-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WVZPydAMTEYMJsWYkyH+dzkai0OtH6CgvDwTOMCckrGd19GEo+HgYpCdbcE+jN6B pOLexqbxCAx0Zwl39hdqjw== 0000950144-98-013930.txt : 19981217 0000950144-98-013930.hdr.sgml : 19981217 ACCESSION NUMBER: 0000950144-98-013930 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981216 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISS GROUP INC CENTRAL INDEX KEY: 0001053148 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 582362189 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-23655 FILM NUMBER: 98770744 BUSINESS ADDRESS: STREET 1: 6600 PEACHTREE DUNWOODY RD STREET 2: BLDG 300 SUITE 500 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 6784436000 8-K 1 ISS GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 16, 1998 ------------------------------ ISS GROUP, INC. - ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) Delaware 0-23655 58-2362189 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 6600 Peachtree-Dunwoody Road, Embassy Row, Bldg. 300, Ste. 500, Atlanta, GA 30328 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (678) 443-6000 ------------------------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On October 6, 1998 the Registrant acquired March Information Systems, a corporation organized under the laws of England and Wales ("March"), by the acquisition (the "March Acquisition") of all the issued and outstanding capital stock of March. The March Acquisition was effected pursuant to a Stock Purchase Agreement ("the Agreement") dated October 6, 1998, by and between the Registrant, March and its shareholders. Additional information regarding the acquisition is presented in the Registrant's previously filed Current Report of Form 8-K, dated October 20, 1998. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Businesses Acquired. In accordance with Item 7(a) of Form 8-K, the requisite financial statements are filed in Exhibit 99.1 (b) Pro Forma Financial Information. In accordance with the requirements of Item 7(b) of Form 8-K, the requisite pro forma financial information is filed in Exhibit 99.2 (c) Exhibits. 23.1 Consent of Independent Auditors 99.1 Consolidated Financial Statements of March Information Systems Limited as of March 31, 1998 and 1997 and for the years then ended and as of September 30, 1998 (unaudited) and for the six months ended September 30, 1998 and 1997 (unaudited). 99.2 Pro Forma Financial Information as of September 30, 1998 and for the year ended December 31, 1997 and the nine months ended September 30, 1998. 2 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. ISS GROUP, INC. Dated: December 16, 1998 By: /S/ Richard Macchia ----------------------------- Richard Macchia Vice President and Chief Financial Officer 3 4 EXHIBIT INDEX Exhibit Number - ------- 23.1 Consent of Independent Auditors 99.1 Consolidated Financial Statements of March Information Systems Limited as of March 31, 1998 and 1997 and for the years then ended and as of September 30, 1998 (unaudited) and for six months ended September 30, 1998 and 1997 (unaudited). 99.2 Pro Forma Financial Information as of September 30, 1998 and for the year ended December 31, 1997 and the nine months ended September 30, 1998. EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8), pertaining to the Restated 1995 Stock Incentive Plan of our report dated October 16, 1998, with respect to the consolidated financial statements of March Information Systems Limited for the year ended March 31, 1998 included in ISS Group, Inc.'s Form 8-K/A filed with the Securities and Exchange Commission. Ernst & Young Reading, England December 16, 1998 EX-99.1 3 CONSOLIDATED FINANCIAL STATEMENTS 1 EXHIBIT 99.1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page MARCH INFORMATION SYSTEMS LIMITED CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young, Independent Auditors 2 Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statement of Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to the Consolidated Financial Statements 7
2 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS To the Board of Directors and Shareholders March Information Systems Limited We have audited the accompanying consolidated balance sheets of March Information Systems Limited as of March 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended March 31, 1998, which have been prepared in accordance with accounting principles generally accepted in the United States and are expressed in U.S. Dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with UK auditing standards, which do not differ materially from auditing standards generally accepted 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 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 financial position of March Information Systems Limited at March 31, 1997 and 1998 and the results of its operations and its cash flows for the each of the two years in the period ended March 31, 1998, in conformity with accounting principles generally accepted in the United States. Reading, England October 16, 1998 2 3 MARCH INFORMATION SYSTEMS LIMITED CONSOLIDATED BALANCE SHEETS
