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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, 2001 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
May 11, 2001: 6,869,787
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2000 and March 31, 2001....................... 1
Consolidated Statements of Operations
for the three month periods ended March 31, 2000 and 2001 ...... 2
Consolidated Statement of Changes in Shareholders' Equity
for the three month period ended March 31, 2001 ................ 3
Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2000 and 2001 ....... 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 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)
AS OF AS OF
DECEMBER 31, MARCH 31,
ASSETS 2000 2001
(UNAUDITED)
---------- -----------
Current assets:
Cash and cash equivalents........................................ $ 10,877 $ 7,045
Short-term interest bearing bank deposits and debt securities.... 5,994 7,241
Restricted cash.................................................. 302 6,313
Trade accounts receivable, net................................... 9,989 10,366
Inventory........................................................ 448 315
Other current assets ............................................ 1,154 1,594
--------- ---------
Total current assets............................................... 28,764 32,874
Investments........................................................... 153 203
Property and equipment, net........................................... 1,535 1,530
Goodwill and other intangible assets, net............................. 2,826 2,668
Long-term deposits.................................................... 6,000 -
Other assets.......................................................... 543 618
Prepaid employee termination benefits................................. 2,336 2,356
--------- ---------
Total assets...................................................... $ 42,157 $ 40,249
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt......... $ 591 $ 6,296
Trade accounts payable........................................... 4,347 4,787
Accrued payroll, payroll taxes and social benefits............... 1,677 1,957
Other current liabilities........................................ 3,971 4,014
--------- ---------
Total current liabilities.................................... 10,586 17,054
--------- ---------
Long-term liabilities:
Long-term debt................................................... 6,015 12
Liability for employee termination benefits...................... 2,935 3,222
--------- ---------
Total long-term liabilities.................................. 8,950 3,234
--------- ---------
Minority interests.................................................... 40 40
--------- ---------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued and
outstanding - 8,035,334 and 8,042,334
shares at December 31, 2000
and March 31, 2001, respectively............................. 80 80
Additional paid-in capital....................................... 35,970 35,986
Warrants......................................................... 114 114
Accumulated deficit.............................................. (8,813) (10,680)
Treasury stock, at cost - 990,647 and 1,172,547 shares at
December 31, 2000 and March 31, 2001, respectively........... (4,770) (5,579)
--------- ---------
Total shareholders' equity............................................ 22,581 19,921
--------- ---------
Total liabilities and shareholders' equity................... $ 42,157 $ 40,249
========= =========
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 (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
2000* 2001
------------ ------------
Sales:
Products .................................................. $ 9,382 $ 9,253
Services .................................................. 5,340 3,976
-------- --------
14,722 13,229
-------- --------
Cost of sales:
Products .................................................. 7,537 7,402
Services .................................................. 3,898 3,016
-------- --------
11,435 10,418
-------- --------
Gross profit .............................................. 3,287 2,811
Research and development expenses .............................. 394 482
Selling, general and administrative expenses ................... 4,700 4,303
-------- --------
Operating loss ............................................ (1,807) (1,974)
Interest income ................................................ 286 384
Interest expense ............................................... (145) (189)
Other expense, net ............................................. (75) (61)
-------- --------
Loss from continuing operations
before provision for income taxes ....................... (1,741) (1,840)
Provision for income taxes ..................................... 51 27
-------- --------
Loss from continuing operations ........................... (1,792) (1,867)
Gain on sale of discontinued operations, net of income taxes ... 4,222 --
-------- --------
Income (loss) before extraordinary item ................... 2,430 (1,867)
Extraordinary loss on early redemption of debt ................. 943 --
-------- --------
Net income (loss) ......................................... $ 1,487 $ (1,867)
======== ========
Basic and diluted income (loss) per share:
Loss from continuing operations ........................... $ (0.24) $ (0.27)
Discontinued operations ................................... 0.56 --
Extraordinary item ........................................ (0.12) --
-------- --------
Net income (loss) per share ............................... $ 0.20 $ (0.27)
======== ========
Weighted average number of shares
outstanding - basic and diluted ............................... 7,460 6,964
======== ========
(*) Certain amounts restated or reclassified; see Note 3.
