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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 JUNE 30, 1999 COMMISSION FILE NUMBER 0-19771
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DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
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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 July 31,
1999: 7,433,278
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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, 1998 and June 30, 1999..................1
Consolidated Statements of Operations
for the three month and six month periods ended
June 30, 1998 and June 30, 1999............................2
Consolidated Statement of Changes in Shareholders' Equity
for the six month period ended
June 30, 1999..............................................3
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1998 and June 30, 1999............................4
Notes to Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........9
PART II. Other Information
Item 1. Legal Proceedings .............................................13
Item 4. Submission of Matters to a Vote of Security Holders ...........13
Item 6. Exhibits and Reports on Form 8-K...............................13
Signatures ...............................................................14
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 share data)
As of As of
December 31, June 30,
------------ -----------
1998 1999
------------ -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,003 $ 510
Short-term interest bearing bank deposits 1,252 --
Marketable equity securities, available for sale 1,383 --
Restricted cash 752 459
Trade accounts receivable, net 7,244 7,255
Inventory 704 581
Other current assets 960 1,098
-------- --------
Total current assets 13,298 9,903
-------- --------
Investments 56,490 50,967
-------- --------
Property and equipment, net 1,738 1,499
-------- --------
Other assets:
Goodwill, net 190 2,260
License, net 471 401
Other 1,057 940
-------- --------
1,718 3,601
-------- --------
Total assets $ 73,244 $ 65,970
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 470 $ 2,520
Current maturities of long-term debt 504 127
Trade accounts payable 2,105 3,410
Accrued payroll, payroll taxes and social benefits 2,561 2,152
Other current liabilities 1,939 980
-------- --------
Total current liabilities 7,579 9,189
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 102 43
Other 585 511
-------- --------
Total long term liabilities 687 554
-------- --------
Commitments and contingencies
Minority interests 25,560 22,535
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized, 20,000,000 shares;
Issued, 7,923,540 shares 79 79
Additional paid-in capital 34,979 35,024
Deferred compensation expense (327) (200)
Retained earnings 6,942 1,154
-------- --------
41,673 36,057
Treasury stock, at cost - 490,262 shares (2,365) (2,365)
Accumulated other comprehensive income 110 --
-------- --------
Total shareholders' equity 39,418 33,692
-------- --------
Total liabilities and shareholders' equity $ 73,244 $ 65,970
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
------------------------- -------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Sales:
Products $ 11,999 $ 6,317 $ 5,107 $ 3,898
Services 9,452 9,624 4,627 4,367
-------- -------- -------- --------
21,451 15,941 9,734 8,265
-------- -------- -------- --------
Cost of sales:
Products 9,454 4,985 3,571 2,953
Services 7,152 7,477 3,836 3,599
-------- -------- -------- --------
16,606 12,462 7,407 6,552
-------- -------- -------- --------
Gross profit 4,845 3,479 2,327 1,713
Research and development
expenses, net 758 581 416 272
Selling, general and
administrative expenses 7,756 5,662 2,867 2,872
-------- -------- -------- --------
Operating loss (3,669) (2,764) (956) (1,431)
Interest income 125 289 64 265
Interest expense (166) (115) (74) (75)
Gain on sale of division 5,998 -- 5,998 --
Other income (loss), net (382) (21) (427) (24)
-------- -------- -------- --------
Income (loss) before income taxes 1,906 (2,611) 4,605 (1,265)
Provision for income taxes 73 12 42 (25)
-------- -------- -------- --------
Income (loss) after income taxes 1,833 (2,623) 4,563 (1,240)
Minority interests 395 109 220 91
Loss in affiliates, net of minority interests (1,596) (3,274) (1,247) (1,761)
-------- -------- -------- --------
Net income (loss) 632 (5,788) 3,536 (2,910)
Other comprehensive income:
Unrealized gain on securities available
for sale -- -- -- (172)
-------- -------- -------- --------
Comprehensive income (loss) $ 632 $ (5,788) $ 3,536 (3,082)
======== ======== ======== ========
Basic net income (loss) per share $ 0.09 $ (0.78) $ 0.48 $ (0.39)
======== ======== ======== ========
