SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997 COMMISSION FILE NO. 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
200 Route 17, Mahwah, New Jersey 07430
(Address of registrant's principal executive offices) (Zip Code)
(201) 529-2026
(Registrant's telephone number, including area code)
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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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding of the registrant's common stock, as of
July 31, 1997: 7,369,178
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1996 and June 30, 1997 1
Consolidated Statements of Operations
for the three month and six month periods ended
June 30, 1996 and June 30, 1997 2
Statement of Changes in Shareholders' Equity
for the six month period ended June 30, 1997 3
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1996 and June 30, 1997 4
Schedules to Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1996 and June 30, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31, June 30,
ASSETS 1996 1997
--------- ---------
Current assets: (unaudited)
Cash and cash equivalents $ 2,464 $ 1,448
Short-term interest bearing bank deposits 398 403
Marketable debt securities 5,226 1,400
Restricted cash 1,403 1,756
Trade accounts receivable, net 7,875 9,268
Inventory 953 744
Other current assets 1,740 1,776
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Total current assets 20,059 16,795
- - - - - - - - - -
Investments 68,372 71,711
- - - - - - - - - -
Property and equipment, net 2,279 2,307
- - - - - - - - - -
Other assets:
Capitalized software development costs, net 5,229 4,475
Intangible assets, net 468 388
Note receivable 2,083 2,165
Other 3,626 3,901
--------- ---------
11,406 10,929
--------- ---------
Total assets $ 102,116 $ 101,742
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 1,962 $ 2,485
Current maturities of long-term debt - banks and others 162 145
Trade accounts payable 1,643 2,836
Accrued payroll, payroll taxes and social benefits 2,140 2,591
Other current liabilities 476 803
--------- ---------
Total current liabilities 6,383 8,860
- - - - - - - - - -
Long-term liabilities -bank and others, net of current maturities 472 610
- - - - - - - - - -
Minority interests 29,283 30,578
- - - - - - - - - -
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized - 20,000,000 shares; Issued - 7,708,540 shares 77 77
Additional paid-in capital 33,997 34,095
Retained earnings 33,752 29,370
--------- ---------
67,826 63,542
Treasury stock, at cost - 339,362 shares (1,848) (1,848)
--------- ---------
Total shareholders' equity 65,978 61,694
--------- ---------
Total liabilities and shareholders' equity $ 102,116 $ 101,742
========= =========
The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
(dollars in thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
----------------- -----------------
1996 1997* 1996 1997*
------- ------- ------- ------
Sales:
Products $63,056 $ 9,897 $32,454 $ 4,494
Services 9,387 10,104 4,257 5,557
------- ------- ------- -------
72,443 20,001 36,711 10,051
- - - - - - - - - - - - - - - -
Cost of sales:
Products 47,519 7,799 25,479 3,861
Services 7,095 7,817 3,336 3,852
------- ------- ------- -------
54,614 15,616 28,815 7,713
- - - - - - - - - - - - - - - -
------- ------- ------- -------
Gross profit 17,829 4,385 7,896 2,338
Research and development expenses, net 1,728 2,913 893 366
Selling, general and administrative expenses 9,080 9,000 4,626 4,699
------- ------- ------- -------
Operating income (loss) 7,021 (7,528) 2,377 (2,727)
Financial income 3,708 545 1,579 285
Financial expenses (1,723) (160) (759) (8)
Other income, net 29 23 12 21
------- ------- ------- -------
Income (loss) before income taxes 9,035 (7,120) 3,209 (2,429)
Income tax expense (benefit) 1,650 (128) 489 36
------- -------- ------- -------
Income (loss) after income taxes 7,385 (6,992) 2,720 (2,465)
Minority interests (6,144) (1,321) (2,325) (686)
Equity in affiliates (126) 3,931 (53) 2,167
------- ------- ------- -------
Net income (loss) $ 1,115 ($4,382) $ 342 ($984)
======= ======= ======= =======
Earnings (loss) per common and common
equivalent share $ 0.14 $ (0.59) $ 0.04 ($ 0.13)
======= ======= ======= =======
Weighted average number of shares (in thousands) 7,425 7,369 7,534 7,372
======= ======= ======= =======
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* Reflects the results of Tower Semiconductor Ltd. on the equity method. See
Note 2.
