<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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23655
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ISS GROUP, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 58-2362189
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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6600 PEACHTREE-DUNWOODY ROAD, 300 EMBASSY ROW, SUITE 500, ATLANTA, GEORGIA 30328
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(Address of principal executive offices)
Registrant's telephone number, including area code (678) 443-6000
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NOT APPLICABLE
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(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>
<S> <C>
Number of Shares Outstanding
Title of each class as of May 5, 2000
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Common Stock, $0.001 par value 41,866,845
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<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
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Item 1 Consolidated Financial Statements:
Consolidated Statements of Operations for the Three Months
ended March 31, 2000 and March 31, 1999.............................................3
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999...................................................................4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2000 and March 31, 1999......................................5
Notes to Consolidated Financial Statements..........................................6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 8
Item 3 Quantitative and Qualitative Disclosures
About Market Risk..................................................................13
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds..........................................14
Item 6 Exhibits and Reports on Form 8-K...................................................14
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ISS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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2000 1999
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<S> <C> <C>
Revenues:
Product licenses and sales $ 24,778 $14,458
Subscriptions 8,089 4,883
Professional services 6,424 3,634
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39,291 22,975
Costs and expenses:
Cost of revenues:
Product 5,255 2,697
Subscription and service 6,733 3,821
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Total cost of revenues 11,988 6,518
Research and development 6,802 4,062
Sales and marketing 14,284 9,437
General and administrative 2,884 2,311
Amortization 248 251
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36,206 22,579
Operating income 3,085 396
Interest income, net 1,868 861
Exchange loss (126) --
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Income before income taxes 4,827 1,257
Provision for income taxes 1,757 81
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Net income $ 3,070 $ 1,176
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Basic net income per share of Common Stock $ 0.07 $ 0.03
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Diluted net income per share of Common Stock $ 0.07 $ 0.03
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Weighted average number of shares:
Basic 41,398 38,137
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Diluted 44,843 41,850
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ISS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
3/31/00 12/31/99
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(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,463 $ 70,090
Marketable securities 44,434 56,693
Accounts receivable, less allowance for doubtful accounts
of $869 and $848, respectively 31,163 26,934
Inventory 707 473
Prepaid expenses and other current assets 2,833 2,122
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Total current assets 163,600 156,312
Property and equipment:
Computer equipment 12,796 10,108
Office furniture and equipment 5,373 5,232
Leasehold improvements 1,124 870
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19,293 16,210
Less accumulated depreciation 8,549 7,277
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10,744 8,933
Restricted marketable securities 12,500 12,500
Goodwill, less accumulated amortization of $476 and $396, respectively 2,695 2,775
Other intangibles, less accumulated amortization of $995 and $827, respectively 3,850 4,019
Other assets 349 306
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Total assets $ 193,738 $ 184,845
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,197 $ 5,144
Accrued expenses 7,159 6,298
Deferred revenues 19,661 17,155
Current portion of long-term debt and capital leases obligations 423 580
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Total current liabilities 31,440 29,177
Long-term debt, including capital lease obligations 181 435
Non-current liabilities 76 80
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 20,000,000 shares authorized, none issued
or outstanding -- --
Common stock, $.001 par value, 120,000,000 shares authorized,
41,782,000 and 40,625,000 issued and outstanding,
Respectively 42 41
Additional paid-in capital 161,269 157,467
Deferred compensation (238) (288)
Cumulative adjustment for currency revaluation 65 100
Retained earnings (accumulated deficit) 903 (2,167)
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Total stockholders' equity 162,041 155,153
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Total liabilities and stockholders' equity $ 193,738 $ 184,845
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</TABLE>
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ISS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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2000 1999
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OPERATING ACTIVITIES