Weighted average number of shares
outstanding 7,372 7,433 7,376 7,433
======== ======== ======== ========
Diluted net income (loss)
per share $ 0.09 $ (0.78) $ 0.48 $ (0.39)
======== ======== ======== ========
Weighted average number of shares
outstanding and common share
equivalents 7,374 7,433 7,378 7,433
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
Accumulated
Additional Deferred other
Common paid-in comp- Treasury Retained comprehensive
Shares stock capital ensation stock earnings income Total
------ ----------- ---------- -------- ----------- -------- ------------- --------
Balances as of
January 1, 1999 7,924 $ 79 $ 34,979 $ (327) $ (2,365) $ 6,942 $ 110 $ 39,418
Amortization of
restricted stock
award compensation 45 127 172
Unrealized gain on securities
available for sale (110) (110)
Net loss (5,788) (5,788)
------ ----------- -------- -------- ----------- -------- ----------- --------
Balances as of
June 30, 1999
(unaudited) 7,924 $ 79 $ 35,024 $ (200) $ (2,365) $ 1,154 $ -- $ 33,692
====== =========== ======== ======== =========== ======== =========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
Six Months ended June 30,
-------------------------
1998 1999
------- --------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 632 $(5,788)
Adjustments to reconcile net income (loss) to net cash used
in operating activities - see Schedule A (5,850) 2,982
------- -------
Net cash used in operating activities (5,218) (2,806)
------- -------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net (1,967) 1,252
Restricted cash 1,456 293
Investment in marketable securities (4,099) --
Proceeds from realization of marketable securities 4,416 1,520
Net proceeds from sale of division-see Schedule B 6,595 --
Acquisitions of property and equipment (743) (227)
Proceeds from sale of property and equipment 128 69
Acquisition of intangible assets (500) (2,182)
Decrease in other assets 1,070 --
------- -------
Net cash provided by investing activities 6,356 725
------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net 55 --
Proceeds from sale of shares received in partial conversion of note receivable 1,871 --
Short-term debt, net (2,176) 2,050
Proceeds of long-term debt -- 29
Repayments of long-term debt (633) (491)
------- -------
Net cash provided by (used in) financing activities (883) 1,588
------- -------
Net increase (decrease) in cash and cash equivalents 255 (493)
Cash and cash equivalents at beginning of period 1,424 1,003
------- -------
Cash and cash equivalents at end of period $ 1,679 $ 510
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 135 $ 114
======= =======
Income taxes $ 127 $ 65
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules To Consolidated Statements Of Cash Flows (unaudited)
(dollars in thousands)
Six months ended June 30,
---------------------------
1998 1999
------- --------
A Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization $ 319 $ 542
Minority interests (1,494) (3,024)
Allowance for writeoff against note receivable 610 --
Earnings on marketable debt securities (17) --
Increase (decrease) in liability for severance pay 103 (74)
Loss in affiliates 1,596 5,523
Gain on sale of division - See Schedule B (5,998) --
Gain on sale of securities (192) (247)
(Gain) loss on sale of property, plant and equipment, net (37) 21
Amortization of restricted stock award compensation 98 172
Other 5 1
Increase in accounts receivable and other current assets (1,137) (149)
(Increase) decrease in inventory (307) 123
Decrease in long-term receivables 131 132
Increase in accounts payable and other current liabilities 220 6
Increase (decrease) in liability in respect of customer advances, net 250 (44)
------- -------
$(5,850) $ 2,982
======= =======
B. Assets/liabilities transferred upon sale of division:
Trade accounts receivable, net $ 754
Property and equipment, net 405
Accrued payroll, payroll taxes and social benefits (111)
Other current liabilities (452)
-------
$ 596
C Non-cash activities: Receipt of capital stock in partial
conversion of note receivable $ 1,871
=======
Reversal of unrealized gain on securities available for sale $ (172)
=======
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
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, 1998. Certain amounts included in the consolidated statements of operations
for the three and six month periods ended June 30, 1998 have been reclassified
to conform with current presentation. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
Note 2: Investment in Tower
Although the Company maintains the effective control of Tower Semiconductor
Ltd. ("Tower"), the Company does not have voting control of Tower and therefore
consolidates Tower's operations on an equity basis.