The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(dollars in thousands, except share data)
Number Additional
of Common paid-in Treasury Retained
shares stock capital stock earnings Total
--------- ------- ------- ------- -------- --------
Balances as of
January 1, 1997 7,708,540 $ 77 $33,997 ($1,848) $ 33,752 $ 65,978
Unamortized
restricted stock
award compensation -- -- 98 -- -- 98
Net loss -- -- -- -- (4,382) (4,382)
--------- ------- ------- ------- -------- --------
Balances as of
June 30, 1997 7,708,540 $ 77 $34,095 ($1,848) $ 29,370 $ 61,694
========= ======= ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
Six months ended
June 30,
------------------
1996 1997*
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Cash flows from operating activities:
Net income (loss) $ 1,115 $(4,382)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities - see Schedule A 12,569 419
------- -------
Net cash provided by (used in) operating activities 13,684 (3,963)
------- -------
Cash flows from investment activities:
Short-term interest bearing bank deposits (3,446) 23
Restricted cash (97) (300)
Investment in marketable securities (138,279) (22,224)
Proceeds from realization of marketable securities 162,445 26,380
Acquisitions of property and equipment (30,277) (522)
Proceeds from sale of property and equipment 39 32
Proceeds from sale of shares in non-affiliated company 80 -
Investments in capitalized software development
costs, net (991) (447)
Investments in other assets (38) (597)
Loans to affiliates (818) -
Net effect of change in reporting from equity
to consolidation method - see Schedule B - 102
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Net cash provided by (used in) investment activities (11,382) 2,447
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 105 98
Short-term debt, net (1,297) 469
Proceeds from long-term debt 714 25
Repayments of long-term debt (971) (92)
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Net cash provided by (used in) financing activities (1,449) 500
------- -------
Net increase (decrease) in cash and cash equivalents 853 (1,016)
Cash and cash equivalents at beginning of period 25,959 2,464
------- -------
Cash and cash equivalents at end of period $26,812 $ 1,448
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 440 $ 86
======= =======
Income taxes $ 1,685 $ 98
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The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules to Consolidated Statements of Cash Flows
(dollars in thousands)
Six months ended
June 30,
------------------
1996 1997
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A. Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization $ 7,221 $ 537
Minority interests 6,144 1,321
Write-down of capitalized software development - 1,967
Earnings on marketable debt securities (1,921) (83)
Deferred income taxes 1,363 262
Increase in liability for severance pay 270 198
Equity in affiliates 126 (3,931)
Other 129 (207)
Decrease (increase) in accounts receivable and other current assets 4,876 (2,084)
Decrease in liability in respect of customer advances, net (211) -
Decrease (increase) in inventory (2,931) 57
Increase in accounts payable and other current liabilities (2,486) (82)
Increase in long-term receivables (11) (2,464)
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$12,569 $ 419
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B. Net effect of change in reporting from
equity method to consolidation of subsidiary:
Working capital, net of cash - (18)
Intercompany loans - 1,157
Other assets - (1,037)
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- $ 102
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The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Such adjustments included, in
addition to adjustments of a normal recurring nature, the writedown of
certain previously capitalized software development and other deferred costs,
which reduced net income by approximately $2.0 million during the first six
months of 1997. Certain financial information, which is normally included in
financial statements prepared in accordance with generally accepted
accounting principles but which is not required for interim reporting
purposes, has been omitted. The accompanying consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. The results of operations for the six months
ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Investment in Tower
Although the Company continued to have effective control of Tower, as a
result of a change in its voting control of Tower's shares, the Company ceased
to consolidate Tower's financial statements as of December 31, 1996. As the
Company's consolidated statement of operations for the three months and six
months ended June 30, 1997 do not include Tower's balances while those for the
comparable periods in 1996 do, the Company's statements of operations for the
periods in 1997 and those in 1996 are not directly comparable.
Summarized income statement information of Tower for the three months and
six months ended June 30, 1997 is as follows:
Six months ended Three months ended
June 30, 1997 June 30, 1997
---------------- ------------------
($,000)
-------
Sales $59,894 $30,773
Gross profit 17,728 9,669
Research and development 3,239 1,930
Sales, general and administrative 3,919 2,002
Operating income 10,570 5,737
Note 3: Implementation of Accounting Standards.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("FAS 128"), which establishes new standards for computing and presenting net
income per share. The statement is effective for periods ending after
December 15, 1997. Accordingly, the Company will adopt the standard beginning
with its fourth quarter of 1997. Had FAS 128 been adopted, net income (loss)
per common and common equivalent share amounts would not have been materially
different for the periods presented.