Net income 3,070 1,176
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 1,272 747
Amortization of goodwill and intangibles 248 251
Accretion of discount on marketable securities (250) --
Other non-cash items 46 84
Income tax benefit from exercise of stock options 1,166 --
Changes in assets and liabilities:
Accounts receivable (4,229) (2,165)
Inventory (234) (46)
Prepaid expenses and other assets (754) (258)
Accounts payable and accrued expenses (86) (154)
Deferred revenues 2,506 5,136
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,755 4,771
INVESTING ACTIVITIES
Net proceeds from maturity of marketable securities 45,926 --
Purchases of marketable securities (33,417) --
Purchases of property and equipment (3,082) (1,499)
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NET CASH USED IN INVESTING ACTIVITIES 9,427 (1,499)
FINANCING ACTIVITIES
Payments on long term debt and capital leases (411) (126)
Proceeds from exercise of stock options 1,982 1,433
Issuance of common stock 655 --
Net proceeds from public offering -- 77,397
Capital transactions of merged entity -- (315)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,226 78,389
Foreign currency impact on cash (35) (62)
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Net increase in cash and cash equivalents 14,373 81,599
Cash and cash equivalents at beginning of period 70,090 52,922
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Cash and cash equivalents at end of period 84,463 134,521
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Supplemental cash flow disclosure:
Interest paid 33 --
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Capital lease obligations incurred during the period -- 102
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Taxes paid -- --
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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, 1999.
ISS' goal is to provide an adaptive security management solution to network
security. This approach entails continuous security risk monitoring and response
to develop an active and informed network security policy. Our business includes
maintaining the latest security threat and vulnerability checks within existing
products and creating new products and services that are consistent with this
approach.
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, 2000 and the consolidated results of its operations and
cash flows for the three months ended March 31, 2000 and 1999. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
The consolidated balance sheet at December 31, 1999 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.
Revenue Recognition
ISS recognizes its perpetual 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. For perpetual license agreements when payment
terms extend over periods greater than twelve months, revenue is recognized as
such amounts are billable. Product sales consist of software developed by third
party-partners, combined in some instances with associated hardware appliances
and partner maintenance services. These sales are recognized upon shipment to
the customer.
Subscriptions revenues include maintenance, term licenses and managed services.
Annual renewable maintenance is a separate component of perpetual license
agreements for which the revenue is recognized ratably over the maintenance
contract term. Term licenses allow customer use of the product and maintenance
for a specified period, generally twelve months, for which revenues are also
recognized ratably over the contract term. Managed services consist of security
monitoring services of information assets and systems and are recognized as such
services are provided. Professional services revenues, including training, are
recognized as such services are performed.
Cost of Revenues
Costs of revenues include the costs of products and services. Cost of products
represents the cost of product sales which are incurred upon recognition of the
associated product revenues. Cost of services includes the cost of ISS's
technical support group who provide assistance to
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<PAGE> 7
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
customers with maintenance agreements, the operations center costs of providing
managed services and the costs related to ISS's professional services and
training.
2. Income taxes
The tax provision for the quarter ended March 31, 1999 relates primarily to our
European operations. In 1999, we utilized net operating loss carryforwards to
offset tax expense that would otherwise be recorded on profits from domestic
operations for 1999. As of December 31, 1999 substantially all net operating
loss carryforwards that would reduce future income tax expense related to United
States operations had been utilized. While income tax expense was recorded on
domestic income for the quarter ended March 31, 2000, taxes payable was reduced
by deductions related to the exercise of stock options. The tax benefit for the
use of stock option deductions was recorded as additional paid-in-capital.
3. Comprehensive Income
Comprehensive income for the quarter ended March 31, 2000 aggregated $3,035,000.
The effects of foreign exchange gains and losses arising from translations of
assets and liabilities of foreign operations into U.S. dollars at March 31, 2000
are included as a component of comprehensive income. Such amounts were $35,000
in the quarter ended March 31, 2000.
4. Income per share
Basic net income per share was computed by dividing net income by the
weighted average number of shares of Common Stock outstanding. Diluted net
income per share was computed by dividing net income by the weighted average
shares outstanding, including Common Stock equivalents if dilutive. For the
quarters ended March 31, 2000 and 1999 weighted average shares included
3,445,000 and 3,713,000 shares, respectively, to reflect the dilutive impact
of stock options.