Summarized statement of operations information of Tower is as follows:
Six months ended June 30, Three months ended June 30,
---------------------------- ----------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Sales $ 37,759 $ 29,142 $ 14,572 $ 14,825
Gross loss (2,248) (7,876) (3,238) (3,628)
Research and development expenses 4,210 4,825 2,070 2,499
Sales, general and administrative 4,038 4,032 2,091 1,841
Operating loss (10,496) (16,733) (7,399) (7,968)
Note 3: Effects of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities,
requiring the recognition of all derivatives as either assets or liabilities and
the measurement of those instruments at fair value, as well as the
identification of the conditions for which a derivative may be specifically
designed as a hedge. SFAS 133 is effective for fiscal years beginning after June
15, 2000. Management is currently addressing the financial reporting measures
that will be needed in order to comply with this disclosure requirement.
-6-
Note 4: Segment Information
Computer VAR Data Multimedia
consulting computer communication Help desk entertainment
services hardware for utilities software software Other* Total
---------- -------- ------------- -------- ------------- ------ -----
Six months ended June 30, 1999:
Revenues from external customers $ 9,630 $ 5,146 $ 642 $ 38 $ 305 $ 15,761
Intersegment revenues .......... 86 16 346 -- -- 448
Segment profit (loss) .......... 268 (77) (1,362) 21 (336) (1,486)
Six months ended June 30, 1998:
Revenues from external customers $ 9,166 $ 10,423 $ 175 $ 785 $ 93 $ 629 $ 21,270
Intersegment revenues .......... 61 11 -- -- 158 -- 230
Segment profit (loss) .......... 5,444 1,225 (1,513) (1,330) (596) 227 3,457
Three months ended June 30, 1999:
Revenues from external customers $ 4,615 $ 2,865 $ 555 $ 21 $ 120 $ 8,176
Intersegment revenues .......... 52 2 346 -- -- 400
Segment profit (loss) .......... 257 21 (724) 15 (250) (681)
Three months ended June 30, 1998:
Revenues from external customers $ 4,480 $ 4,562 $ 48 $ 2 $ 61 $ 490 $ 9,643
Intersegment revenues .......... 32 1 -- -- 158 -- 191
Segment profit (loss) .......... 5,570 451 (852) (133) (126) 262 5,172
- ----------
* Represents two operating segments below the quantitative thresholds of FAS
131, a VAR software operation in Israel and an Internet database venture.
Reconciliation of Segment Profit to Consolidated Net Loss
Six months ended June 30, 1999:
Total loss for reportable segments $(1,150)
Other operational segment loss (336)
Unallocated amounts: Net loss of corporate headquarters* (4,302)
-------
Total consolidated net loss $(5,788)
=======
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*Includes equity in losses of Tower (net of minority interest) of $3,227
Six months ended June 30, 1998:
Total income for reportable segments $ 3,230
Other operational segment income
227
Unallocated amounts: Net loss of corporate headquarters* (2,825)
-------
Total consolidated net income $ 632
=======
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*Includes equity in losses of Tower (net of minority interest) of $1,522
Three months ended June 30, 1999:
Total loss for reportable segments $ (431)
Other operational segment loss (250)
Unallocated amounts: Net loss of corporate headquarters* (2,229)
-------
Total consolidated net loss $(2,910)
=======
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*Includes equity in losses of Tower (net of minority interest) of $1,738
Three months ended June 30, 1998:
Total income for reportable segments $ 4,910
Other operational segment income 262
Unallocated amounts: Net loss of corporate headquarters* (1,636)
-------
Total consolidated net income $ 3,536
=======
----------
*Includes equity in losses of Tower (net of minority interest) of $1,240.