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In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Disclosure about Segments of an
Enterprise and Related Information"("FAS 130"), which requires the reporting
of profit and loss, specific revenue and expense items, and assets for
reportable segments. It also requires the reconciliation of total segment
revenues, total segment profit or loss, total segment assets and other
amounts disclosed for segments to the corresponding amounts in the general
purpose financial statements. FAS 130 is effective for fiscal years beginning
after December 15, 1997. The Company has not yet determined what additional
disclosures may be required in connection with adopting FAS 130.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, "Reporting Comprehensive Income"
("FAS 131"), which requires a reconciliation of net income to comprehensive
income in the financial statements. Comprehensive income includes items that
are excluded from net income and reported as components of stockholders'
equity, such as unrealized gains and losses on certain investments in debt
and equity securities, foreign currency items and minimum pension liability
adjustments. FAS 131 is effective for fiscal years beginning after December
15, 1997.
Note 4: Inventory
Inventory includes almost exclusively merchandise and finished goods.
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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") is a provider of computer
consulting and development services and packaged software products and is an
authorized direct seller and value-added-reseller of computer hardware
products. Through its Tower Semiconductor Ltd. subsidiary ("Tower") the
Company also engages in the manufacture of semiconductors.
Through the end of 1996, the Company conducted its business through two
business segments: the Computer Segment and the Semiconductor Segment. Although
the Company retains effective control of Tower, due to changes in the Company's
voting control in Tower, the balance sheets as at December 31, 1996 and June 30,
1997 do not include Tower balances. Commencing in 1997, the Company accounts for
its interest in Tower's results using the equity method, including its pro-rata
share of Tower's net income as equity income.
Capitalized software development costs reflected on the balance sheet
at June 30, 1997 were $4.5 million, all of which related to the Company's
EPSM product. Applicable accounting principles require that capitalized
software costs be periodically reviewed and written down to net realizable
value. The Company took significant writedowns of such costs in the first
quarter of 1997 and has taken such writedowns in prior periods. Possible
writedowns of currently capitalized software costs associated with EPSM may
significantly affect operating results in 1997 and\or future periods. The
Company's future operating results are also subject to the outcome of various
other factors and are subject to various other 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, 1996 (the "1996
10-K").
Results of Operations
The following tables set forth certain information with respect to the
results of operations of the Company for the three months and six months ended
June 30, 1996 and 1997, the percentage of total revenues during each period
attributable to selected components of operations statement data, and the period
to period actual and percentage changes in such components.
The statements of operations for the three months and six months ended
June 30, 1997 reflect Tower's activity on the equity method while the
statements of operations for the comparable periods in 1996 reflects Tower's
activity on a fully consolidated basis. Therefore, the balances for the two
years are not directly comparable. Following is an analysis comparing the
statement of operations data for the Company in the first three months and
six months of 1997 to statement of operations data relating to the operations
of the Company's Computer Segment for the comparable periods in 1996.
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Three months ended June 30, Change Six months ended June 30, Change
---------------------------- from --------------------------- from
1997 1996 1996 1997 1996 1996
------------ ------------- ------------- ------------- ------------- ----------
% of % of % of % of
($,000) sales ($,000) sales ($,000) % ($,000) sales ($,000) sales ($,000) %
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- ----
Computer segment:
Sales 10,051 8,223 1,828 22% 20,001 15,893 4,108 26%
Gross profit 2,338 23% 1,768 22% 570 32% 4,385 22% 3,750 24% 634 17%
R&D expenses, net 366 4% 114 1% 252 221% 2,913 15% 235 2% 2,678
SG&A expenses 4,062 41% 2,020 25% 2,042 101% 8,003 40% 4,217 27% 3,806 90%
Operating loss (2,090) -21% ( 366) -5% (1,724) 471% (6,532) 33% ( 702) -4% (5,850)
Semiconductor segment:
Sales 28,488 56,550
Gross profit 6,128 22% 14,079 25%
R&D expenses, net 779 3% 1,493 3%
SG&A expenses 2,385 8% 4,170 7%
Operating income 2,964 10% 8,416 15%
Corporate:
SG&A expenses 637 221 416 188% 997 693 304 44%
Equity income, net 1,376 - 1,376 2,417 - 2,417
Combined:
Sales 10,051 36,711 20,001 72,443
Gross profit 2,338 23% 7,896 22% 4,385 22% 17,829 25%
R&D expenses, net 366 4% 893 2% 2,913 15% 1,728 2%
SG&A expenses 4,699 47% 4,626 13% 9,000 45% 9,080 13%
Operating income (loss)(2,727) -27% 2,377 7% (7,528) -38% 7,021 10%
Net income (loss) ( 984) -10% 342 1% (1,326) -388% (4,382) -22% 1,115 2% (5,492)-493%
SALES. The increase in Computer Segment sales in the second quarter and
the six months ended June 30, 1997 as compared to the same periods in 1996
was due to increased sales from the Segment's United States operations,
primarily attributable to a 69% and a 102% increase in Computer - VAR sales
in the second quarter and six months ended June 30, 1997, respectively, as
compared to similar periods in 1996. These were partially offset by a
decrease in sales from the segment's Israeli operations, resulting from the
sale of the Company's Atir subsidiary at the end of the second quarter of
1996.