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ITEM 2. 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,
the matters discussed in this Quarterly Report on Form 10-Q may be considered
"forward-looking" statements. Such statements include declarations regarding our
intent, belief or current expectations. Such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results may 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
Annual Report on Form 10-K for the year ended December 31, 1999 as filed with
the Securities and Exchange Commission and available at their Web site at
www.sec.gov.
OVERVIEW
We are a leading source for e-business security management solutions. Our
Adaptive Security Management approach to information security protects
distributed computing environments, such as internal corporate networks,
inter-company networks and electronic commerce environments, from attacks,
misuse and security policy violations, while ensuring the confidentiality,
privacy, integrity and availability of proprietary information. We deliver an
end-to-end security management solution through our SAFEsuite security
management platform coupled with around-the-clock remote security monitoring
through our managed services offerings. Our SAFEsuite family of products is a
critical element of an active Internet and networking security program within
today's world of global connectivity, enabling organizations to proactively
monitor, detect and respond to risks to enterprise information. Our managed
security services offerings currently provide remote management of the
industry's best-of-breed security technology including firewalls, virtual
private networks, or VPNs, anti-virus, URL filtering software and security
assessment and intrusion detection systems. We focus on serving as the trusted
security provider to our customers by maintaining within our existing products
the latest counter-measures to security risks, creating new innovative products
based on our customers' needs and providing education, consulting and managed
services.
We generate a majority of our revenues from our SAFEsuite family of products in
the form of perpetual licenses and subscriptions, and sales of best-of-breed
technology products developed by our partners. We recognize perpetual license
revenues from ISS developed products upon delivery of software or, if the
customer has evaluation software, delivery of the software key and issuance of
the related license, assuming that no significant vendor obligations or customer
acceptance rights exist. When payment terms are extended over periods greater
than 12 months, revenue is recognized as such amounts are billable. Product
sales, consisting of software developed by third-party partners combined in some
instances with associated hardware appliances and partner maintenance services,
are recognized upon shipment to the customer. If maintenance is subcontracted,
as with partner maintenance services, the revenue less the related subcontract
expense is recognized when the contract is placed in service.
Annual renewable maintenance is a separate component of each perpetual license
agreement for ISS products with revenue recognized ratably over the maintenance
term. Subscription revenues include maintenance, term licenses, and managed
service arrangements. Term licenses allow customers to use our products and
receive maintenance coverage for a specified period, generally 12 months. We
recognize revenues from these term agreements ratably over the subscription
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ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
term. Managed services consist of monitoring services of information assets and
systems and are recognized as such services as provided. Professional services
revenues include consulting services and training. Consulting services,
typically billed on a time-and-materials basis, assist in, the development of
customers' security policies, the assessment of security policy decisions and
the successful deployment of our products within customer networks. We recognize
such professional services revenues as the related services are rendered.
We believe that our total solutions approach will grow all of our revenue
categories. This includes our products and managed services offerings, as well
as maintenance and professional services and training. While we expect the
expansion of these product and service offerings to originate primarily from
internal development, our strategy includes acquiring products, technologies and
service capabilities that fit within our strategy and that potentially
accelerate the timing of the commercial introduction of such products and
technologies. Over the last 18 months, we have made four different acquisitions,
each of which included such products, technologies or service capabilities.
Our business has been growing rapidly. Although we continue to experience
significant revenue growth, we cannot assure our stockholders that such growth
can be sustained and, therefore, investors should not rely on our past growth as
a predictor of future performance. We expect to continue to expand our domestic
and international sales and marketing operations, increase our investment in
product development including our proprietary threat and vulnerability database
and managed services capabilities, seek acquisition candidates that will enhance
our products and market share, and improve our internal operating and financial
infrastructure in support of our strategic goals and objectives. All of these
initiatives will increase operating expenses. Thus, our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies in new and rapidly evolving markets. As a result, while we achieved
profitability throughout 1999 and the first quarter of 2000, we cannot be
certain that we can sustain such profitability. See the risk factors included as
Exhibit 99 to this Quarterly Report on Form 10-Q.
