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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-19771
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
Delaware 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 Route 17, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip code)
(201) 529-2026
Registrant's telephone number, including area code
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.
|X| Yes |_| No
Number of shares outstanding of the registrant's common stock, as of April 30,
2000: 7,481,756
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000 .........................................................1
Consolidated Statements of Operations and Comprehensive Income
for the three month periods ended March 31, 1999 and 2000 ..............2
Consolidated Statement of Changes in Shareholders' Equity
for the three month period ended March 31, 2000 ........................3
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 2000 ..........................................4
Notes to Consolidated Financial Statements ...............................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...........................................7
PART II. Other Information
Item 1. Legal Proceedings .....................................................9
Item 4. Submission of Matters to a Vote of Security Holders ...................9
Item 6. Exhibits and Reports on Form 8-K ......................................9
Signatures ...................................................................10
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company expects", "the Company anticipates", "the Company believes", "the
Company estimates" and other phrases of similar meaning. Whether such statements
ultimately prove to be accurate depends upon a variety of factors that may
affect the business and operations of the Registrant.
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
As of As of
December 31, March 31,
ASSETS 1999 2000
------------ --------
(unaudited)
Current assets:
Cash and cash equivalents ................................................ $ 1,379 $ 5,787
Short-term interest bearing bank deposits ................................ 1,009 10,991
Investment held for sale ................................................. 25,900 --
Restricted cash .......................................................... 536 291
Trade accounts receivable, net ........................................... 10,078 10,050
Inventory ................................................................ 1,249 499
Other current assets ..................................................... 1,124 744
-------- --------
Total current assets ................................................. 41,275 28,362
-------- --------
Property and equipment, net ................................................... 1,853 1,851
-------- --------
Other assets:
Goodwill and other intangible assets, net ................................ 4,285 4,063
Long-term deposits ....................................................... -- 11,246
Other .................................................................... 995 401
-------- --------
5,280 15,710
-------- --------
Total assets ......................................................... $ 48,408 $ 45,923
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt .......................................................... $ 8,375 $ 1,826
Trade accounts payable ................................................... 5,809 5,673
Accrued payroll, payroll taxes and social benefits ....................... 1,246 1,935
Other current liabilities ................................................ 5,838 2,652
-------- --------
Total current liabilities ............................................ 21,268 12,086
-------- --------
Long-term liabilities:
Convertible debentures ................................................... 2,000 --
Long-term debt ........................................................... -- 6,000
Other .................................................................... 584 588
-------- --------
Total long-term liabilities .......................................... 2,584 6,588
-------- --------
Minority interests ............................................................ 10 98
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued and outstanding - 7,923,540 and
7,999,015 shares at December 31, 1999 and March 31, 2000, respectively . 79 80
Additional paid-in capital ............................................... 35,398 35,463
Warrants ................................................................. 432 432
Deferred compensation expense ............................................ (73) (9)
Retained earnings ........................................................ (8,925) (6,150)
-------- --------
26,911 29,816
Treasury stock, at cost - 490,262 and 522,259 shares at
December 31, 1999 and March 31, 2000, respectively ..................... (2,365) (2,665)
-------- --------
Total shareholders' equity .................................................... 24,546 27,151
-------- --------
Total liabilities and shareholders' equity ........................... $ 48,408 $ 45,923
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (unaudited)
(in thousands, except per share data)
Three months ended March 31,
----------------------------
1999 2000
-------- --------
Sales:
Products .................................................. $ 2,419 $ 9,382
Services .................................................. 5,257 5,340
-------- --------
7,676 14,722
-------- --------
Cost of sales:
Products .................................................. 2,032 7,537
Services .................................................. 3,878 3,898
-------- --------
5,910 11,435
-------- --------
Gross profit .............................................. 1,766 3,287
Research and development expenses, net ......................... 309 394
Selling, general and administrative expenses ................... 2,790 4,700
-------- --------
Operating loss ............................................ (1,333) (1,807)
Interest income ................................................ 24 286
Interest expense ............................................... (40) (160)
