<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
---------------------------
OR
[ ] TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------
Commission File Number
----------------
ISS GROUP, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
GEORGIA 58-2362189
----------------------------- -------------------
<S> <C>
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6600 PEACHTREE-DUNWOODY ROAD, 300 EMBASSY ROW, SUITE 500, ATLANTA, GEORGIA 30328
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone umber, including area code (678) 443-6000
--------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of Shares Outstanding
Title of each class as of May 1, 1998
- -------------------------------------- ----------------------------
<S> <C>
Common Stock, $0.001 par value 16,861,178
</TABLE>
1
<PAGE> 2
ISS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
<S> <C> <C>
Item 1 Consolidated Financial Statements:
Consolidated Statements of Operations for the
Three months ended March 31, 1998 and 1997..................................... 3
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997.............................................................. 4
Consolidated Statements of Cash Flows for the three
Months ended March 31, 1998 and 1997........................................... 5
Notes to Consolidated Financial Statements..................................... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 9
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds..................................... 13
Item 4 Submission of Matter to a Vote of Securities Holders.......................... 15
Item 6 Exhibits and Reports on Form 8-K.............................................. 16
</TABLE>
<PAGE> 3
ISS GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
-------------------------------
1998 1997
<S> <C> <C>
Revenues:
Licenses $ 4,875,000 $ 1,872,000
Support services 1,198,000 353,000
------------ ------------
6,073,000 2,225,000
Costs and expenses:
Cost of revenues 513,000 87,000
Research and development 1,636,000 493,000
Sales and marketing 4,648,000 1,754,000
General and administrative 981,000 320,000
------------ ------------
7,778,000 2,654,000
------------ ------------
Operating loss (1,705,000) (429,000)
Interest income, net 66,000 35,000
------------ ------------
Net loss $ (1,639,000) $ (394,000)
============ ============
Basic and diluted net loss per share of Common Stock $ (0.19) $ (0.05)
============ ============
Weighted average number of shares used in calculating
basic and diluted net loss per share of Common Stock 8,741,000 7,902,000
============ ============
Pro forma net loss per share of Common Stock $ (0.12) $ (0.03)
============ ============
Weighted average number of shares used in
calculating pro forma net loss per share of Common
Stock 13,968,000 12,595,000
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
ISS GROUP, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 64,184,000 $ 3,929,000
Accounts receivable, less allowance for doubtful
accounts of $292,000 and $255,000, respectively 5,413,000 4,038,000
Other current assets 644,000 281,000
------------ ------------
Total current assets 70,241,000 8,248,000
Property and equipment:
Computer equipment 2,168,000 1,688,000
Office furniture and equipment 285,000 268,000
Leasehold improvements 15,000 15,000
------------ ------------
2,468,000 1,971,000
Less accumulated depreciation 572,000 402,000
------------ ------------
1,896,000 1,569,000
Other assets 158,000 49,000
------------ ------------
Total assets $ 72,295,000 $ 9,866,000
============ ============
Current liabilities:
Accounts payable $ 1,452,000 $ 2,002,000
Accrued expenses 2,784,000 1,798,000
Deferred revenues 3,976,000 2,106,000
Current portion of long term debt 70,000 70,000
------------ ------------
Total current liabilities 8,282,000 5,976,000
Non-current liabilities 17,000 -
Long term debt 47,000 70,000
Commitments and contingencies - -
Redeemable, Convertible Preferred Stock (5,737,000
shares authorized):
Series A; $.001 par value; none issued or outstanding and 3,650,000
issued and outstanding; (liquidation preference $1 per share) - 3,621,000
Series B; $.001 par value; none issued or outstanding and
2,087,000 issued and outstanding (liquidation preference
$2.53 per share) - 5,257,000
Stockholders' equity (deficit):
Common stock, $.001 par value, 50,000,000 shares authorized,
16,862,000 and 7,921,000 issued and outstanding 17,000 8,000
Additional paid-in capital 72,085,000 695,000
Deferred compensation (1,317,000) (571,000)
Cumulative adjustment for currency revaluation (7,000) -
Accumulated deficit (6,829,000) (5,190,000)
------------ ------------
Total stockholders' equity (deficit) 63,949,000 (5,058,000)
Total liabilities and stockholders' equity $ 72,295,000 $ 9,866,000
------------ ------------
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ISS GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,639,000) $ (395,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 171,000 38,000