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<PAGE> 10
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain consolidated historical operating
information, as a percentage of total revenues, for the three months ended March
31, 2000 and 1999:
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<CAPTION>
Three months ended
March 31,
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2000 1999
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Product and license sales 63.1% 62.9%
Subscriptions 20.6% 21.3%
Professional services 16.3% 15.8%
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Total revenues 100.0% 100.0%
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Cost of revenues 30.5% 28.4%
Research and development 17.3% 17.7%
Sales and marketing 36.4% 41.1%
General and administrative 7.3% 10.0%
Amortization 0.6% 1.1%
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Total costs and expenses 92.1% 98.3%
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Operating income 7.9% 1.7%
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</TABLE>
REVENUES
Our total revenues increased 71% to $39,291,000 for the three months ended March
31, 2000 as compared with the same period in the prior year. Product and license
sales, including perpetual licenses and sales of partner software and hardware
appliances, continued to be the primary source of revenue generation at 63% of
total revenues for both the three month periods ended March 31, 2000 and March
31, 1999.
Licenses of each category of our product offerings grew in absolute dollars when
comparing the three months ended March 31, 2000 to the comparable prior year
period. This fact reflects the continued customer confidence in each component
of our solution. As a percentage of total license revenues, there were the
following fluctuations in categories for the three months ended March 31. We do
not feel these variances are reflective of any trend.
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<CAPTION>
2000 1999
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<S> <C> <C>
Vulnerability assessment 32% 32%
RealSecure intrusion detection 38% 41%
SAFEsuite decisions 4% 4%
-- --
Total 74% 77%
</TABLE>
The balance of our sales and license revenues originated from sales of partner
software and hardware appliances that increased in absolute dollars and
represented 26% of overall product sales and licenses in the three months ended
March 31, 2000 compared with 23% in the comparable period in 1999.
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<PAGE> 11
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
We continued to add significant functionality to our SAFEsuite product family,
providing customers with more powerful and easier-to-use solutions for security
management across the enterprise. The sales of partner software and hardware
appliances are a part of our total solution approach whereby we provision
partner products to provide a single solution source for our customers.
Subscription revenues grew 66% from $4,883,000 in the three months ended March
31, 1999 to $8,089,000 in the three months ended March 31, 2000, while remaining
at 21% of total revenues. Subscription revenues consist of maintenance, term
licenses of product usage and managed services.
Professional services revenue increased 77% from $3,634,000 for the three months
ended March 31, 1999 to $6,424,000 for the three months ended March 31, 2000
representing 16% of total revenues in both periods. We continue to build our
service capabilities to address the demand from our customers for security
consulting, training and implementation services.
Geographically, we derived the majority of our revenues from sales to customers
within North America; however, international operations continued to be an
increasing component of revenues. For the three months ended March 31, 2000
revenues from customers outside of North America represented 25% of total
revenues compared to 15% of total revenues for the comparable period in 1999.
International growth occurred in all theatres, including Europe, the
Asia/Pacific region and the recently developed Brazil market.
COSTS AND EXPENSES
Cost of revenues
Cost of revenues consists of several components. Substantially all of the cost
of product licenses and sales represents payments to partners for their products
that we provision to our customers in providing a single solution source. Costs
associated with licensing ISS products are minor. Costs of product revenues as a
percentage of total revenues increased from 12% for the three months ended March
31, 1999 to 13% for the comparable period in 2000 due to the increased level of
sales of partner software and hardware appliances.
Cost of subscription and services includes the cost of our technical support
personnel who provide assistance to customers under maintenance agreements, the
operations center costs of providing managed services and the costs related to
professional services and training. These costs represented 17% of total
revenues for the three-month periods ended March 31, 1999 and 2000.