Other income, net .............................................. 3 4,847
-------- --------
Income (loss) before income taxes .............................. (1,346) 3,166
Provision for income taxes ..................................... 37 51
-------- --------
Income (loss) after income taxes .......................... (1,383) 3,115
Minority interests ............................................. 18 --
Loss in affiliates, net of minority interests .................. (1,513) --
-------- --------
Net income (loss) before extraordinary item ............... (2,878) 3,115
Extraordinary loss on early redemption of convertible debentures -- 340
-------- --------
Net income (loss) ......................................... (2,878) 2,775
Other comprehensive income:
Unrealized gain on securities available for sale ............... 172 --
-------- --------
Comprehensive income (loss) ............................... $ (2,706) $ 2,775
======== ========
Basic net income (loss) per share:
Net income (loss) before extraordinary item ............... $ (0.36) $ 0.42
Extraordinary item ........................................ -- (0.05)
-------- --------
Net income (loss) per share................................ $ (0.36) $ 0.37
======== ========
Weighted average number of shares outstanding .................. 7,433 7,460
======== ========
Diluted net income (loss) per share:
Net income (loss) before extraordinary item ............... $ (0.36) $ 0.40
Extraordinary item ........................................ -- (0.04)
-------- --------
Net income per share (loss) ............................... $ (0.36) $ 0.36
======== ========
Weighted average number of shares outstanding .................. 7,433 7,746
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
(in thousands)
Additional
Number Common Paid-In Deferred Deferred Treasury Retained
of Shares Stock Capital Compensation Interest Warrants Stock Earnings Total
--------- -------- ---------- ------------ -------- -------- --------- -------- --------
Balances as of
January 1, 2000 7,924 $ 79 $ 35,702 $ (73) $ (304) $ 432 $ (2,365) $ (8,925) $ 24,546
Conversion of
convertible debentures 85 1 259 -- -- -- -- -- 260
Reversal of imputed
interest on
convertible debentures -- -- (317) -- -- -- -- -- (317)
Exercise of options 6 -- 22 -- -- -- -- -- 22
Amortization of
restricted stock award
compensation and
warrants -- -- -- 64 101 -- -- -- 165
Purchase of treasury
shares -- -- -- -- -- -- (300) -- (300)
Net income -- -- -- -- -- -- -- 2,775 2,775
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balances as of
March 31, 2000 8,015 $ 80 $ 35,666 $ (9) $ (203) $ 432 $ (2,665) $ (6,150) $ 27,151
======== ======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Three months ended March 31,
----------------------------
1999 2000
---- ----
Cash flows provided by (used in) operating activities:
Net income (loss) ............................................ $ (2,878) $ 2,775
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ............................ 234 435
Minority interests ....................................... (18) --
Issuance of subsidiary shares to minority interests ...... -- 87
Gain on sale of investment held for sale ................. -- (4,989)
Increase (decrease) in liability for severance pay ....... (36) 18
Loss in affiliates ....................................... 1,404 --
Gain on sale of property, plant and equipment, net ....... (3) --
Amortization of restricted stock award compensation ...... 109 64
Reversal of imputed interest on convertible debentures ... -- (317)
Interest expense related to warrants issued .............. -- 101
Decrease in accounts receivable and other current assets . 1,137 408
Decrease (increase) in inventory ......................... (102) 750
Decrease (increase) in other assets ...................... 82 594
Decrease in accounts payable and other current liabilities (125) (2,633)
-------- --------
Net cash used in operating activities .................... (196) (2,707)
-------- --------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net .................. 245 (21,228)
Restricted cash .............................................. (1,683) 245
Acquisitions of property and equipment ....................... (117) (222)
Proceeds from sale of property and equipment ................. 9 21
Proceeds from sale of investment held for sale ............... -- 30,889
Acquisition of intangible assets ............................. 4 (9)
-------- --------
Net cash provided by (used in) investing activities ...... (1,542) 9,696
-------- --------
Cash flows provided by (used in) financing activities:
Short-term debt, net ......................................... 1,763 (6,549)
Proceeds of long-term debt ................................... 9 6,000
Repayments of long-term debt ................................. (47) (14)
Proceeds from stock options exercised ........................ -- 23
Issuance of shares from conversion of convertible debt ....... -- 260
Purchase of treasury shares .................................. -- (300)
Redemption of convertible debt ............................... -- (2,001)
-------- --------
Net cash provided by (used in) financing activities ...... 1,725 (2,581)
-------- --------
Net increase (decrease) in cash and cash equivalents .............. (13) 4,408
Cash and cash equivalents at beginning of period .................. 1,003 1,379
-------- --------
Cash and cash equivalents at end of period ........................ $ 990 $ 5,787
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ................................................. $ 54 $ 404
======== ========
Income taxes ............................................. $ 35 $ 3,019
======== ========
Non-cash activities:
Unrealized gain on securities available for sale ......... $ 172
========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Certain financial information, which is
normally included in financial statements prepared in accordance with generally
accepted accounting principles but which is not required for interim reporting
purposes, has been omitted. The accompanying consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for the full year.