March 31, September 30, 1997 1998 1998 -------------------------------------------- ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $4,494 $16,900 $38,683 Accounts receivable 533,080 538,851 441,074 Other receivables 32,433 25,724 81,089 Prepaid expenses 26,545 20,800 49,765 Other current assets 15,434 15,742 26,105 --------------------------------------- Total current assets 611,986 618,017 636,716 Investments (Note 2) 821 837 - Equipment and fixtures: Computer equipment 176,594 220,985 243,701 Office furniture and equipment 36,244 38,469 39,039 Motor vehicles 312,857 230,541 243,216 --------------------------------------- 525,695 489,995 525,956 Less accumulated depreciation 327,295 356,635 391,792 --------------------------------------- 198,400 133,360 134,164 Deferred income taxes (Note 4) 12,256 12,704 12,704 --------------------------------------- TOTAL ASSETS $823,463 $764,918 $783,584 ======================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $1,478 $42,763 $44,084 Accrued expenses and other liabilities 68,457 51,747 91,516 Deferred revenue 92,227 84,301 111,370 Taxes and social security payable 180,387 98,011 103,193 Notes payable to Directors 52,544 90,428 - Current portion of capital lease obligations 63,378 25,713 20,802 --------------------------------------- Total current liabilities 458,471 392,963 370,965 Capital lease obligation (Note 3) 31,191 6,097 12,710 Minority interest 161 - - Commitments (Note 7) SHAREHOLDERS' EQUITY Ordinary shares: $1 par value, 50,000 shares authorised; 9,600 issued and outstanding at March 31, 1997, 9,700 shares at March 31,1998 and 9,800 shares at September 30, 1998 14,654 14,821 14,988 Retained earnings 292,128 317,305 345,180 Cumulative translation adjustment 26,858 33,732 39,741 --------------------------------------- Total shareholders' equity 333,640 365,858 399,909 ---------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $823,463 $764,918 $783,584 ========================================
4 MARCH INFORMATION SYSTEMS LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Six months ended March 31, September 30, 1997 1998 1997 1998 ------------------------------------------------------ (unaudited) (unaudited) Revenues: Consulting $1,294,573 $1,224,339 $566,991 $663,205 Licenses 267,568 690,764 275,582 461,247 Maintenance and other 73,909 131,265 65,231 74,323 ------------------------------------------------------ 1,636,050 2,046,368 907,804 1,198,775 Research and development 460,027 697,808 367,380 405,083 Marketing, general and administrative 1,176,375 1,193,958 519,050 695,334 Depreciation and amortization 110,216 99,304 55,029 39,293 ------------------------------------------------------ 1,746,618 1,991,070 941,459 1,139,710 Operating (loss) profit (110,568) 55,298 (33,655) 59,065 Equity share of losses of affiliated company 3,263 - - - Interest expense (29,253) (12,861) (6,518) (6,921) Interest income 1,680 3,103 1,995 714 Other income - 330 8,402 727 ------------------------------------------------------ Income (loss) before taxation and minority interests (134,878) 45,870 (29,776) 53,585 Minority interest 692 - - - Income tax benefit (expense) 26,677 (20,693) - (25,710) ------------------------------------------------------ Net (loss) income $(107,509) $25,177 $(29,776) $27,875 ======================================================
See accompanying Notes to the Consolidated Financial Statements 5 MARCH INFORMATION SYSTEMS LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative Common Retained translation Stock Earnings adjustment Total ---------------------------------------------------------- Balance at March 31, 1996 (unaudited) $14,654 $399,637 $20,267 $434,558 Net loss - (107,509) - (107,509) Cumulative translation adjustment - - 6,591 6,591 ---------------------------------------------------------- Balance at March 31, 1997 14,654 292,128 26,858 333,640 Net income - 25,177 - 25,177 Cumulative translation adjustment - - 6,874 6,874 Issuance of ordinary stock for bonuses to employees 167 - - 167 ---------------------------------------------------------- Balance at March 31, 1998 14,821 317,305 33,732 365,858 Net income (unaudited) - 27,875 - 28,042 Cumulative translation adjustment (unaudited) - - 6,009 6,009 Issuance of ordinary stock for bonuses to employees (unaudited) 167 - - 167 ---------------------------------------------------------- Balance at September 30, 1998 (unaudited) $14,988 $345,180 $39,741 $399,909 ==========================================================