Research and development
Research and development expenses consist of salary and related costs of
research and development personnel, including costs for employee benefits, and
depreciation on computer equipment. These costs include those associated with
maintaining and expanding the "X-Force," our internal team 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. We continue to increase these expenditures, as we
perceive primary
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ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
research and product development and managed service offerings as essential
ingredients for retaining our leadership position in the market. We also
increased the number of our development personnel focused on our best-of-breed
products, enterprise applications, managed services offerings and research for
future product offerings. Accordingly, research and development expenses
increased in absolute dollars from $4,062,000 in the three months ended March
31, 1999 to $6,802,000 in the three months ended March 31, 2000. These costs
decreased slightly as a percentage of total revenues, and we expect the
percentage to stabilize in 2000 around the current 17% level.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, travel expenses,
commissions, advertising, maintenance of the our Website, trade show expenses,
costs of recruiting sales and marketing personnel and costs of marketing
materials. In the quarter ended March 31, 2000, sales and marketing expenses
were $14,284,000 or 36% of total revenues, compared to $9,437,000 or 41% of
total revenues, in the quarter ended March 31, 1999. The absolute increases have
occurred principally from our larger workforce, which has continued to increase
each and every quarter, both domestically and internationally. The decrease in
sales and marketing expenses as a percentage of total revenues is due to greater
levels of productivity achieved by our sales force. This is due to more
experience in selling our broadening enterprise offering of products and
services and the interest of the marketplace in such offerings.
General and administrative
General and administrative expenses in the quarter ended March 31, 2000
increased $573,000 to $2,884,000, but decreased to 7% of our total revenues.
General and administrative expenses consist of personnel-related costs for
executive, administrative, finance and human resources, information systems and
other support services costs, and legal, accounting and other professional
service fees. The increase in these expenses in absolute dollars is attributable
to our effort, through additional employees and systems, to enhance our
management's ability to obtain and analyze information about our domestic and
international operations, as well as the expansion of our facilities.
We recorded $248,000 of amortization expense in the three months ended March 31,
2000 related to goodwill and intangible assets resulting from 1998 acquisitions.
Interest income
Net interest income increased from $861,000 in the quarter ended March 31, 1999
to $1,868,000 in the comparable quarter of 2000, primarily due to increased
amounts of cash invested in interest-bearing securities. This increase in cash
resulted primarily from the sale of equity securities in March 1999. The
exchange loss of $126,000 in the three months ended March 31, 2000 is a result
of fluctuations in currency exchange rates between the U.S. dollar and other
currencies, primarily the Japanese Yen and the Euro.
Income taxes
We recorded provisions for income taxes of $81,000 for the quarter ended March
31, 1999 and $1,757,000 for the quarter ended March 31, 2000. The tax provision
for the quarter ended March
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<PAGE> 13
ISS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
31, 1999 relates primarily to our European operations. In 1999, we utilized net
operating loss carryforwards to offset tax expense that would otherwise be
recorded on profits from domestic operations for 1999. As of December 31, 1999
substantially all net operating loss carryforwards that would reduce future
income tax expense related to United States operations have been utilized. While
income tax expense was recorded on domestic income for the quarter ended March
31, 2000, taxes payable was reduced by deductions related to the exercise of
stock options. The tax benefit for the use of these stock option deductions was
recorded as additional paid-in-capital. As of March 31, 2000, we had a
carryforward of approximately $73 million for stock option deductions. The tax
benefit for this carryforward will be recorded as additional paid-in-capital as
realized. We also have approximately $1.2 million of net operating loss
carryforwards related to certain foreign operations and approximately $1.3
million of research and development tax credit carryforwards which expire
between 2011 and 2019.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations in the first three months of 2000 was $2,755,000
and included net income of $3,070,000 and non-cash expense charges of
$1,566,000. Billings and collections used cash as the increase in net accounts
receivable of $4,229,000 in the three months ended March 31, 2000 associated
with our growth was only partially offset by the $2,506,000 increase in deferred
revenues. The increase in deferred revenues was due to growth in both annual
maintenance contracts and term licenses.
