
provided at December 31, 1998 for the net operating loss generated from Netect
and certain foreign subsidiaries.
Netect has been granted certain tax exemptions in Israel to encourage
development activities in Israel. Such exemptions may not be available if
changes in the Company's activities occur.
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 1,757 shares of common stock on October 13, 1997 and 3,188 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 1,304 common stock options under the
Company's 1997 Employee Stock Option Plan with an exercise price of $2.85 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.
<PAGE> 12
Stock compensation expense of $436 was recognized in 1996 in connection with
cash payments made for the extinguishment of certain rights to receive Company
common stock which were held by a terminated employee.
Officer Warrants
In November 1997, the Company issued a warrant to purchase 438 shares of
common stock at a price of $2.85 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 503 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 February 1997, Netect issued to a certain investor a warrant to purchase
62 shares of common stock, at $16.14 per share. These warrants were immediately
exercisable and have an expiration date of February 23, 2000.
In October 1997, the Company issued 2,528 shares of $0.01 par value
convertible preferred stock and warrants to purchase 750 shares of common stock,
at $4.00 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 2.5-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 October 1997 and July 1998, Netect issued 4 and 3 shares of $0.025 par
value convertible preferred stock and warrants to purchase 57 and 6 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 1-for-1 basis.
These preferred shares bear 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 36 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.
Treasury Stock Transactions
The Company repurchased 4,922 shares of common stock for $2.85 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 2,759 shares of its common stock to the public and 563
additional shares to cover over-allotments. The registration statement also
permitted certain stockholders of the Company to sell 991 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.
<PAGE> 13
Secondary Offering
On November 25, 1998, the Company filed a registration statement permitting
the Company to sell 300 shares of its common stock to the public and 45
additional shares to cover over-allotments. The registration statement also
permitted certain stockholders of the Company to sell 2,700 shares to the public
and 405 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.
Incentive Stock Option Plan
In 1996, the Company's Board of Directors adopted the Incentive Stock Option
Plan. At December 31, 1998, there were 1,753 shares of common stock reserved by
the Board of Directors for issuance under this plan. Options on 464, 262 and 170
shares were exercisable at December 31, 1998, 1997 and 1996 with a weighted
average exercise price per share of $1.06, $0.80 and $0.78, respectively.
Nonqualified Stock Option Plan
In 1996, the Company's Board of Directors adopted the Nonqualified Stock
Option Plan. At December 31, 1998, there were 976 shares of common stock
reserved by the Board of Directors for issuance under this plan. Options on 517
and 219 shares were exercisable at December 31, 1998 and 1997, with a weighted
average exercise price per share of $2.23 and $1.34, respectively. There were no
options exercisable at December 31, 1996.
1997 Employee Stock Option Plan
In 1997, the Company's Board of Directors adopted the 1997 Employee Stock
Option Plan. At December 31, 1998, there were 1,074 shares of common stock
reserved by the Board of Directors for issuance under this plan. Options on 565
shares were exercisable at December 31, 1998, with a weighted average exercise
price per share of $2.85. 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, 1998, there were 1,749 shares of common stock reserved by
the Board of Directors for issuance under this plan. Options on 29 shares were
exercisable at December 31, 1998, with a weighted average exercise price per
share of $4.88.
Non-Employee Director Plan
In 1998, the Company's Board of Directors adopted the Non-Employee Director
Plan. At December 31, 1998, there were 250 shares of common stock reserved by
the Board of Directors for issuance under this plan. There were no options
exercisable at December 31, 1998.
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, 1998, there
were 308 shares of common stock reserved by the Board of Directors for issuance
under these plans. Options on 10 shares were exercisable at December 31, 1998,
with a weighted average exercise price per share of $4.50.