Deferred compensation expense 65,000 -
Deferred rent 17,000 -
Changes in assets and liabilities:
Accounts receivable (1,375,000) (635,000)
Prepaid expenses and other assets (472,000) (91,000)
Accounts payable and accrued expenses 437,000 368,000
Deferred revenues 1,870,000 578,000
-------------------------------
Net cash used in operating activities (926,000) (137,000)
INVESTING ACTIVITIES
Purchases of property and equipment (498,000) (115,000)
-------------------------------
Net cash used in investing activities (498,000) (115,000)
FINANCING ACTIVITIES
Payments on long term debt (23,000) (17,000)
Net proceeds from Redeemable, Convertible
Preferred Stock issuance - 5,280,000
Proceeds from exercise of stock options 162,000 -
Net proceeds from initial public offering 61,547,000 -
-------------------------------
Net cash provided by financing activities 61,686,000 5,263,000
Foreign currency impact on cash (7,000) -
-------------------------------
Net increase in cash and cash equivalents 60,255,000 5,011,000
Cash and cash equivalents at beginning of period 3,929,000 2,007,000
-------------------------------
Cash and cash equivalents at end of period $ 64,184,000 $ 7,018,000
===============================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 4,000 $ 5,000
===============================
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The accompanying consolidated financial statements of ISS Group, Inc.
("ISS" or "Company") should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1997.
Significant accounting policies disclosed therein have not changed.
The accompanying consolidated financial statements are unaudited;
however, in the opinion of management, they include all normal
recurring adjustments necessary for a fair presentation of the
consolidated financial position of the Company at March 31, 1998 and
the consolidated results of its operations and cash flows for the three
months ended March 31, 1998 and 1997. Results of operation reported for
interim periods are not necessarily indicative of results for the
entire year.
The consolidated balance sheet at December 31, 1997 has been derived
from the audited financial statements at that date but does not include
all the footnotes required by generally accepted accounting principles
for complete financial statements.
The Company's business is focused on maintaining the latest security
threat and vulnerability checks within existing products and creating
new products and services that are consistent with the Company's goal
of providing an adaptive security management approach to network
security. This approach entails continuous security risk monitoring and
response to develop an active and informed network security policy.
2. Initial Public Offering
On March 23, 1998, ISS completed an initial public offering of its
Common Stock ("the IPO"). The Company's shares are sold on the National
Market of the Nasdaq Stock Market under the ticker symbol ISSX. A total
of 3,450,000 shares were issued including 3,070,000 newly issued shares
by the Company and 380,000 outstanding shares sold by existing
stockholders. The Company did not receive any of the proceeds from the
sale of stock by the selling stockholders. The shares were sold to the
underwriting group in the IPO at a price of $22.00 per share which,
after underwriters' discount of $4,728,000 and offering expenses of
$1,265,000, resulted in net proceeds to ISS of $61,547,000. The
proceeds of the initial public offering, along with other available
cash, were invested at March 31, 1998 in an overnight money market
account.
Under the conversion feature of the Company's Redeemable, Convertible
Preferred Stock, all of the outstanding shares of preferred stock were
automatically converted into an aggregate 5,737,000 shares of Common
Stock upon the closing of the IPO.
Additionally, the Company's repurchase rights with respect to 4,586,000
shares that were originally issued to the Company's founder in 1994 in
exchange for the assignment of technology previously developed and
distributed by the founder as shareware expired as a result of the IPO.
3. Stock Option Plans
During the fourth quarter of 1997 and the first quarter of 1998, the
Company recorded deferred compensation related to stock option grants
that were made in December 1997 and in January and February 1998. The
amount was determined by comparing the exercise price
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<PAGE> 7
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the stock options to the fair value of the Common Stock on the dates
of grant. The fair value for December grants was established based on
the estimated price range for the IPO as set forth in the Company's
Registration Statement on Form S-1 that was filed with the Securities
and Exchange Commission on January 20, 1998. The fair value for January
and February 1998 grants was determined to be $20 based on the final
estimated pricing range contained in the Company's March 1998
pre-effective amendment to its Registration Statement for the IPO.