See accompanying Notes to the Consolidated Financial Statements 6 MARCH INFORMATION SYSTEMS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended March September 30, 1997 1998 1997 1998 ------------------------------------------------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(107,509) $ 25,177 $ (29,776) 27,875 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 110,216 99,304 55,029 39,293 Minority interest 692 -- -- -- Loss on disposal of assets 6,107 12,354 7,926 7,953 Changes in operating assets and liabilities: Accounts receivable (59,188) 4,719 160,112 102,894 Other receivable (23,401) 7,210 6,915 (53,496) Prepaid expenses (13,036) 6,149 (8,360) (27,881) Other current assets 714 -- -- (9,856) Accounts payable (159) 40,450 39,022 670 Accrued expenses and other liabilities 70,140 18,406 27,189 (51,336) Deferred revenue 30,478 (9,567) (19,845) 25,122 Taxes and social security payable 28,839 (84,279) (147,501) 3,629 Deferred income taxes (5,259) (448) -- -- ------------------------------------------------------ Net cash provided by operating activities 38,634 119,475 90,711 64,867 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment and fixtures (87,164) (44,026) (5,003) (18,917) Loss from Joint Venture -- -- -- 827 ------------------------------------------------------ Net cash used in investing activities (87,164) (44,026) (5,003) (18,090) CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital lease obligations (35,355) (63,374) (36,852) (25,993) Minority interest (1,537) (161) (160) -- Dividends paid (41,050) -- -- -- Issuance of ordinary stock for bonus -- 167 167 167 ------------------------------------------------------ Net cash used in financing activities (77,942) (63,368) (36,845) (25,826) --------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents (126,472) 12,081 48,863 20,951 Cash and cash equivalents at the beginning of the year 124,544 4,494 4,494 16,900 Translation adjustment 6,422 325 (596) 832 --------------------------------------------------- Cash and cash equivalents at the end of the year $ 4,494 $ 16,900 $ 52,761 $ 38,683 =================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 13,850 $ 12,368 $ 5,866 $ 8,182 =================================================== Income taxes paid $ 56,455 $ - $ 20,047 $ - =================================================== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Equipment and fixtures acquired under capital leases $ - $ - $ - $ 27,190 ===================================================
See accompanying Notes to the Consolidated Financial Statements 7 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS March Information Systems ("March" or the "Company") was incorporated in England in 1990 with the name March Systems Consultancy Limited with the objective of providing computer consultancy services ins systems administration, application development and systems integration. The Company's name was changed in February 1997 to March Information Systems reflecting the refocus of the company as a supplier of specialist security software rather than as a consultancy company. The company was acquired in October 1998 by ISS Group, Inc. as further explained in Note 7. The Company provides security software and services to customers using computers running UNIX and Windows NT operating systems with the objective of helping those customers improve the security of and reduce the threats to critical corporate data held on these computers. BASIS OF PRESENTATION These financial statements do not comprise the statutory accounts of the Company within the meaning of Section 240 of the Companies Act 1985, as amended (the "Companies Act"). The Company's statutory accounts, which are its primary financial statements, are prepared in accordance with the Companies Act and are presented in British pounds. Statutory accounts for the year ended March 31, 1997 and March 31, 1998 have been prepared and the auditors have given unqualified audit reports thereon. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and have been prepared in U.S. dollars. These consolidated financial statements have been translated from the functional currency (British pounds) to U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 - "Foreign Currency Translation". Under this Statement assets and liabilities are translated at year end rates and income and expenses are translated at average rates. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Investments in 50% or less owned companies and joint ventures over which the Company has the ability to exercise significant influence are accounted for using the equity method. REVENUE RECOGNITION The Company recognizes its license revenue upon (i) delivery of software or, if the customer has evaluation software, delivery of the software key, and (ii) issuance of the related license, assuming no significant vendor obligations or customer acceptance rights exist. In October 1997, the AICPA issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, which the Company adopted, effective April 1, 1997. Such adoption had no effect on the Company's revenue recognition policies related to its licensee and maintenance activities. Prior to 1997, the Company's revenue recognition policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue Recognition. Annual renewable maintenance is a separate component of each contract, and is recognized ratably over the contract term. Professional services revenues are recognized as such services are performed. 