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
<PAGE> 14
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, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER PRICE
OPTIONS SHARE PER SHARE
------- -------------- ---------
<S> <C> <C> <C>
Options outstanding, December 31, 1995
Options granted................................. 1,529 $0.75 - $ 2.47 $ 1.50
Options lapsed or canceled...................... (133) $ 0.75 $ 0.75
Options exercised............................... -- -- --
-------
Options outstanding, December 31, 1996............ 1,396 $0.75 - $ 2.47 $ 1.57
Options granted................................. 3,391 $1.10 - $ 2.85 $ 2.01
Options lapsed or canceled...................... (213) $0.75 - $ 2.85 $ 0.97
Options exercised............................... (10) $0.75 - $ 0.76 $ 0.75
-------
Options outstanding, December 31, 1997............ 4,564 $0.75 - $ 2.85 $ 1.92
Options granted................................. 1,596 $3.85 - $27.50 $ 10.70
Options lapsed or canceled...................... (116) $0.95 - $10.00 $ 3.03
Options exercised............................... (1,091) $0.75 - $10.00 $ 1.91
-------
Options outstanding, December 31, 1998............ 4,953 $0.75 - $27.50 $ 4.72
=======
</TABLE>
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES IN REMAINING EXERCISE SHARES IN EXERCISE
THOUSANDS LIFE IN YEARS PRICE THOUSANDS PRICE
--------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
under $5.00...... 4,103 7.7 $ 2.31 1,580 $ 2.15
$5.01 - $10.00... 478 9.5 $ 9.99 5 $ 10.00
$10.01 - $15.00.. 3 9.6 $ 14.38 -- $ --
$15.01 - $20.00.. 61 9.8 $ 18.00 -- $ --
$20.01 - $25.00.. 85 9.8 $ 21.46 -- $ --
Over $25.01...... 223 10.0 $ 27.50 -- $ --
----- -----
4,953 1,585
===== =====
</TABLE>
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 stock based compensation for the
three years ended December 31, 1998 (the minimum value method does not include
volatility):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (in years)................. 4 4 4
Interest rate............................ 5% 6% 6%
Volatility............................... 77% N/A N/A
Dividend yield........................... 0% 0% 0%
</TABLE>
Stock based compensation costs would have reduced pretax income by $1,097,
$164 and $18 in 1998, 1997 and 1996, respectively ($757, $107 and $12 after tax
and $0.05, $0.01 and $0 per share in 1998, 1997 and 1996, 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 $795, $642
and $304 at December 31, 1998, 1997 and 1996, respectively.
<PAGE> 15
The minimum rental commitments under operating leases at December 31, 1998
were: $2,023 in 1999, $2,228 in 2000, $1,893 in 2001, $1,884 in 2002 and $1,866
in 2003 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 $546, $174 and $165 in 1998, 1997 and 1996,
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 years ended December 31, 1997 and 1996. Shares issued as a result of the 503
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) are not material to the weighted shares
outstanding.
The computation of basic and diluted net (loss) per share and pro forma
basic and diluted net income (loss) per share follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net (loss)......................................... $ (1,824) $ -- $ --
Pro forma net income (loss)........................ $ -- $ (9,613) $ 1,012
======== ======== ========
Shares used in basic calculation (in thousands):
Total basic shares............................... 14,098 8,762 8,317
Additional shares for diluted computation:
Effect of stock options.......................... 3,259 593 70
Effect of warrants............................... 545 15 --
Effect of convertible debentures................. 333 37 --
Effect of convertible preferred stock............ 3,537 1,319 --
Effect of phantom stock.......................... -- 5,075 2,748
Exclusion of share equivalents that are
anti-dilutive because a loss was incurred..... (7,674) (7,039) --
-------- -------- --------
Total diluted shares..................... 14,098 8,762 11,135
======== ======== ========
Basic net (loss) per share......................... $ (0.13)
Diluted net (loss) per share....................... $ (0.13)
Pro forma basic net income (loss) per share........ $ (1.10) $ 0.12
Pro forma diluted net income (loss) per share...... $ (1.10) $ 0.09
</TABLE>
13. Acquisition
In December 1998, the Company committed to deliver 175 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. In
addition, the Company may be obligated to make contingent payments to
certain former owners of Curasoft based on the achievement of future revenue
targets related to an existing product and to an in-process technology, as
well as their continued employment with the Company. As of December 31,
1998, the maximum aggregate amount of these contingent payments is
approximately $4,800. When it is determined that the payment of any of these
contingent payments is probable, the Company expects to record a
corresponding charge to compensation expense related to these payments.
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 not exceeding 7 years. 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.
<PAGE> 16
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") currently undergoing development. 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 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 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
fourth quarter of 1999, the Company anticipates generating material net cash
inflows from this product in 2000.
Allocation of the purchase price in the transaction is as follows:
<TABLE>
<S> <C>
Common stock to be issued $ 3,352
Transactions 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
=======
</TABLE>
The Company's results of operations include the operating results of
Curasoft from the date of the acquisition. The unaudited pro forma results
of operations, as if Curasoft had been acquired by the Company from January
1, 1997, is for illustrative purposes only and is not necessarily indicative
of the combined results of operations of future periods or the results that
would have actually occurred had the companies been combined during the
specified periods, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Total revenues........................... $ 39,413 $ 21,378
Pro forma net loss....................... $ (2,050) $ (9,808)
======== ========
Basic and diluted net loss per share..... $ (0.14) $ (1.10)
Total basic and diluted
shares outstanding..................... 14,245 8,909
</TABLE>
<PAGE> 17
14. Subsequent Event
On March 1, 1999 the Company merged with 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 1,161 shares of common stock, based upon an
exchange ratio of 0.400022101 shares of BindView common stock for each share of
Netect common stock. Merger related costs of $2,286 were incurred as a result of
the transaction. The financial data included in this report have been restated
to reflect the merger with Netect. There were no material transactions between
the Company and Netect during the periods prior to the merger.