No deferred compensation was recorded for options granted in March 1998
covering 474,000 shares at an exercise price of $20 to $22 per share.
The Company believes that these exercise prices were equal to fair
value because these prices are within the final estimated pricing range
contained in the Company's pre-effective March 1998 amendment to its
Registration Statement for the IPO.
Deferred compensation of $811,000 in the first quarter of 1998 and
$571,000 in the fourth quarter of 1997 has been reflected as a
reduction of stockholders' equity in the accompanying consolidated
balance sheets. The amounts are being amortized over the four year
vesting period of the related stock options and the quarter ended March
31, 1998 included $65,000 of compensation expense related to such
amortization.
4. Loss per share
Basic and diluted historical net loss per share was computed by
dividing net loss plus accretion of the Series A and Series B
Redeemable, Convertible Preferred Stock by the weighted average number
of shares of Common Stock. Common Stock equivalents were antidilutive
and therefore were not included in the computation of weighted average
shares used in computing diluted loss per share.
Pro forma loss per share was computed by dividing net loss by the
weighted average number of shares of Common Stock outstanding plus the
conversion of the Redeemable Convertible Preferred Stock into 5,737,000
shares of Common Stock as of the later of (i) the beginning of each
period reported or (ii) the date of issuance of such preferred stock,
instead of when such shares of preferred stock automatically converted
into Common Stock on March 27, 1998.
The following table sets forth the computation of basic, diluted and
unaudited pro forma net loss per share for the three months ended March
31:
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<PAGE> 8
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Numerator:
Net loss $ (1,639,000) $ (395,000)
Accretion of Series A and Series B Redeemable
Convertible Preferred Stock - (2,000)
------------------ -------------------
$ (1,639,000) $ (397,000)
Denominator:
Denominator for basic and diluted net loss per
Share - weighted average shares 8,741,000 7,902,000
Redeemable, Convertible Preferred Stock 5,227,000 4,693,000
------------------ -------------------
Weighted average shares for pro forma net
loss per share 13,968,000 12,595,000
Basic net loss per share $ (0.19) $ (0.05)
Diluted net loss per share $ (0.19) $ (0.05)
Pro forma net loss per share $ (0.12) $ (0.03)
</TABLE>
5. Commitments
In the first quarter of 1998, ISS entered into a noncancellable operating
lease for new headquarters and research and development facilities in
Atlanta, Georgia. The lease expires in June 2002 and provides for minimum
annual lease payments of approximately $842,000.
-8-
<PAGE> 9
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the historical financial information
contained herein, the matters discussed in this Quarterly Report on Form 10-Q
may be considered "forward-looking" statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include declarations regarding
the intent, belief or current expectations of the Company and its management.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are the risk factors included under Exhibit 99 at the end of this
Quarterly Report on Form 10-Q, as well as the risk factors identified in the
Company's Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission ("the Commission") and available at the Commission's Web
site at www.sec.gov.
OVERVIEW
Internet Security Systems is the leading provider of network security
monitoring, detection and response software that protects the security and
integrity of enterprise information systems, according to market share reports
by The Aberdeen Group and The Gartner Group issued in 1998. The Company's
products rely on an innovative Adaptive Security Management ("ASM") approach to
network security which entails continuous security risk monitoring and responses
to develop an active and informed network security policy.
The Company continues to generate a substantial portion of its revenues from the
license and related maintenance of its SAFEsuite products. The Company has also
derived a small portion of its revenues from responses to customer requests for
training and implementation services, typically billed on a time and materials
basis, to assist in the successful deployment of its products within customer
networks, development of customers' security policies and assessment of security
policy decisions. The Company believes that each of its current products and
products in development, together with professional services, will represent
important revenue sources in the future.
The market for the Company's products has recently emerged and studies indicate
that substantial growth may occur in this market. The ability of the Company to
sustain a leading position in its market is critical to its long-term success.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stage of
development, particularly companies in new and rapidly evolving markets. There
can be no assurance that the Company will be successful in addressing such risks
or difficulties or that ISS will achieve profitability in the future. See the
risk factors included as Exhibit 99 to this Quarterly Report on Form 10-Q
RESULTS OF OPERATIONS
The following table sets forth certain consolidated historical operating
information for the Company, as a percentage of total revenues, for the three
months ended March 31.