7 8 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS EQUIPMENT AND FIXTURES Depreciation is provided so as to write down the cost of property and equipment to their estimated residual value over their expected useful lives which is typically 3-4 years. The principal annual depreciation rates and methods of calculation are as follows: Computer and telecom equipment 3 years straight line Furniture and fittings 3 years straight line Motor vehicles 4 years straight line INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement No. 109, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to carryforward losses and differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recorded at their likely realizable amount. FOREIGN CURRENCY TRANSLATION Although the Company's functional currency is the British pound, some transactions are made in different currencies. Foreign currency transactions are converted into local currency at the rate of exchange prevailing at the date of the transaction. Exchange gains or losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in other expenses. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain estimates used by management are particularly susceptible to significant changes, such as the recoverability and amortization periods of intangible assets. Management believes that as of March 31, 1997 and 1998 and September 30, 1998, the estimates used are adequate based on the information currently available. INTERIM FINANCIAL INFORMATION The financial information at September 30, 1998 and for the six months ended September 30, 1997 and 1998 is unaudited but included all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Results of the September 30, 1998 period are not necessarily indicative of the results for the entire year. 8 9 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for the Company's financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and long-term debt approximate fair values. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Therefore, the estimates are not necessarily indicative of the amounts which could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amount. CASH AND CASH EQUIVALENTS The Company considers investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. Such amounts are stated at cost which approximates market value. CONCENTRATION OF CREDIT RISK The Company performs ongoing credit evaluations of its customers' financial condition and, generally, does not require collateral on accounts receivable. When required, the Company maintains allowances for credit losses and such losses have been within management's expectations. The Company's services are provided to customers mainly throughout Europe and United States. There was no allowance for doubtful accounts established for the periods presented and write-offs of accounts receivable have not been significant. The Company had one customer that accounted for approximately 49% of total revenues for the year ended March 31, 1997 and 45% for the six months ended September 30, 1997 and two customers that accounted for approximately 33% and 41% of total revenues for the year ended March 31, 1998 and 29% and 42% of total revenues for the six months ended September 30, 1998, respectively. PENSION PLAN The Company sponsors a defined contribution pension plan. The pension charge represents the amounts payable by the Company to the fund. Employees are eligible to join the plan after three months of employment. The Company matches the employees contribution up to a maximum 5% of the employees salary. If an employee belongs to a pension fund outside of the company and does not elect to join the pension fund maintained by March, then the Company will contribute to the outside fund at a rate of 5% or match what the employee contributes, whichever is lower. Contributions for the year ended March 31, 1997 and 1998 and the six months ending September 30, 1997 and 1998 were $45,030, $47,247, $23,733 and $22,588, respectively. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. The Company has not capitalized any such development costs under SFAS No. 86, Accounting for the Costs of Computer Software to be sold, leased, or otherwise marketed, because the costs incurred by the company between the attainment of technological feasibility for the related software product through the date when the product is available for general release to customers is insignificant. 