GROSS PROFIT. The increase in gross profit as a percentage of Computer
Segment sales in the second quarter of 1997, as compared to the same period in
1996, was primarily due to increased profitability in the Company's United
States operations, partially offset by decreased profitability in the Company's
Israeli operations resulting from increased labor costs. This decrease was the
primary reason for the decrease in gross profit as a percentage of Segment sales
in the first six months of 1997 as compared to the same period in 1996.
RESEARCH AND DEVELOPMENT EXPENSES. The increase in research and
development expenses in the Computer Segment during the second quarter of
1997, as compared to the same period in 1996, was attributable to continued
development expenses, not capitalizable, primarily for pilot maintenance,
related to the Company's EPSM product.
The increase in research and development expenses in the Computer Segment
during the six months ended June 30, 1997, as compared to the same period in
1996, was primarily attributable to writedowns of previously capitalized
software of the PHD(TM) and CybrCard products during the first quarter of 1997.
These writedowns resulted from the Company's ongoing reassessment of the likely
realizable value of these costs in light of the short market cycle and rapid
rate of change in the PC-software environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in
SG&A in both periods was primarily attributable to increased marketing efforts
related to the Company's PHD and CybrCard products.
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OPERATING LOSS. The increase in the operating loss was primarily
attributable to the aforementioned increase in research and development
costs and marketing expenses.
SHARE OF AFFILIATED COMPANY'S NET INCOME. Had the Company incorporated
Tower's results for the second quarter and six months ended June 30, 1996 using
the equity method, equity income for those periods would have been $658,000 and
$2.1 million respectively, as compared to $1.4 million and $2.4 million for the
second quarter and six months ended June 30, 1997, respectively. The increase in
Tower's net income was primarily attributable to higher sales and capacity
utilization.
NET INCOME (LOSS). The decrease in net income, resulting in a net loss
both in the second quarter and six months ended June 30, 1997, was attributable
to increased losses in the Company's Computer Segment, primarily as a result
from the aforementioned.
Financial Condition
As of June 30, 1997, DSSI and its wholly-owned subsidiaries had working
capital of $5.8 million including cash and cash equivalents of $1.4 million
and marketable securities of $1.4 million. The decrease in working capital is
primarily attributable to the Company's investment in the development and
marketing of its PHD and CybrCard products.
As of June 30, 1997, the Company's DSI Israel subsidiary had working
capital of $2 million, including short term bank deposits of $403,000. Certain
DSI bank deposits serve as collateral for bank loans and guarantees.
Impact of Inflation and Currency Fluctuations
Approximately 90% of the Company's sales are denominated in dollars. The
remaining portion is primarily denominated in New Israel Shekels ("NIS") that
are linked to the dollar. These transaction amounts are linked to the dollar for
the period between the date the transactions are entered into and the date they
are effected and billed. Subsequent thereto, through the date of settlement,
amounts are primarily unlinked. The majority of the Company's expenses in the
six months ended June 30, 1997 were in dollars or dollar-linked NIS and
virtually all the remaining expenses were in NIS. The dollar cost of the
Company's operations in Israel is influenced by the timing and extent of any
increase in the rate of inflation in Israel over the rate of inflation in the
United States that is not offset by the devaluation of the NIS in relation to
the dollar. The Company believes that the rate of inflation in Israel has had
a minor effect on its business to date. However, the Company's dollar costs
in Israel will increase if, as opposed to the first six months of 1997,
inflation in Israel exceeds, as in previous years, the devaluation of the NIS
against the dollar or the timing of such devaluation lags behind inflation in
Israel.
The Company does not engage in any hedging activities.
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As of June 30, 1997, virtually all of the Company's monetary assets and
liabilities that were not denominated in dollars or dollar-linked NIS were
denominated in NIS, and the net amount of such monetary assets and liabilities
was not material. In the event that in the future the Company has material net
monetary assets or liabilities that are not denominated in dollar-linked NIS,
such net assets or liabilities would be subject to the risk of currency
fluctuations.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1996 10-K for a discussion of
material litigation to which the Company is a party.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11.1 - Calculation of Primary Earnings per Common Share
Exhibit 27.1 - Financial Data Schedule
Reports on Form 8-K
None
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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 AND SOFTWARE INC.
Dated: August 14, 1997
By: /s/ Yacov Kaufman
------------------------------
Yacov Kaufman
Chief Financial Officer
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