-7-
Note 5: Contingencies
Tower has been approached separately by two parties alleging that Tower is
infringing on certain semiconductor production patents owned by such parties and
requesting that Tower enter into negotiations for a royalty-bearing license for
the use of the technology covered by such patents.
Tower has successfully obtained, without royalty or other payments, a
license to use such technology from one of the parties and is engaged in
discussions with the other party to determine the merits of its claims. Tower
and the Company are unable to determine at this time with any certainty the
ultimate outcome of these discussions or the possible effect, if any, of this
matter on Tower's and the Company's financial condition, operating results and
business.
Note 6: Purchase of Outstanding Minority Interest in Subsidiary
In April 1999, the Company completed successfully a tender offer for all of
the publicly-held shares of a foreign subsidiary. The Company recorded goodwill
resulting from the purchase of the outstanding minority interest in the
subsidiary of approximately $2,200, which is being amortized over seven years.
The cost of the tender offer was approximately $2,700. The Company financed the
offer primarily by short-term bank credit and cash.
Note 7: Subsequent Event
The Company has entered into an agreement to acquire substantially all of
the assets of the Control Systems division of Scientific-Atlanta, Inc., which
would become an integral part of the Company's data communications solutions for
utilities segment. The purchase price for the acquisition is $5,000, subject to
certain adjustments. The closing of this acquisition, which is subject to the
satisfaction of certain conditions by both Scientific-Atlanta and the Company,
is expected to occur in the third quarter of 1999.
-8-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Data Systems & Software Inc. through its subsidiaries in the United States
and in Israel (collectively, the "Company"), (i) provides consulting and
development services for computer software and systems, (ii) is an authorized
dealer and a value-added-reseller ("VAR") of computer hardware, and (iii) is a
provider of data communications solutions for utilities. Through its equity
investment in Tower Semiconductor Ltd. ("Tower"), the Company also engages in
the manufacture of semiconductor products. Although the Company has retained
effective control of Tower, the Company does not control more than 50% of
Tower's voting shares, and accordingly accounts for its interest in Tower's
results under the equity investment method.
The Company's future operating results are subject to various risks and
uncertainties. See "Item 1. Business - Factors Which May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the six months and three months ended
June 30, 1998 and 1999, including the percentage of total revenues during each
period attributable to selected components of operations statement data, and for
the period to period percentage changes in such components.
Six months ended June 30,
------------------------------------------------- Change
from
1998 1999 1998
-------------------- ------------------------ -----
% of % of % of
($,000) sales ($,000) sales 1998
-------- ------- -------- -------- ------
Sales $ 21,451 100% $ 15,941 100% (26)%
Cost of sales 16,606 77 12,462 78 (25)
-------- -------- -------- --------
Gross profit 4,845 23 3,479 22 (28)
R&D expenses 758 4 581 4 (23)
SG&A expenses 7,756 36 5,662 35 (27)
-------- -------- -------- --------
Operating loss (3,669) (17) (2,764) (17) (25)
Interest income (expense), net (41) (--) 174 1 524
Gain on sale of division 5,998 28 -- --
Other loss, net (382) (2) (21) (--) 95
-------- -------- -------- --------
Income (loss) before
income taxes 1,906 9 (2,611) (16) (237)
Income tax expense 73 -- 12 -- (84)
-------- -------- -------- --------
Income (loss) after
income taxes 1,833 9 (2,623) (16) (243)
Minority interests 395 1 109 1 (72)
Loss in affiliates, net of
minority interests (1,596) (7) (3,274) (20) 105
-------- -------- -------- --------
Net income (loss) $ 632 3% $ (5,788) 36%
======== ======== ======== ========
Three months ended June 30,
--------------------------------------------- Change
from
1998 1999 1998
------------------- -------------------- ------
% of % of % of