Investing activities include the purchase and maturity of marketable securities.
These assets have quality characteristics similar to cash equivalents except
their maturities are longer than three months. Investing activities in the first
quarter of 2000 also included $3.1 million of equipment related to providing
existing and new personnel with the necessary hardware and software tools to
perform their job functions.
Cash provided by financing activities of $2,226,000 was primarily proceeds from
the exercise of stock options and proceeds from issuance of Common Stock through
the Company's Employee Stock Purchase Plan.
As of March 31, 2000, we had $128,897,000 of cash and cash equivalents and
marketable securities, consisting primarily of United States government agency
securities, money market accounts and commercial paper carrying the highest
investment grade rating. We believe that such cash and cash equivalents and
marketable securities will be sufficient to meet our working capital needs and
capital expenditures for the foreseeable future. Although we have not identified
any specific businesses, products or technologies that we intend to acquire or
invest in, and there are not any current agreements with respect to any such
transactions, from time to time we expect to evaluate such opportunities. We
expect to evaluate possible acquisition and investment opportunities in
businesses, products or technologies that are complementary to ours. In the
event we determine to pursue such opportunities, we may use our available cash
and cash equivalents. Pending such uses, we will continue to invest available
cash in investment grade, interest-bearing investments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that our exposure
to market risk associated with other financial instruments (such as marketable
securities) are not material.
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<PAGE> 14
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(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 order of the SEC.
Net proceeds to the Company from this offering were
$61,547,200. During the three months ended March 31, 2000 the
Company used none of the proceeds from the offering for
general or other corporate purposes. The remaining $52,585,400
of the proceeds remain in temporary investments consisting of
money market accounts available on a daily basis, U.S.
Government agency investments and short-term, commercial
paper.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule (for SEC use only)
99 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statements for Forward-Looking Statements
(b) Reports on Form 8-K.
ISS filed no reports on Form 8-K during this reporting period.
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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 12, 2000 By /s/ Richard Macchia
------------------ ------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<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, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 84,463
<SECURITIES> 44,434
<RECEIVABLES> 32,032
<ALLOWANCES> 869
<INVENTORY> 707
<CURRENT-ASSETS> 163,600
<PP&E> 19,293
<DEPRECIATION> 8,549
<TOTAL-ASSETS> 193,738
<CURRENT-LIABILITIES> 31,440
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 161,999
<TOTAL-LIABILITY-AND-EQUITY> 193,738
<SALES> 0
<TOTAL-REVENUES> 39,291
<CGS> 0
<TOTAL-COSTS> 36,206
<OTHER-EXPENSES> 126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,827
<INCOME-TAX> 1,757
<INCOME-CONTINUING> 3,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,070
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
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<PAGE> 1
Private Securities Litigation Reform Act of 1995 EXHIBIT 99
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. We intend to qualify both our
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 us
and our business, as well as the Risk Factors set forth in our Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on March 30,
2000.
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. We provide the following information in connection with our
continuing effort to qualify forward-looking statements for the safe harbor
protection of the Reform Act.
RISK FACTORS
Forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and are subject to known
and unknown risks and uncertainties. Our forward-looking statements should be
considered in light of the following important risk factors. Variations from our
stated intentions or failure to achieve objectives could cause actual results to
differ from those projected in our forward-looking statements. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
WE HAVE ONLY RECENTLY ACHIEVED PROFITABILITY
We began operations in 1994 and achieved profitability in 1999. We operate in a
new and rapidly evolving market and must, among other things:
- respond to competitive developments;
- continue to upgrade and expand our product and services
offerings; and
- continue to attract, retain and motivate our employees.
We cannot be certain that we will successfully address these risks. As a result,
we cannot assure our investors that we will be able to continue to operate
profitably in the future.