9 10 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ADVERTISING Costs related to advertising are expensed as incurred. Advertising expense was $4,879, $4,031 $1,051 and $7,589 for the years ended March 31, 1997 and 1998 and the six months ended September 30, 1997 and 1998, respectively. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This Statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Statement will be effective for annual periods beginning after December 15, 1997 and the Company will adopt its provisions in fiscal 1998. Reclassification for earlier periods is required for comparative purposes. The Company is currently evaluating the impact this Statement will have on its financial statements, however, because the Statement requires only additional disclosure, the Company does not expect the statement to have a material impact on its financial position or results of operations. In June 1997, the FASB issued SFAS No 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. The Statement will be effective for annual periods beginning after December 15, 1997 and the Company will adopt its provisions in fiscal 1998. The Company does not expect the Statement to have a material impact on its financial position or results of operations. YEAR 2000 (UNAUDITED) The Company has determined that its current computer systems are Year 2000 compliant and would function properly with respect to dates in the Year 2000 and beyond. The Company has not noted any Year 2000 issues with its products; however, the Company has not performed a significant amount of testing with respect to its products. The Company has yet to initiate discussions with all of its third-party relationships to ensure that those parties have appropriate plans in place to correct all of their year 2000 issues. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no assurance that the systems and products of other companies on which the Company's operations rely will be converted on a timely basis and will not have a material adverse effect on the Company's results of operations. The cost of the Year 2000 initiatives is not expected to be material to the Company's consolidated results of operations or financial position. 2 BUSINESS COMBINATIONS The Company incorporated a wholly-owned subsidiary in Belgium, March Systems Consultancy BVBA, in January 1993 to exploit the market for temporary computer specialists in Belgium and Western Europe. March Systems Consultancy BVBA was dissolved in December 1997 as the UK company continued to focus on software development. 10 11 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Also in 1993, the Company acquired a 50% interest in another company, Westmount UK Limited, supplying UNIX based I-CASE software and professional services. Westmount UK ceased trading in December 1997. 3 COMMITMENTS OPERATING LEASES The Company leases two separate office spaces under non-cancelable operating leases. One lease is month to month and the other expires on September 30, 1999. The Company also leases cars and computer equipment under a non-cancelable lease arrangements. Required future minimum lease payments under both operating and capital leases as of March 31, 1998 are as follows:
Operating Capital Leases Leases Years ending December 31: 1999 $31,817 $32,226 2000 15,908 3,190 --------------------- Total minimum payments required $47,725 35,416 ======= Present value of future lease payments 31,810 Less current portion (25,713) -------- Noncurrent portion $6,097 ========
Rent expense was $42,152, $43,629, $16,424 and $22,744 for the fiscal years ending March 31, 1997 and March 31, 1998, and the six months ending September 30, 1997 and September 30, 1998, respectively. Equipment and fixtures financed under a capital lease were $277,639, $158,365 and $85,592 at March 31, 1997, March 31, 1998 and September 30, 1998, respectively. Accumulated amortization related to the leased assets were $139,910, $98,466 and $37,528 at March 31, 1997, March 31, 1998 and September 30, 1998, respectively. Amortization related to capital leases are included in depreciation expense. 4 INCOME TAX The deferred tax asset reflects 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 assets are as follows:
Year ended March 31 1997 1998 Book over tax depreciation $11,468 $10,945 Other 788 1,759 ===================== Total deferred tax asset $12,256 $12,704 =====================
11 12 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Significant components of the benefit (provision) for income taxes attributable to operations are as follows:
Year ended March 31 1997 1998 Current $21,418 $ (20,811) Deferred 5,259 118 ===================== $26,677 $ (20,693) =====================
A reconciliation of the statutory income tax rate to the Company's effective income tax rate is as follows:
Year ended March 31 1997 1998 Income tax at statutory rates $32,370 $(9,564) Income not taxable - 3,276 Non deductible expenses (6,239) (12,210) Other 809 (152) Change in rate for deferred accounts (263) (2,043) ===================== $26,677 $(20,693) ===================== 19.8% 45.4% =====================
5. RELATED PARTIES The directors of the Company have made short term loans to assist in the funding of the Company during temporary cash flow shortages. At March 31, 1997 and March 31, 1998 the total of the loans were approximately $52,544 and $90,428, respectively. There were no balances outstanding at September 30, 1998. There were no specific payment terms attached to the notes. The balances are included in accrued expenses and other liabilities on the balance sheet. Subsequent to year end, the balance of the notes were paid. 6. SEGMENT REPORTING Revenue by geographic area is as follows:
Year ended Six months ended March 31, September 30, 1997 1998 1997 1998 -------------------------------------------------------- (unaudited) (unaudited) United Kingdom customers $1,553,784 $1,473,022 $691,533 $691,287 Continental Europe customers 62,754 118,691 57,866 240,123 United States of America - 358,461 147,386 41,610 Rest of the world 19,512 96,194 11,019 225,755 ======================================================== Total revenue $1,636,050 $2,046,368 $907,804 $1,198,775 ========================================================
12 13 MARCH INFORMATION SYSTEMS LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7 SUBSEQUENT EVENTS On October 6, 1998, the Company was purchased by ISS Group, Inc. for $4.75 million plus 120,000 shares of ISS Group, Inc.'s common stock. The acquisition will be accounted for as a purchase. ISS Group is a US based company currently being traded on the NASDAQ stock exchange. Upon acquisition, the Company's name was changed to ISS Group Ltd. 13 EX-99.2 4 PRO FORMA FINANCIAL INFORMATION 1 EXHIBIT 99.2 ISS GROUP, INC. ACQUISITION OF MARCH INFORMATION SYSTEMS UNAUDITED PRO FORMA FINANCIAL DATA On October 6, 1998, the Company acquired privately held March Information Systems Limited ("March Systems"), a United Kingdom-based developer of Windows NT and Unix-based security assessment technologies. Under the terms of the agreement, ISS Group, Inc. ("ISS" or "Company") acquired all of the outstanding stock of March Systems in exchange for $4.75 million in cash and 120,000 shares of the Company's common stock. The transaction has been accounted for using the purchase method of accounting and the results of March Systems will be included in future results of the Company from October 6, 1998, the closing date of the transaction. The Unaudited Pro Forma Consolidated Statement of Operations set forth below for the year ended December 31, 1997 gives effect to the acquisition as if it occurred on January 1, 1997. It has been derived from the Company's historical consolidated statement of operations for the year ended December 31, 1997 and from the March Systems statement of operations for its fiscal year ended March 31, 1998. The Unaudited Pro Forma Consolidated Statement of Operations set forth below for the nine months ended September 30, 1998 gives effect to the acquisition as if it occurred on January 1, 1997. It has been derived from the Company's unaudited historical consolidated statement of operations for the nine months ended September 30, 1998 and from the March Systems unaudited consolidated statement of operations for the same nine-month period. In order to provide interim unaudited financial results covering nine months, the historical operating results of March Systems for the three month period ended March 31, 1998 are included in both the 1997 annual and 1998 interim pro forma consolidated statements of operations presented below. The Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1998 has been derived from the unaudited interim balance sheets of each entity at such date, assuming the acquisition occurred at such date. The Pro Forma Consolidated Financial Statements do not purport to be indicative of the results of operations or financial position which would have actually been reported if the acquisition had been consummated on the date indicated, or which may be reported in the future. 2 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET September 30, 1998