($,000) sales ($,000) sales 1998
-------- -------- -------- -------- ------
Sales $ 9,734 100% $ 8,265 100% (15)%
Cost of sales 7,407 76 6,552 79 (12)
-------- -------- -------- --------
Gross profit 2,327 24 1,713 21 (26)
R&D expenses 416 4 272 3 (35)
SG&A expenses 2,867 30 2,872 35
-------- -------- -------- --------
Operating loss (956) (10) (1,431) (17) 50
Interest income (expense), net (10) -- 190 2
Gain on sale of division 5,998 62 -- --
Other loss, net (427) (4) (24) (--) (94)
-------- -------- -------- --------
Income (loss) before
income taxes 4,605 47 (1,265) (15) (128)
Income tax expense 42 -- (25) (--) (160)
-------- -------- -------- --------
Income (loss) after
income taxes 4,563 47 (1,240) (15) (127)
Minority interests 220 2 91 1 (58)
Loss in affiliates, net of
minority interests (1,247) (13) (1,761) (21) 41
-------- -------- -------- --------
Net income (loss) $ 3,536 36% $ (2,910) (34)% (182)%
======== ======== ======== ========
-9-
SALES. The decrease in sales in the six months and three months ended June
30, 1999, as compared to the same periods in 1998, was primarily due to
decreased VAR computer hardware segment sales. This decrease was partially
offset by increased sales in the data communication solutions for utilities
segment, which recorded over half a million dollars in sales during the second
quarter of 1999. Computer hardware VAR sales were up 26% in the second quarter
of 1999 as compared to the previous quarter, and the Company believes this
improvement will continue.
GROSS PROFIT. The decrease in gross profit in the six months and three
months ended June 30, 1999 as compared to the same periods in 1998, was
primarily due to the decrease in sales, as well as to slightly decreased gross
profit margins from the Company's consulting services provided in Israel. The
decrease in the gross profit margins in these periods as compared to the
comparable periods in 1998 was primarily due to decreased gross profit margins
in the VAR computer hardware segment and consulting services provided in Israel.
RESEARCH AND DEVELOPMENT ("R&D"). The decrease in R&D in the six months and
three months ended June 30, 1999, as compared to the same periods in 1998, is
due to lower development costs in the Company's data communication solutions for
utilities segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in SG&A
in the six months ended June 30, 1999, as compared to the same period in 1998,
was primarily due to the sale of the former help desk segment and the suspension
of operations of the multimedia entertainment software segment.
OPERATING LOSS. The decrease in the operating loss in the six months ended
June 30, 1999, as compared to the same period in 1998, was primarily
attributable to the decrease in SG&A and R&D, partially offset by the decrease
in gross profit for this period. The increase in the operating loss in the three
months ended June 30, 1999, as compared to the same period in 1998, was
primarily attributable to the decrease in gross profit, which exceeded the
aforementioned decrease in R&D expenses.
SHARE OF AFFILIATED COMPANY'S NET LOSS. The increase in the equity loss,
net of minority interests, in the six months ended June 30, 1999, as compared to
the same period in 1998, resulted from increased losses in Tower, primarily
attributable to a continued decrease in Tower sales and capacity utilization.
NET INCOME (LOSS). The net loss in the six months and three months ended
June 30, 1999 as compared with net income in the comparable periods in 1998, was
almost entirely due to a nonrecurring gain from the sale of the former help desk
segment in the second quarter of 1998, as well as to the aforementioned increase
in equity losses from the Company's Tower subsidiary. Net loss excluding this
gain on sale would have been $5.4 million in the six months ended June 30, 1998,
and $2.5 million in the three months ended June 30, 1998.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 30, 1999, the Company had working capital of $707,000, including
cash and cash equivalents of $510,000. The Company also had restricted cash of
approximately $459,000. DSSI has a credit line from a bank of up to $2.2
million, which is secured by accounts receivable and inventory of its US
subsidiaries, of which $1.4 million was being utilized at June 30, 1999.