OUR FUTURE OPERATING RESULTS WILL LIKELY FLUCTUATE SIGNIFICANTLY
As a result of our limited operating history, we cannot predict our future
revenues and operating results. However, we do expect our future revenues and
operating results to fluctuate due to a combination of factors, including:
- the growth in the acceptance of, and activity on, the Internet
and the World Wide Web, particularly by corporate,
institutional and government users;
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- the extent to which the public perceives that unauthorized
access to and use of online information are threats to network
security;
- the volume and timing of orders, including seasonal trends in
customer purchasing;
- our ability to develop new and enhanced product and managed
service offerings and expand our professional services;
- our ability to provide scalable manage service offerings
through out partners in a cost effective manner needed to gain
marketplace usage on a long-term basis;
- foreign currency exchange rates that affect our international
operations; o product and price competition in our markets;
and o general economic conditions, both domestically and in
our foreign markets.
We increasingly focus our efforts on sales of enterprise-wide security
solutions, which consist of our entire product suite and related professional
services, rather than on the sale of component products. As a result, we expect
that each sale may require additional time and effort from our sales staff. In
addition, the revenues associated with particular sales vary significantly
depending on the number of products licensed by a customer, the number of
devices used by the customer and the customer's relative need for our
professional services. Large individual sales, or even small delays in customer
orders, can cause significant variation in our license revenues and results of
operations for a particular period. The timing of large orders is usually
difficult to predict and, like many software companies, many of our customers
typically license most of our products in the last month of a quarter.
We cannot predict our operating expenses based on our past results. Instead, we
establish our spending levels based in large part on our expected future
revenues. As a result, if our actual revenues in any future period fall below
our expectations, our operating results likely will be adversely affected
because very few of our expenses vary with our revenues. Because of the factors
listed above, we believe that our quarterly and annual revenues, expenses and
operating results likely will vary significantly in the future.
WE FACE INTENSE COMPETITION IN OUR MARKET
The market for network security monitoring, detection and response solutions is
intensely competitive, and we expect competition to increase in the future. We
cannot guarantee that we will compete successfully against our current or
potential competitors, especially those with significantly greater financial
resources or brand name recognition. Our chief competitors generally fall within
one of five categories:
- internal information technology departments of our customers
and the consulting firms that assist them in formulating
security systems;;
- relatively smaller software companies offering relatively
limited applications for network and Internet security;
- large companies, including Axent Technologies and Network
Associates, that sell competitive products and offerings, as
well as other large software companies that have the technical
capability and resources to develop competitive products; and
- software or hardware companies that could integrate features
that are similar to our products into their own products.
- Small and large companies with competitive offerings to
components of our managed security service offerings.
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<PAGE> 3
Mergers or consolidations among these competitors, or acquisitions of small
competitors by larger companies, would make such combined entities more
formidable competitors to us. Large companies may have advantages over us
because of their longer operating histories, greater name recognition, larger
customer bases or greater financial, technical and marketing resources. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. They can also devote greater resources to
the promotion and sale of their products than we can. In addition, these
companies have reduced and could continue to reduce, the price of their security
monitoring, detection and response products, which increases pricing pressures
within our market.
Several companies currently sell software products (such as encryption,
firewall, operating system security and virus detection software) that our
customers and potential customers have broadly adopted. Some of these companies
sell products that perform the same functions as some of our products. In
addition, the vendors of operating system software or networking hardware may
enhance their products to include the same kinds of functions that our products
currently provide. The widespread inclusion of comparable features to our
software in operating system software or networking hardware could render our
products obsolete, particularly if such features are of a high quality. Even if
security functions integrated into operating system software or networking
hardware are more limited than those of our software, a significant number of
customers may accept more limited functionality to avoid purchasing additional
software.
For the above reasons, we may not be able to compete successfully against our
current and future competitors. Increased competition may result in price
reductions, reduced gross margins and loss of market share.
