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.
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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1998
MARCH
INFORMATION PRO FORMA ISS GROUP,
ISS GROUP, SYSTEMS ACQUISITION INC.
INC. LIMITED ADJUSTMENTS PRO FORMA
------------ ----------- ------------ -------------
Current assets:
Cash and cash equivalents $ 60,558,000 $ 39,000 $ (4,750,000)(1) $ 55,847,000
Accounts receivable, net 7,334,000 522,000 7,856,000
Other current assets 677,000 76,000 753,000
------------ -------- ------------ ------------
Total current assets 68,569,000 637,000 (4,750,000) 64,456,000
Property and equipment:
Computer equipment 3,442,000 244,000 (177,000)(2) 3,509,000
Office furniture and equipment 854,000 39,000 (32,000)(2) 861,000
Leasehold improvements 249,000 243,000 (183,000)(2) 309,000
------------ -------- ------------ ------------
4,545,000 526,000 (392,000) 4,679,000
less accumulated depreciation 1,205,000 392,000 (392,000)(2) 1,205,000
------------ -------- ------------ ------------
3,340,000 134,000 3,474,000
Intangible assets, including goodwill 6,790,000 (2) 6,790,000
Other assets 117,000 13,000 130,000
------------ -------- ------------ ------------
Total assets $ 72,026,000 $784,000 $ 2,040,000 $ 74,850,000
============ ======== ============ ============
Current liabilities:
Accounts payable $ 1,569,000 $ 44,000 $ $ 1,613,000
Accrued expenses 2,668,000 195,000 265,000 (1) 3,128,000
Deferred revenues 4,904,000 111,000 5,015,000
Current portion of long term debt 21,000 21,000
------------ -------- ------------ ------------
Total current liabilities 9,141,000 371,000 265,000 9,777,000
Non-current liabilities 133,000 13,000 146,000
Stockholders' equity:
Common stock 17,000 10,000 (1) 17,000
(10,000)(2)
Additional paid-in capital 72,107,000 5,000 2,880,000 (1) 74,987,000
(5,000)(2)
Deferred compensation (842,000) (842,000)
Cumulative adjustment for
currency revaluation (36,000) 40,000 (40,000)(2) (36,000)
(Accumulated deficit) retained earnings (8,494,000) 345,000 (345,000)(2) (9,199,000)
(705,000)(2)
------------ -------- ------------ ------------
Total stockholders' equity 62,752,000 400,000 1,775,000 64,927,000
------------ -------- ------------ ------------
Total liabilities and stockholders' equity $ 72,026,000 $784,000 $ 2,040,000 $ 74,850,000
============ ======== ============ ============
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
MARCH
INFORMATION ISS GROUP
ISS GROUP SYSTEMS YEAR ENDED
YEAR ENDED LIMITED PRO FORMA DECEMBER 31,
DECEMBER 31, YEAR ENDED ACQUISITION 1997
1997 MARCH 31, 1998 ADJUSTMENTS PRO FORMA
------------ -------------- ----------- -------------
Revenues:
Licenses $ 10,936,000 $ 691,000 $ - $ 11,627,000
Subscriptions 2,462,000 131,000 2,593,000
Professional services 69,000 1,224,000 1,293,000
------------ ---------- ----------- -----------
13,467,000 2,046,000 15,513,000
Costs and expenses:
Cost of revenues 676,000 979,000 1,655,000
Research and development 3,434,000 698,000 4,132,000
Sales and marketing 11,731,000 214,000 11,945,000
Amortization 809,000 (4) 809,000
General and administrative 1,773,000 100,000 1,873,000
------------ ---------- ----------- -----------
17,614,000 1,991,000 809,000 20,414,000
------------ ---------- ----------- -----------
Operating income (loss) (4,147,000) 55,000 (809,000) (4,901,000)
Interest income (expense), net 228,000 (9,000) (243,000)(3) (24,000)
------------ ---------- ----------- -----------
Income (loss) before income taxes (3,919,000) 46,000 (1,052,000) (4,925,000)
Income taxes 21,000 21,000
------------ ---------- ----------- -----------
Net income (loss) $ (3,919,000) $ 25,000 $(1,052,000) $(4,946,000)
============ ========== =========== ===========
Basic and diluted net loss per share
of Common Stock $ (0.50) $ (0.62)
============ ===========
Weighted average number of shares
used in calculating basic and diluted
net loss per share of Common Stock 7,907,000 120,000 (1) 8,027,000
============ =========== ===========
Unaudited pro forma net loss per share
of Common Stock (see note 5) $ (0.29) $ (0.36)
============ ===========
Unaudited weighted average number of
shares used in calculating pro forma
net loss per share of Common Stock
(see note 5) 13,644,000 120,000 (1) 13,764,000
============ =========== ===========
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months ended September 30, 1998
MARCH
INFORMATION PRO FORMA