Note 2: Investment Held for Sale
In December 1999, the Company entered into an agreement to sell its
interest in Tower Semiconductor Ltd. ("Tower") for $30,889. The closing of the
agreement took place in January 2000, at which time the Company received the
proceeds from the sale. The Company recorded a gain of $4,989 which was included
in other income.
Note 3: Short and Long-Term Deposits
Short and long-term deposits are comprised of the following:
Interest
Maturity date Rate Amount
-------------- -------- --------
Short-term deposits:
Treasury bill April 2000 5.70% $ 6,962
Asset backed security September 2000 6.69% 1,030
Asset backed security September 2000 6.61% 999
Certificate of deposit September 2000 6.38% 2,000
--------
$ 10,991
========
Long-term deposits:
Asset backed security November 2001 7.05% $ 5,246
Certificate of deposit (*) February 2002 6.90% 6,000
--------
$ 11,246
========
(*) A security interest has been granted against this deposit securing the
repayment of its long-term bank debt. (see Note 5).
Note 4: Convertible Debentures
In February 2000, the Company redeemed $1,740 of the $2,000 convertible
debentures for an aggregate redemption price of $2,001, recording an
extraordinary expense of $340 due to the early redemption. The $260 balance of
convertible debentures was converted into 84,794 shares of common stock of the
Company.
Note 5: Long-Term Debt
In February 2000, a subsidiary of the Company refinanced its $6,000
short-term bank loan. The bank loan bears interest at LIBOR +0.75%, payable
quarterly. Principal is payable in a single installment on the maturity date in
February 2002.
-5-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 6: Segment Information
Computer
consulting Computer Utility
services hardware Solutions Other (*) Total
---------- -------- --------- --------- -----
Three months ended March 31, 2000:
Revenues from external customers $ 5,058 $ 5,124 $ 4,441 $ 69 $ 14,692
Intersegment revenues 182 16 244 -- 442
Segment profit (loss) (2) 230 (849) 12 (609)
Three months ended March 31, 1999:
Revenues from external customers $ 5,015 $ 2,281 $ 87 $ 202 $ 7,585
Intersegment revenues 34 14 -- -- 48
Segment profit (loss) 13 (98) (638) (80) (803)
- -----------
(*) Represents operating segments below the quantitative thresholds of FAS 131,
in 2000 a VAR software operation in Israel and in 1999 the VAR software
operation in Israel, an Internet database venture and a multimedia
entertainment operation.
Reconciliation of Segment Profit to Consolidated Net Profit (Loss)
Three months ended March 31, 2000:
Total loss for reportable segments $ (621)
Other operational segment profit 12
Unallocated amounts: Net profit of corporate headquarters* 3,384
-------
Total consolidated net income $ 2,775
=======
Three months ended March 31, 1999:
Total loss for reportable segments $ (723)
Other operational segment loss (80)
Unallocated amounts: Net loss of corporate headquarters* (2,075)
-------
Total consolidated net loss $(2,878)
=======
- ---------
(*) In 2000 includes a $4,989 gain from the sale of Tower shares and in 1999
includes equity in losses of Tower (net of minority interest) of $1,489.
-6-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect our business and operations. Certain of these
factors are discussed at "Item 1. Description of Business Factors That May
Influence Future Results" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (the "1999 10-K").
During 1999 and in the first quarter of 2000, we operated in three
reportable segments: computer consulting and development services, computer
hardware and utility solutions. The following analysis should be read together
with the segment information provided in Note 6 to the interim financial
statements included in this quarterly report.
Computer Consulting and Development Services
Sales and gross profits increased during the first quarter of 2000,
returning to the levels of the first quarter of 1999. These increases were
attributable to our Israeli activities, partially offset by decreases in
domestic activities. The competitive marketplace for qualified engineers in
general and in Israel in particular, continued to have a negative affect on
profit margins and we expect this will continue in the future.
Computer Hardware
Sales in this segment more than doubled, comparing the first quarter of
2000 to the same quarter in 1999. In comparison to the fourth quarter of 1999,
although sales have decreased as we diversify our customer base, gross profit
and gross profit margins have improved.
Utility Solutions
In the latter half of 1999 we acquired the Scientific-Atlanta Control
Systems business division, including its line of load control products and
Maingate gateway system. The segment first began to have significant sales in
the second quarter of 1999. These sales increased throughout the rest of 1999
and into 2000 to date and accounted for over 30% of consolidated revenues in the
first quarter 2000.