WE FACE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY AND FREQUENT INTRODUCTIONS OF
NEW PRODUCTS
Rapid changes in technology pose significant risks to us. We do not control nor
can we influence the forces behind these changes, which include:
- the extent to which businesses and others seek to establish
more secure networks;
- the extent to which hackers and others seek to compromise
secure systems;
- evolving computer hardware and software standards;
- changing customer requirements; and
- frequent introductions of new products and product
enhancements.
To remain successful, we must continue to change, adapt and improve our products
in response to these and other changes in technology. Our future success hinges
on our ability to both continue to enhance our current line of products and
professional services and to introduce new products and services that address
and respond to innovations in computer hacking, computer technology and customer
requirements. We cannot be sure that we will successfully develop and market new
products that do this. Any failure by us to timely develop and introduce new
products, to enhance our current products or to expand our professional services
capabilities in response to these changes could adversely affect our business,
operating results and financial condition.
Our products involve very complex technology, and as a consequence, major new
products and product enhancements require a long time to develop and test before
going to market. Because this amount of time is difficult to estimate, we have
had to delay the scheduled introduction of
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<PAGE> 4
new and enhanced products in the past and may have to delay the introduction of
new products and product enhancements in the future.
The techniques computer hackers use to gain unauthorized access to, or to
sabotage, networks and intranets are constantly evolving and increasingly
sophisticated. Furthermore, because new hacking techniques are usually not
recognized until used against one or more targets, we are unable to anticipate
most new hacking techniques. To the extent that new hacking techniques harm our
customers' computer systems or businesses, affected customers may believe that
our products are ineffective, which may cause them or prospective customers to
reduce or avoid purchases of our products.
WE FACE RISKS ASSOCIATED WITH OUR GLOBAL OPERATIONS
The expansion of our international operations includes our presence in dispersed
locations throughout the world, including throughout Europe and the Asia/Pacific
and Latin America regions. Our international presence and expansion exposes us
to risks not present in our U.S. operations, such as:
- the difficulty in managing an organization spread over various
countries located across the world;
- unexpected changes in regulatory requirements in countries
where we do business;
- excess taxation due to overlapping tax structures;
- fluctuations in foreign currency exchange rates;
- export license requirements and restrictions on the export of
certain technology, especially encryption technology and trade
restrictions.
Despite these risks, we believe that we must continue to expand our operations
in international markets to support our growth. To this end, we intend to
establish additional foreign sales operations, expand our existing offices, hire
additional personnel, expand our international sales channels and customize our
products for local markets. If we fail to execute this strategy, our
international sales growth will be limited.
WE MUST SUCCESSFULLY INTEGRATE ACQUISITIONS
As part of our growth strategy, we have and may continue to acquire or make
investments in companies with products, technologies or professional services
capabilities complementary to our solutions. In acquisitions, we could encounter
difficulties in assimilating new personnel and operations into our company.
These difficulties may disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
These difficulties could also include accounting requirements, such as
amortization of goodwill or in-process research and development expense. We
cannot be certain that we will successfully overcome these risks with respect to
any or our recent or future acquisitions or that we will not encounter other
problems in connection with our recent or any future acquisitions. In addition,
any future acquisitions may require us to incur debt or issue equity securities.
The issuance of equity securities could dilute the investment of our existing
stockholders.
WE DEPEND ON OUR INTELLECTUAL PROPERTY RIGHTS AND USE LICENSED TECHNOLOGY
We rely primarily on copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We have obtained one United States
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patent and have a patent application under review. We also believe that the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, our name recognition, our professional services
capabilities and delivery of reliable product maintenance are essential to
establishing and maintaining our technology leadership position. We cannot
assure you that our competitors will not independently develop technologies that
are similar to ours.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult.
While we cannot determine the extent to which piracy of our software products
occurs, we expect software piracy to be a persistent problem. In addition, the
laws of some foreign countries do not protect our proprietary rights to as great
an extent as do the laws of the United States and many foreign countries do not
enforce these laws as diligently as U.S. government agencies and private
parties.
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