MARCH INFORMATION PRO FORMA ISS GROUP, ISS GROUP, SYSTEMS ACQUISITION INC. INC. LIMITED ADJUSTMENTS PRO FORMA ------------ ----------- ------------ ------------- Current assets: Cash and cash equivalents $ 60,558,000 $ 39,000 $ (4,750,000)(1) $ 55,847,000 Accounts receivable, net 7,334,000 522,000 7,856,000 Other current assets 677,000 76,000 753,000 ------------ -------- ------------ ------------ Total current assets 68,569,000 637,000 (4,750,000) 64,456,000 Property and equipment: Computer equipment 3,442,000 244,000 (177,000)(2) 3,509,000 Office furniture and equipment 854,000 39,000 (32,000)(2) 861,000 Leasehold improvements 249,000 243,000 (183,000)(2) 309,000 ------------ -------- ------------ ------------ 4,545,000 526,000 (392,000) 4,679,000 less accumulated depreciation 1,205,000 392,000 (392,000)(2) 1,205,000 ------------ -------- ------------ ------------ 3,340,000 134,000 3,474,000 Intangible assets, including goodwill 6,790,000 (2) 6,790,000 Other assets 117,000 13,000 130,000 ------------ -------- ------------ ------------ Total assets $ 72,026,000 $784,000 $ 2,040,000 $ 74,850,000 ============ ======== ============ ============ Current liabilities: Accounts payable $ 1,569,000 $ 44,000 $ $ 1,613,000 Accrued expenses 2,668,000 195,000 265,000 (1) 3,128,000 Deferred revenues 4,904,000 111,000 5,015,000 Current portion of long term debt 21,000 21,000 ------------ -------- ------------ ------------ Total current liabilities 9,141,000 371,000 265,000 9,777,000 Non-current liabilities 133,000 13,000 146,000 Stockholders' equity: Common stock 17,000 10,000 (1) 17,000 (10,000)(2) Additional paid-in capital 72,107,000 5,000 2,880,000 (1) 74,987,000 (5,000)(2) Deferred compensation (842,000) (842,000) Cumulative adjustment for currency revaluation (36,000) 40,000 (40,000)(2) (36,000) (Accumulated deficit) retained earnings (8,494,000) 345,000 (345,000)(2) (9,199,000) (705,000)(2) ------------ -------- ------------ ------------ Total stockholders' equity 62,752,000 400,000 1,775,000 64,927,000 ------------ -------- ------------ ------------ Total liabilities and stockholders' equity $ 72,026,000 $784,000 $ 2,040,000 $ 74,850,000 ============ ======== ============ ============
See accompanying notes to unaudited pro forma consolidated financial statements for explanation of pro forma acquisition adjustments. 3 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1997
MARCH INFORMATION ISS GROUP ISS GROUP SYSTEMS YEAR ENDED YEAR ENDED LIMITED PRO FORMA DECEMBER 31, DECEMBER 31, YEAR ENDED ACQUISITION 1997 1997 MARCH 31, 1998 ADJUSTMENTS PRO FORMA ------------ -------------- ----------- ------------- Revenues: Licenses $ 10,936,000 $ 691,000 $ - $ 11,627,000 Subscriptions 2,462,000 131,000 2,593,000 Professional services 69,000 1,224,000 1,293,000 ------------ ---------- ----------- ----------- 13,467,000 2,046,000 15,513,000 Costs and expenses: Cost of revenues 676,000 979,000 1,655,000 Research and development 3,434,000 698,000 4,132,000 Sales and marketing 11,731,000 214,000 11,945,000 Amortization 809,000 (4) 809,000 General and administrative 1,773,000 100,000 1,873,000 ------------ ---------- ----------- ----------- 17,614,000 1,991,000 809,000 20,414,000 ------------ ---------- ----------- ----------- Operating income (loss) (4,147,000) 55,000 (809,000) (4,901,000) Interest income (expense), net 228,000 (9,000) (243,000)(3) (24,000) ------------ ---------- ----------- ----------- Income (loss) before income taxes (3,919,000) 46,000 (1,052,000) (4,925,000) Income taxes 21,000 21,000 ------------ ---------- ----------- ----------- Net income (loss) $ (3,919,000) $ 25,000 $(1,052,000) $(4,946,000) ============ ========== =========== =========== Basic and diluted net loss per share of Common Stock $ (0.50) $ (0.62) ============ =========== Weighted average number of shares used in calculating basic and diluted net loss per share of Common Stock 7,907,000 120,000 (1) 8,027,000 ============ =========== =========== Unaudited pro forma net loss per share of Common Stock (see note 5) $ (0.29) $ (0.36) ============ =========== Unaudited weighted average number of shares used in calculating pro forma net loss per share of Common Stock (see note 5) 13,644,000 120,000 (1) 13,764,000 ============ =========== ===========
See accompanying notes to unaudited pro forma consolidated financial statements for explanation of pro forma acquisition adjustments. 4 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Nine Months ended September 30, 1998
MARCH INFORMATION PRO FORMA SYSTEMS ACQUISITION ISS GROUP ISS GROUP LIMITED ADJUSTMENTS PRO FORMA ------------ ----------- ----------- ------------ Revenues: Licenses $ 17,030,000 $ 1,029,000 $ - $ 18,059,000 Subscriptions 4,808,000 109,000 4,917,000 Professional services 996,000 668,000 1,664,000 ------------ ----------- --------- ------------ 22,834,000 1,806,000 24,640,000 - Costs and expenses: - Cost of revenues 2,964,000 584,000 3,548,000 Research and development 6,009,000 387,000 6,396,000 Sales and marketing 15,711,000 585,000 16,296,000 Amortization - 607,000 (4) 607,000 General and administrative 3,127,000 75,000 3,202,000 ------------ ----------- --------- ------------ 27,811,000 1,631,000 607,000 30,049,000 ------------ ----------- --------- ------------ Operating income (loss) (4,977,000) 175,000 (607,000) (5,409,000) Interest income (expense), net 1,672,000 (31,000) (196,000)(3) 1,445,000 ------------ ----------- --------- ------------ Income (loss) before income taxes (3,305,000) 144,000 (803,000) (3,964,000) Income taxes 67,000 67,000 ------------ ----------- --------- ------------ Net income (loss) $ (3,305,000) $ 77,000 $(803,000) $ (4,031,000) ============ =========== ========= ============ Basic and diluted net loss per share of Common Stock $ (0.23) $ (0.28) ============ ============ Weighted average number of shares used in calculating basic and diluted net loss per share of Common Stock 14,162,000 120,000 (1) 14,282,000 ============ ========= ============ Unaudited pro forma net loss per share of Common Stock (see note 5) $ (0.21) $ (0.25) ============ ============ Unaudited weighted average number of shares used in calculating pro forma net loss per share of Common Stock (see note 5) 15,904,000 120,000 (1) 16,024,000 ============ ========= ============
See accompanying notes to unaudited pro forma consolidated financial statements for explanation of pro forma acquisition adjustments. 5 ISS GROUP, INC. ACQUISITION OF MARCH INFORMATION SYSTEMS NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (1) Acquisition Consideration The outstanding stock of March Information Systems Limited ("March Systems") was acquired by ISS Group, Inc. ("ISS" or the "Company") in exchange for $4,750,000 in cash and 120,000 shares of ISS common stock. The ISS shares were valued at the closing price of ISS common stock on October 6, 1998 of $24 per share, as quoted on the NASDAQ National Market System. In addition, there were transaction costs of approximately $265,000 in connection with the transaction, principally for legal and accounting professional services and stock transfer taxes. (2) Allocation of Purchase Price The purchase price was allocated first to tangible net assets, then to identified intangible assets with any remaining unallocated purchase price attributed to goodwill. The fair value of tangible assets approximated their historical book values at September 30, 1998. The following intangible assets were identified: Professional work force $ 215,000 Core technology software 3,099,000 Developed software 380,000 In process research and development software 705,000 Goodwill 3,096,000
The value assigned to in-process research and development software, in accordance with generally accepted accounting principles, was written off at the time of the acquisition and is reflected in the pro forma balance sheet adjustments as a pro forma reduction of stockholders' equity. In accordance Regulation S-X of the Securities and Exchange Commission, this write off is not reflected as an adjustment in the pro forma consolidated statements of operations as it represents a nonrecurring charge directly attributable to the transaction. (3) Interest Income In connection with the payment of $5,015,000 in cash in conjunction with the acquisition, including transaction costs, interest income was reduced for the year ended December 31, 1997 and the nine months ended September 30, 1998 using the interest rate earned on such funds of 4.85% and 5.2%, respectively. (4) Amortization of Intangible Assets and Goodwill The amortization of intangible assets and goodwill is reflected in the pro forma consolidated statement of operations using the following estimated lives: Professional work force 6 years Core technology software 8 years Developed software 5 years Goodwill 10 years
6 ISS GROUP, INC. ACQUISITION OF MARCH INFORMATION SYSTEMS NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (5) Pro Forma Loss Per Share The Pro Forma basic and diluted historical net loss per share use the historical amounts for ISS Group, Inc adjusted by the impact of the March Systems acquisition. This impact includes March Systems historical net income for the periods, the impact of purchase accounting adjustments and the shares of Common Stock issued in connection with the acquisition. Additionally, these pro forma consolidated statements of operation reflect adjustments to the pro forma net loss per share amounts reflected in the ISS historical consolidated statements of operations. The per share amounts were computed for the historical ISS statements by dividing its net losses by the number of shares of common Stock outstanding plus the conversion of the 3,650,000 shares of Series A and 2,087,000 shares of Series B Redeemable, Convertible Preferred Stock into 5,737,000 share of Common Stock which occurred upon consummation of the Company's initial public offering in March 1998. These pro forma financial statements adjust such net loss and weighted average share amounts for March Systems historical net income for the periods, the impact of purchase accounting adjustments and the shares of Common Stock issued in connection with the acquisition. -----END PRIVACY-ENHANCED MESSAGE-----