-9-
<PAGE> 10
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Licenses 80.3% 84.1%
Support services 19.7% 15.9%
--------------- -----------------
Total revenues 100.0% 100.0%
--------------- -----------------
Costs of revenues 8.5% 3.9%
Research and development 26.9% 22.2%
Sales and marketing 76.5% 78.8%
General and administrative 16.2% 14.4%
--------------- -----------------
Total costs and expenses 128.1% 119.3%
--------------- -----------------
Operating loss (28.1)% (19.3)%
Interest income, net 1.1% 1.6%
=============== =================
Net loss (27.0)% (17.7)%
=============== =================
</TABLE>
References to 1998 and 1997 in the following discussion, unless otherwise
indicated, refer to the three month periods ended March 31, 1998 and 1997.
REVENUES
The Company's revenues increased 173% from $2,225,000 in 1997 to $6,073,000 in
1998. During these periods, perpetual license revenues were the primary source
of revenue generation, but decreased from 84% of total revenues in 1997 to 80%
in 1998. The 1998 license revenues include a large sale of over $1 million to a
customer in the government market. Internet Scanner continued to be the majority
source of license revenues, but decreased from 93% of license revenues in 1997
to 76% in 1998 due to the growth of the Company's more recent product offerings,
System Security Scanner and RealSecure.
Support services, consisting of maintenance, annual contracts for product usage
and support and professional services, accounted for the remaining 20% and 16%
of total revenues in 1998 and 1997, respectively. Maintenance is the majority
component of this category, but all three components increased as a percentage
of revenues from 1997 to 1998.
Geographically, the majority of the Company's revenues were from sales to
customers within North America; however, international operations continued to
be a significant contributor to revenues as revenues from customers outside of
North America increased from 12% of revenues in 1997 to 19% in 1998.
COSTS AND EXPENSES
Costs of revenues include packaging and distribution costs for the Company's
software products which, since the Company uses the Internet to provide product
updates and keys necessary to activate a customer's software, is a minor cost.
The category also includes the costs related to the Company's professional
services offerings, which were provided by a dedicated employee group. During
1998, expenses included the recruitment and compensation of a professional
services management team, including a Vice President of Services, Director of
Operations and Director of Training. As a result of this increase in management
and other personnel in anticipation of
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<PAGE> 11
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
significant expansion in the Company's professional services operations, gross
margin decreased from 96% in 1997 to 92% in 1998.
Research and development expenses consist of salary and related costs of
research and development personnel, including costs for employee benefits,
depreciation on computer equipment and support services used in product and
technology development. This includes the "X-Force", a team composed of security
experts dedicated to understanding, documenting and coding new vulnerability
checks, real-time threats and attack signatures and developing solutions to
address global security issues. ISS continued to increase these expenditures as
it perceives primary research and product development as essential ingredients
for retaining its leadership position in its market. Accordingly, research and
development expenses increased from $493,000, or 22% of revenues, in 1997 to
$1,636,000, or 27% of revenues, in 1998. This increase included the hiring of
additional personnel in Atlanta and the establishment of a development team in
Mountain View, California in 1998.
Sales and marketing expenses consist primarily of salaries, travel expenses,
commissions, advertising, maintenance of the ISS Web site, trade show expenses,
personnel recruiting costs and costs of marketing materials. Sales and marketing
expenses increased from $1,754,000 in 1997, or 79% of revenues, to $4,648,000 in
1998, or 77% of revenues. Personnel head counts increased both domestically and
internationally, including both the Europe and Asia/Pacific regions. The Company
hired sales and marketing personnel throughout 1997 in all three theatres of
operation and accelerated its hiring pace in 1998.
General and administrative expenses increased to $981,000 in 1998 from $320,000
in 1997. Such expenses included salaries and other personnel-related costs for
the Company's executive, administrative, finance and human resources personnel,
support services and professional services fees. The Company has begun
implementing upgrades to its internal financial reporting systems and expects to
continue these efforts to enhance management's ability to obtain and analyze
information about its domestic and international operations. In addition, ISS
incurred approximately $150,000 of expense in 1998 in connection with the
Company's relocation of its headquarters and research and development facilities
to a new Atlanta location.