The Company intends to finance its operating activities and the service on
its debt for the remainder of 1999 from cash on hand and credit lines, to the
extent available. The Company is also seeking additional financing for its data
communications solutions for utilities segment. The Company is considering
various avenues for financing its ongoing activities, including the selling of
certain assets and obtaining additional financing. To the extent that these
resources are unavailable or insufficient, the Company may have to curtail
and/or discontinue certain of its activities.
In the second quarter of 1999, the Company completed successfully a tender
offer for all of the publicly-held shares of a foreign subsidiary, approximately
77% of the shares of which it had owned up to the date of the tender offer. The
cost of the tender offer was approximately $2.7 million and was financed
primarily by short-term bank credit and also by cash that resulted in part from
the sale of the balance of the Company's marketable securities for $1.6 million.
-10-
The Company has entered into an agreement to acquire substantially all of
the assets of the Control Systems division of Scientific-Atlanta, Inc., which
would become an integral part of the Company's data communications solutions for
utilities segment. The purchase price for the acquisition is $5 million subject
to certain adjustments. The closing of this acquisition is subject to the
satisfaction of certain conditions both by Scientific Atlanta and by the Company
and is currently anticipated to take place during the third quarter of 1999.
The decrease in trade accounts receivable during the second quarter of
1999, reflected both improved collections and the lower level of hardware sales
during the quarter. The increase in short term debt was attributable to
utilization of the credit line to fund, in part, the purchase by the Company of
the publicly held shares of DSI Israel.
Year 2000 Disclosure
The Company has conducted a review of its computer systems and operations,
both those for internal use and those developed for customers, to identify and
determine the extent to which any systems may be vulnerable to potential errors
and failures as a result of the "Year 2000 problem." Any of these programs that
have time-sensitive software could experience system failures or miscalculations
and result in disruption of operations.
The Company has completed a comprehensive review of these computer systems
to ensure that all such systems are Year 2000 compliant prior to the
commencement of the year 2000. The Company's plan for its Year 2000
compatibility effort includes the following: (i) conducting a comprehensive
inventory of the Company's internal systems, including non-information
technology systems (e.g. switching, billing and other platforms and electrical
systems) and any systems intended to be acquired by the Company, (ii) conducting
a comprehensive review of the systems developed by or licensed to the Company
for customers either under development or within their warranty period, (iii)
assessing and prioritizing any required mediation, and (iv) remediating any
problems by modifying, or replacing where appropriate, non-compliant systems.
In connection with its Year 2000 remediation efforts, the Company has not
and does not expect to incur any significant costs. Any such efforts are
expected to be handled by Company personnel as part of their regular duties. In
respect of Tower's remediation efforts, Tower expects to incur staff costs as
well as consulting and other expenses incremental to current spending levels.
Tower anticipates that such costs will not be material. Tower estimates that the
total cost associated with the Year 2000 projects will be $1.5 million, of which
approximately $1.1 million has been expended to date. Tower has financed its
Year 2000 related costs from its working capital and has expensed them as
incurred.
Both the Company and Tower do not believe that any of its products have any
direct material Year 2000 compliance problems.
In addition to assessing its own internal or externally supplied systems,
the Company has made efforts to identify and remedy potential implications to
the Company as a result of its suppliers' vulnerability to Year 2000 problems.
There can be no assurance that the Company has or will be able to identify all
aspects of its business that are subject to Year 2000 problems of customers or
suppliers that affect the Company's business. There can also be no assurance
that the Company's software suppliers are correct in their assertions that the
software is Year 2000 compliant. Should either the Company's internal systems or
the internal systems of any of the more significant suppliers or customers fail
to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected. The Company has reviewed all of its key
systems and has satisfied itself that it has identified substantially all
systems with potential problems and has either corrected or is in the process of
replacing them. As of June 30, 1999, the Company's Year 2000 remediation efforts
were approximately 90% completed. The Company expects to complete the
remediation by the end of the third quarter of 1999.