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the three months ended March 31, 1999
and 2000, including the percentage of total revenues during each period
attributable to selected components of operations statement data and for the
period to period percentage changes in such components.
Three months ended March 31,
---------------------------------------------------- Change
1999 2000 from 1999
----------------------- ----------------------- ---------
($,000) % of sales ($,000) % of sales % of 1999
-------- ---------- -------- ----------
Sales $ 7,676 100% $ 14,722 100% 92%
Cost of sales 5,910 77 11,435 78 93
-------- -------- -------- --------
Gross profit 1,766 23 3,287 22 86
R&D expenses 309 4 394 3 28
SG&A expenses 2,790 36 4,700 32 68
-------- -------- -------- --------
Operating loss (1,333) (17) (1,807) (12) 36
Interest income (expense), net (16) (1) 126 1 888
Other income, net 3 -- 4,847 33
-------- -------- -------- --------
Income (loss) before income taxes (1,346) (18) 3,166 22 335
Provision for income taxes 37 -- 51 1 38
-------- -------- -------- --------
Income (loss) after income taxes (1,383) (18) 3,115 21 325
Minority interests 18 -- -- -- (100)
Equity loss, net of minority interests (1,513) (19) -- -- 100
-------- -------- -------- --------
Income (loss) before extraordinary item (2,878) (37) 3,115 21 208
Extraordinary loss on early redemption
of convertible debentures -- -- 340 2
-------- -------- -------- --------
Net income (loss) $ (2,878) (37)% $ 2,775 19% 196%
======== ======== ======== ========
-7-
SALES. Sales in the first quarter of 2000 were the highest in the last four
years. The increase in sales as compared to the same period in 1999, was due to
utility solutions segment sales of $4.4 million, which first had significant
sales in the second quarter of 1999, as well as a $2.8 million increase in
computer hardware sales. Revenues from the computer consulting and development
service segment were relatively stable.
GROSS PROFIT. The increase in gross profit was due to increased sales. The
decrease in gross profit margin was attributable to lower margins in the
computer consulting and development service segment due to the competitive
marketplace for qualified engineers in general and in Israel in particular.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in SG&A
was due primarily to increased administrative and marketing costs in the utility
solutions segment as it builds its infrastructure and increases its marketing
efforts, as well as to increased corporate expenses, primarily due to a $550,000
bonus to the CEO in the first quarter of 2000.
INTEREST INCOME (EXPENSE). The increase in interest income was primarily
due to the interest earned on the proceeds from the sale of our investment in
Tower. This increase was partially offset by an increase in interest expense,
primarily due to the interest on the bank loan taken to finance the acquisition
of the Scientific-Atlanta Control Systems division in the third quarter of 1999.
OTHER INCOME. Other income in the first quarter of 2000 was from the sale
of our investment in Tower in January 2000, in accordance with the agreement
signed in December 1999.
EQUITY LOSS. The equity loss net of minority interests in the first quarter
of 1999 resulted from losses in Tower. Since the agreement to sell our
investment in Tower in December 1999 we no longer consolidate Tower's results.
FINANCIAL CONDITION
As of March 31, 2000 we had working capital of $16.3 million, including
cash, cash equivalents and short-term interest bearing deposits of $16.8
million, and in addition had-long term interest bearing cash deposits of $11.2
million. Some of the long-term deposits serve as security for a $6 million term
loan, taken by our Comverge subsidiary to finance the acquisition of the
Scientific-Atlanta Control Systems division and for working capital
requirements. The loan is repayable in February 2002 and bears interest at a
rate of LIBOR +0.75% per annum.
The increase in cash equivalents and interest bearing deposits is due to
the proceeds from the sale of our investment in Tower in January 2000. In
addition, proceeds from this sale were used to finance our operations, redeem
$1.76 million of the $2 million convertible debenture outstanding and reduce our
short-term debt. The remainder of the convertible debenture was converted into
common stock.
We believe we currently have adequate liquidity to finance our activities
including those of our utility solutions segment for the foreseeable future.
-8-
PART II - Other information
Item 1: Legal Proceedings
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Amendment No. 1 dated March 2, 2000 to Report on Form 8-K relating to
the disposition of the Registrant's interest in Tower Semiconductor Ltd.
-9-
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 its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: May 15, 2000
By: /s/ YACOV KAUFMAN
--------------------------
Yacov Kaufman
Chief Financial Officer
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