No provision for federal, state or foreign income taxes has been recorded
because the Company had a net loss for the 1997 and 1998 periods. The Company
has not recognized any benefit from the future use of loss carryforwards for
these period or other periods since inception because management's evaluation of
all the available evidence in assessing the realizability of the tax benefits of
such loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize such benefits currently.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operations in the first quarter of 1998 of $926,000 was the
result of the net loss of ISS in the period, partially offset by a decrease in
working capital. Although there was a growth in accounts receivable of
$1,375,000 in 1998 commensurate with the growth of the Company's business, this
was more than offset by an increase of $1,870,000 in the deferred revenue
liability account balance. The increase in deferred revenue was due to growth in
annual maintenance contracts, the upfront billing of multi-year maintenance
arrangements with certain customers, growth in term licenses and the deferral of
revenue for certain perpetual licenses billed in 1998.
-11-
<PAGE> 12
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cash provided by financing activities of $61,686,000 was primarily the result of
the initial public offering of the Company's Common Stock that was consummated
in March 1998. These proceeds have been invested in overnight investments at
March 31, 1998. The Company anticipates diversifying these investments during
the second quarter of 1998 into several short-term, interest bearing instruments
with various debtors carrying investment grade commercial paper or debt ratings.
Additionally, upon consummation of the initial public offering, all shares of
the Company's Convertible, Redeemable Preferred Stock automatically converted
into shares of ISS Common Stock, removing the possibility of any redemption
requirements in the future.
As of March 31, 1998, the Company had $64,184,000 of cash and cash equivalents.
The Company believes that these investments will be sufficient to fund its
anticipated operating losses and to meet its working capital needs and capital
expenditures for the foreseeable future. Although the Company has not identified
any specific businesses, products or technologies that it may acquire, nor are
there any current agreements or negotiations with respect to any such
transactions, the Company from time to time evaluates such opportunities, In the
event ISS determines to pursue such opportunities, it may use its available cash
and cash equivalents. Pending such uses, cash will continue to be invested in
short-term, investment grade, interest-bearing investments.
-12-
<PAGE> 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) Changes in Securities.
Under the terms of the Company's Certificate of Incorporation, all of
the outstanding preferred stock of the Company was automatically
converted, on a one-for-one basis, into shares of Common Stock upon the
closing of the initial public offering on March 27, 1998.
(d) Use of Proceeds.
(1) On March 23, 1998 the Company's Registration Statement on Form
S-1, SEC Registration No. 333-44529 (the "IPO Registration
Statement"), was declared effective by oral order of the SEC.
(2) The offering pursuant to the IPO Registration Statement was
commenced on March 24, 1998.
(3) (i) The offer terminated after the sale of all securities
to be registered under the IPO Registration Statement.
(ii) The managing underwriters of the offering were
Goldman, Sachs & Co., BancAmerica Robertson Stephens,
UBS Securities LLC and Wessels, Arnold & Henderson,
L.L.C.
(iii) The Company's Common Stock was sold in the offering
pursuant to the IPO Registration Statement.
(iv) The number of shares of Common Stock registered, the
aggregate price of the offering amount registered,
the amount sold and the aggregate offering price of
the amount sold to date relating to the IPO
Registration Statement are indicated in the table
below:
<TABLE>
<CAPTION>
Shares Aggregate Amount Aggregate Price
Offeror Registered Price Sold of Shares Sold
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Company 3,070,000 $67,540,000 3,070,000 $67,540,000
H. Keith Cooley 20,000 $ 440,000 20,000 $ 440,000
Christopher W. Klaus 125,000 $ 2,750,000 125,000 $ 2,750,000
Glenn M. McGonnigle 15,000 $ 330,000 15,000 $ 330,000
Thomas E. Noonan 150,000 $ 3,300,000 150,000 3,300,000
Kevin J. O'Connor 70,000 $ 1,540,000 70,000 $ 1,540,000
</TABLE>
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<PAGE> 14
(v) From March 23, 1998 through March 31, 1998, the
Company incurred the following expenses in connection
with the issuance and distribution of the securities
registered pursuant to the IPO Registration
Statement, none of which constituted direct or
indirect payments to directors, officers or general
partners of the Company (other expenses represent a
reasonable estimate of actual costs incurred):
<TABLE>
<S> <C>
Underwriting discounts and commissions $4,727,800
Finders fees 0
Expenses paid to or for Underwriters 0
Other expenses 1,265,000
----------
TOTAL EXPENSES $5,992,800
</TABLE>
<TABLE>
<S> <C> <C>
(vi) The net proceeds to the Company of the offering
pursuant to the IPO Registration Statement, after
deducting the expenses listed in (v) above are
$61,547,200.
