<PAGE> 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.)
<PAGE> 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
<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.
ISS GROUP, INC.
Dated: December 16, 1998 By: /S/ Richard Macchia
-----------------------------
Richard Macchia
Vice President and
Chief Financial Officer
3
<PAGE> 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.
<PAGE> 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
<PAGE> 1
EXHIBIT 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
<PAGE> 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
<PAGE> 3
MARCH INFORMATION SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1997 1998 1998
--------------------------------------------
<S> <C> <C> <C>
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
========================================
</TABLE>
<PAGE> 4
MARCH INFORMATION SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six months ended
March 31, September 30,
1997 1998 1997 1998
------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
======================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 5
MARCH INFORMATION SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Retained translation
Stock Earnings adjustment Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 6
MARCH INFORMATION SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six months ended
March September 30,
1997 1998 1997 1998
------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
===================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended March 31
1997 1998
<S> <C> <C>
Book over tax depreciation $11,468 $10,945
Other 788 1,759
=====================
Total deferred tax asset $12,256 $12,704
=====================
</TABLE>
11
<PAGE> 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:
<TABLE>
<CAPTION>
Year ended March 31
1997 1998
<S> <C> <C>
Current $21,418 $ (20,811)
Deferred 5,259 118
=====================
$26,677 $ (20,693)
=====================
</TABLE>
A reconciliation of the statutory income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended March 31
1997 1998
<S> <C> <C>
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%
=====================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended Six months ended
March 31, September 30,
1997 1998 1997 1998
--------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
========================================================
</TABLE>
12
<PAGE> 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
<PAGE> 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.
<PAGE> 2
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
MARCH
INFORMATION PRO FORMA ISS GROUP,
ISS GROUP, SYSTEMS ACQUISITION INC.
INC. LIMITED ADJUSTMENTS PRO FORMA
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
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
============ ======== ============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
<PAGE> 3
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
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
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
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
============ =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
<PAGE> 4
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months ended September 30, 1998
<TABLE>
<CAPTION>
MARCH
INFORMATION PRO FORMA
SYSTEMS ACQUISITION ISS GROUP
ISS GROUP LIMITED ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
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
============ ========= ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
<PAGE> 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:
<TABLE>
<S> <C>
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
</TABLE>
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:
<TABLE>
<S> <C>
Professional work force 6 years
Core technology software 8 years
Developed software 5 years
Goodwill 10 years
</TABLE>
<PAGE> 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.