Tower believes that it has or will have addressed all Year 2000 issues
before the end of 1999, except with respect to certain embedded fab machinery as
a result of nonresponse on the part of certain vendors; however, there can be no
assurance that Tower will achieve Year 2000 compliance as scheduled.
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Quantitative and Qualitative Disclosures About Market Risk
General
The Company is required to make certain disclosures with respect to its
financial instruments, including derivatives, if any. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that imposes on one entity a contractual obligation either to deliver or receive
cash or another financial instrument to or from a second entity. Examples of
financial instruments include cash and cash equivalents, trade accounts
receivable, loans, investments, trade accounts payable, accrued expenses,
options and forward contracts. The disclosures below include, among other
matters, the nature and terms of derivative transactions, information about
significant concentrations of credit risk, and the fair value of financial
assets and liabilities.
Forward Exchange Agreements
The Company, through Tower, has entered into forward exchange agreements to
manage exposure to equipment purchase commitments denominated in Japanese yen.
These transactions qualified for hedge accounting in accordance with generally
accepted accounting principles and, accordingly, the results of such
transactions have been recorded concurrently with the realization of the related
items (i.e., receipt of the equipment and payment of the related liability).
Although the Company has retained effective control of Tower, the Company no
longer maintains voting control of Tower. The Company does not hold or issue
derivative financial instruments for trading purposes.
Foreign Exchange Transactions
No such transactions are reflected for the six-month and three-month
periods ended June 30, 1998 and 1999.
Fair Value of Financial Instruments
Fair values are estimated for financial instruments included in current
assets and current liabilities at book value, due to the short maturity of such
instruments. Fair value for long-term debt is estimated based on the current
rates offered to the Company for debt with the same remaining maturities. Fair
value of long-term equity marketable investments is estimated based on market
value. The estimation of fair value for non-marketable long-term equity
investments (book value of $286,000 as of June 30, 1999) was not practicable,
although the Company believes that the estimated fair value of such financial
instruments was not materially different from their book value.
The market value of the Company's investment in Tower as of June 30, 1999
was approximately $26.8 million, below the carrying value of the equity
investment (after minority interest) as of June 30, 1999 of $27.7 million. The
Company believes that the abovedescribed decline in the market price of Tower is
temporary.
Concentrations of Credit Risk
The Company is subject to credit risk through its trade receivables. As of
June 30, 1999, approximately 9% of the trade accounts receivable were due from a
major Israel government-owned company which, despite experiencing financial
difficulties, continues to pay its trade receivables over extended credit
periods. Approximately 17% of the trade accounts receivable were due from a U.S.
customer that continues to pay its trade receivables over usual credit periods.
The remaining balance consists primarily of receivables from various customers.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of Stockholders (the "Meeting") was held on
June 16, 1999. The following individuals were elected as directors of the
Registrant at the Meeting:
George Morgenstern
Robert L. Kuhn
Harvey Eisenberger
Sheldon Krause
Susan L. Malley
Maxwell M. Rabb
Allen L. Schiff
The election of directors was the only matter voted upon at the meeting.
Set forth below is the number of votes cast for, against or withheld, as well as
the number of abstentions and/or broker non-votes with respect to the election
of directors.
There were 6,170,103 votes for and 206,469 votes withheld for the election
of each of the nominees, except for Mr. Rabb, who received 6,169,503 votes for
and 207,069 votes withheld. There were no broker non-votes.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset Purchase Agreement between Comverge Technologies, Inc. and
Scientific-Atlanta, Inc. dated as of June 11, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report of the Company on Form 8-K dated June 16, 1999.
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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: August 12, 1999
By: /s/ Yacov Kaufman
Yacov Kaufman
Chief Financial Officer
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