(vii) From March 23, 1998 through March 31, 1998, the
Company has applied the following amounts of its net
proceeds from the offering pursuant to the IPO
Registration Statement, none of which constituted
direct or indirect payments to the Company's
affiliates, 10% stockholders, directors, officers or
general partners or their associates, direct or
indirect payments to others:
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment $ 0
Purchases of real estate $ 0
Acquisitions of other business(es) $ 0
Repayment of indebtedness $ 0
Working capital $ 0
Temporary investments (specified below) $61,547,200
Other uses of at least $100,000 (specified below) $ 0
</TABLE>
Temporary investments consist of money market accounts available on a daily
basis.
-14-
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its Annual Meeting of Stockholders on March 31, 1998. Two
matters were voted upon and approved at the meeting.
Proposal 1 Election of Directors
- ---------------- -------------------------------------------
The reelection of the directors, Thomas E. Noonan, Christopher W. Klaus, Richard
S. Bodman, Robert E. Davoli, Kevin J. O'Connor and David N. Strohm, was voted on
at the annual meeting.
The results of the voting were as follows:
FOR AGAINST OR ABSTAIN
13,369,278 0
Proposal 2 Election of Directors
- ----------------- -------------------------------------------
Ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for 1998.
The results of the voting were as follows:
FOR AGAINST OR ABSTAIN
13,369,278 0
-15-
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C>
3.1* Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Common Stock Certificate
4.2* See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws defining the rights of holders of
Common Stock
10.1* Restated 1995 Stock Incentive Plan
10.2* Directed Shares Agreement
10.3* Internet Security Systems, Inc. Amended and Restated Rights
Agreement
10.4* Stock Exchange Agreement
10.5* Amended and Restated Agreement Regarding Acceleration of
Vesting of Future Optionees
10.6* Forms of Non-Employee Director Compensation Agreement, Notice
of Stock Options Grant and Stock Option Agreement
10.7* Sublease for Atlanta facilities
10.8* Form of Indemnification Agreement for directors and certain
officers
10.9* Series B Preferred Stock Purchase Agreement
10.10* Amended and Restated Right of First Refusal and Co-Sale
Agreement
27.1 Financial Data Schedule (for SEC used only)
99 Private Securities Litigation reform Act of 1995 Safe-Harbor
Compliance Statement for Forward-Looking Statements
</TABLE>
- ----------------------
* Exhibit previously filed with the SEC as an exhibit to the Company's
IPO Registration Statement, and incorporated herein by this reference.
The number of the exhibit above corresponds to the number of the
exhibit in the IPO Registration Statement.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
this reporting period.
-16-
<PAGE> 17
ISS GROUP, INC.
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 thereunto duly authorized.
ISS GROUP, INC.
----------------
(Registrant)
Date: May 15, 1998 By /s/ Richard Macchia
-------------------- -------------------
Chief Financial Officer and
Principal Financial and Accounting Officer
-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ISS GROUP, INC. AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 64,184,000
<SECURITIES> 0
<RECEIVABLES> 5,705,000
<ALLOWANCES> 292,000
<INVENTORY> 0
<CURRENT-ASSETS> 70,241,000
<PP&E> 2,468,000
<DEPRECIATION> 572,000
<TOTAL-ASSETS> 72,295,000
<CURRENT-LIABILITIES> 8,282,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 63,932,000
<TOTAL-LIABILITY-AND-EQUITY> 72,295,000
<SALES> 0
<TOTAL-REVENUES> 6,073,000
<CGS> 0
<TOTAL-COSTS> 7,778,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> (1,639,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,639,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,639,000)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
<PAGE> 1
EXHIBIT 99
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), Congress encouraged public companies to make "forward-looking statements"
by creating a safe-harbor to protect companies from securities law liability in
connection with forward-looking statements. ISS Group, Inc. ("ISS") intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act.