SYSTEMS ACQUISITION ISS GROUP
ISS GROUP LIMITED ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
Revenues:
Licenses $ 17,030,000 $ 1,029,000 $ - $ 18,059,000
Subscriptions 4,808,000 109,000 4,917,000
Professional services 996,000 668,000 1,664,000
------------ ----------- --------- ------------
22,834,000 1,806,000 24,640,000
-
Costs and expenses: -
Cost of revenues 2,964,000 584,000 3,548,000
Research and development 6,009,000 387,000 6,396,000
Sales and marketing 15,711,000 585,000 16,296,000
Amortization - 607,000 (4) 607,000
General and administrative 3,127,000 75,000 3,202,000
------------ ----------- --------- ------------
27,811,000 1,631,000 607,000 30,049,000
------------ ----------- --------- ------------
Operating income (loss) (4,977,000) 175,000 (607,000) (5,409,000)
Interest income (expense), net 1,672,000 (31,000) (196,000)(3) 1,445,000
------------ ----------- --------- ------------
Income (loss) before income taxes (3,305,000) 144,000 (803,000) (3,964,000)
Income taxes 67,000 67,000
------------ ----------- --------- ------------
Net income (loss) $ (3,305,000) $ 77,000 $(803,000) $ (4,031,000)
============ =========== ========= ============
Basic and diluted net loss per share
of Common Stock $ (0.23) $ (0.28)
============ ============
Weighted average number of shares
used in calculating basic and diluted
net loss per share of Common Stock 14,162,000 120,000 (1) 14,282,000
============ ========= ============
Unaudited pro forma net loss per share
of Common Stock (see note 5) $ (0.21) $ (0.25)
============ ============
Unaudited weighted average number of
shares used in calculating pro forma
net loss per share of Common Stock
(see note 5) 15,904,000 120,000 (1) 16,024,000
============ ========= ============
See accompanying notes to unaudited pro forma consolidated financial statements
for explanation of pro forma acquisition adjustments.
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ISS GROUP, INC. ACQUISITION OF MARCH INFORMATION SYSTEMS
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) Acquisition Consideration
The outstanding stock of March Information Systems Limited ("March Systems") was
acquired by ISS Group, Inc. ("ISS" or the "Company") in exchange for $4,750,000
in cash and 120,000 shares of ISS common stock. The ISS shares were valued at
the closing price of ISS common stock on October 6, 1998 of $24 per share, as
quoted on the NASDAQ National Market System. In addition, there were transaction
costs of approximately $265,000 in connection with the transaction, principally
for legal and accounting professional services and stock transfer taxes.
(2) Allocation of Purchase Price
The purchase price was allocated first to tangible net assets, then to
identified intangible assets with any remaining unallocated purchase price
attributed to goodwill. The fair value of tangible assets approximated their
historical book values at September 30, 1998. The following intangible assets
were identified:
Professional work force $ 215,000
Core technology software 3,099,000
Developed software 380,000
In process research and development software 705,000
Goodwill 3,096,000
The value assigned to in-process research and development software, in
accordance with generally accepted accounting principles, was written off at the
time of the acquisition and is reflected in the pro forma balance sheet
adjustments as a pro forma reduction of stockholders' equity. In accordance
Regulation S-X of the Securities and Exchange Commission, this write off is not
reflected as an adjustment in the pro forma consolidated statements of
operations as it represents a nonrecurring charge directly attributable to the
transaction.
(3) Interest Income
In connection with the payment of $5,015,000 in cash in conjunction with the
acquisition, including transaction costs, interest income was reduced for the
year ended December 31, 1997 and the nine months ended September 30, 1998 using
the interest rate earned on such funds of 4.85% and 5.2%, respectively.
(4) Amortization of Intangible Assets and Goodwill
The amortization of intangible assets and goodwill is reflected in the pro forma
consolidated statement of operations using the following estimated lives:
Professional work force 6 years
Core technology software 8 years
Developed software 5 years
Goodwill 10 years
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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.