In addition to the other information in this Quarterly Report on Form 10-Q,
stockholders should carefully consider the following factors in evaluating the
Company and its business, as well as the Risk Factors set forth in the Company's
Registration Statement on Form S-1 as filed with the Securities and Exchange
Commission on March 23, 1998.
To qualify oral forward-looking statements for protection under the Reform Act,
a readily available written document must identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements. ISS provides the following information in connection with its
continuing effort to qualify forward-looking statements for the safe harbor
protection of the Reform Act.
SIGNIFICANT POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future revenues and operating results are uncertain and
are expected to fluctuate from quarter to quarter and from year to year due to a
combination of factors, including the level of demand for the Company's
products, the volume and timing of orders, the level of product and price
competition, the Company's ability to expand its domestic and international
sales and marketing organizations, the Company's ability to develop new and
enhanced products and control costs, the Company's ability to attract and retain
key technical, sales and managerial personnel, the mix of distribution channels
through which the Company's products are sold, the growth in the acceptance of,
and activity on, the Internet and World Wide Web ("Web"), particularly by
corporate, institutional and government users, the growth of private Internet
protocol ("IP") networks (or "intranets"), the extent to which unauthorized
access and use of online information is perceived as a threat to network
security, customer budgets, seasonal trends in customer purchasing, foreign
currency exchange rates and general economic factors. As the Company
increasingly focuses on sales of the Company's product suite rather than
individual products, the Company expects that the sales cycle associated with
the purchase of the Company's products will lengthen. In addition, the amount of
revenues associated with particular licenses can vary significantly based upon
the number of products that are licensed and the number of devices involved in
the installation. The Company has experienced, and may continue to experience
from time to time, large individual license sales which can cause significant
variations in quarterly license revenues. Moreover, small delays in customer
orders can cause significant variability in the Company's license revenues and
results of operations for any particular period. As a result, the timing of
significant orders is unpredictable and, like many software companies, the
Company typically realizes a significant portion of its software license
revenues in the last month of a quarter. The Company establishes its expenditure
levels for product development, sales and marketing and other operating expenses
based, in large part, on its expected future revenues. As a result, if revenues
fall below expectations, operating results and net income are likely to be
adversely and disproportionately affected because only a small portion of the
Company's expenses vary with its revenues.
<PAGE> 2
LIMITED OPERATING HISTORY
The Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based and is subject to all
of the risks inherent in the establishment of a new business enterprise. The
Company has never achieved profitability, nor does the Company expect to achieve
profitability in the foreseeable future.
COMPETITION
The market for security monitoring, detection and response products and
services is intensely competitive and the Company expects competition to
increase further in the future. There can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other competitive resources.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological advances, including by those seeking to establish more secure
systems and those seeking to compromise such systems, evolving industry
standards in computer hardware and software technology, changes in customer
requirements and frequent new product introductions and enhancements. As a
result, the Company must continually change and improve its products in response
to changes in operating systems, application and networking software, computer
and communications hardware, programming tools and computer language technology.
RISKS ASSOCIATED WITH THE EMERGING MARKET FOR SECURITY PRODUCTS
The market for the Company's products is rapidly evolving. There can be
no assurance that Internet protocols will continue to be used to facilitate
communications or that the market for security monitoring, detection and
response systems in general will continue to expand. If the market for products
to monitor Internet and intranet security fails to grow or grows more slowly
than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially and adversely affected.
OTHER RISK FACTORS
In addition to the above-referenced items, the Company's business,
financial condition and results of operations may be affected by (i) risks
associated with its international operations, (ii) the Company's reliance on
indirect distribution channels, (iii) current product concentration, (iv) the
Company's dependence on key personnel, (v) management of growth, (vi) the
Company's inability to provide complete protection with respect to its
proprietary intellectual property, (vii) potential product liability or product
defects, (viii) the risk of targeted attacks against the Company and (ix)
government regulation of the Company's products. For a more complete description
of these risks, stockholders and others are encouraged to review the section
captioned "Risk Factors" in the Company's Registration Statement on Form S-1 as
filed with the Securities and Exchange Commission on March 23, 1998.