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 OF COMMON PAID-IN TREASURY ACCUMULATED
SHARES STOCK CAPITAL WARRANTS STOCK DEFICIT TOTAL
----------- ----------- ------------ ----------- ----------- ------------- ------------
Balances as of
January 1, 2001 8,035 $ 80 $35,970 $ 114 $(4,770) $(8,813) $22,581
Exercise of options 7 - 16 - - - 16
Purchase of treasury shares - - - - (809) - (809)
Net loss - - - - - (1,867) (1,867)
----------- ----------- ------------ ----------- ----------- ------------- ------------
Balances as of
March 31, 2001 8,042 $ 80 $35,986 $ 114 $(5,579) $(10,680) $19,921
=========== =========== ============ =========== =========== ============= ============
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)
THREE MONTHS ENDED MARCH 31,
2000* 2001
-------- --------
Cash flows used in operating activities:
Net income (loss) .............................................................. $ 1,487 $ (1,867)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization .............................................. 435 353
Issuance of subsidiary shares to minority interests ........................ 87 --
Gain on sale of investment held for sale ................................... (4,989) --
Allowance for doubtful accounts ............................................ 192 --
Increase in liability for employee termination benefits .................... 55 287
Loss on sale of property, plant and equipment .............................. -- 10
Amortization of restricted stock award compensation ........................ 64 --
Extraordinary loss on early redemption of debt ............................. 943 --
Non-cash interest expense on convertible debentures and warrants ........... 37 --
Receipt of investments for services rendered ............................... -- (50)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable and other current assets ..... 37 (817)
Decrease in inventory ................................................... 750 133
Decrease (increase) in other assets ..................................... 437 (75)
Increase (decrease) in accounts payable and other current liabilities ... (2,695) 763
-------- --------
Net cash used in operating activities ...................................... (3,160) (1,263)
-------- --------
Cash flows provided by (used in) investing activities:
Short-term bank deposits, net .................................................. (9,982) (96)
Restricted cash ................................................................ 245 (11)
Investment in long-term deposits ............................................... (11,246) --
Investment in debt securities .................................................. -- (1,151)
Acquisitions of property and equipment ......................................... (222) (196)
Proceeds from sale of property and equipment ................................... 21 --
Proceeds from sale of Tower .................................................... 30,889 --
Funding of termination benefits ................................................ (61) (20)
Acquisition of intangible assets ............................................... (9) (4)
-------- --------
Net cash provided by (used in) investing activities ........................ 9,635 (1,478)
-------- --------
Cash flows provided by (used in) financing activities:
Short-term debt, net ........................................................... (5,782) (295)
Proceeds of long-term debt ..................................................... 6,013 --
Repayments of long-term debt ................................................... (20) (3)
Proceeds from stock options exercises .......................................... 23 16
Purchase of treasury stock ..................................................... (300) (809)
Redemption of convertible debentures ........................................... (2,001) --
-------- --------
Net cash used in financing activities ...................................... (2,067) (1,091)
-------- --------
Net increase (decrease) in cash and cash equivalents ................................ 4,408 (3,832)
Cash and cash equivalents at beginning of period .................................... 1,379 10,877
-------- --------
Cash and cash equivalents at end of period .......................................... $ 5,787 $ 7,045
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 404 $ 127
======== ========
Income taxes ............................................................... $ 3,019 $ 32
======== ========
Non-cash activities:
Issuance of shares from conversion of convertible debt ...................... $ 260
========
(*) Certain amounts restated or reclassified; see Note 3.
The accompanying notes are an integral part of these
consolidated financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Data
Systems & Software Inc. and subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
DEBT SECURITIES
Debt securities at March 31, 2001 consist of U.S. Treasury,
asset-backed and corporate debt securities. The Company classifies its debt
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the security
until maturity. All securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in operations. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from operations and are reported as a separate component
of other comprehensive income until realized. Realized gains and losses from the
sale of available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to operations and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned. All investment in debt securities are classified as trading or
held-to-maturity and are recorded in short-term interest bearing bank deposits
and debt securities in the consolidated balance sheet at March 31, 2001.
DERIVATIVE INSTRUMENTS
In June 1998 and June 2000, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", an amendment of SFAS No. 133, respectively,
which establish accounting and reporting standards for all derivative
instruments and hedging activities. These statements require an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those investments at fair value. The Company's adoption of these
pronouncements on January 1, 2001 had no effect on the Company's consolidated
results of operations, financial position and financial disclosures, as the
Company had no derivatives or embedded derivatives requiring separate accounting
and disclosure. In addition, the Company does not engage in hedging activities
of foreign currency.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
NOTE 3: RESTATEMENT OF PREVIOUSLY REPORTED RESULTS
The financial data for the first quarter of 2000 differs from the data
previously reported by us on Form 10-Q as described below:
Previously As
reported adjusted
--------- ---------
Income (loss) from continuing operations (1) ......... $ 3,115 $ (1,792)
Gain on sale of discontinued operations (2) .......... -- 4,222
Extraordinary loss on early redemption of debt (3) ... (340) (943)
--------- ---------
Net income ........................................... $ 2,775 $ 1,487
========= =========
Basic income (loss) per share:
Income (loss) from continuing operations .......... $ 0.42 $ (0.24)
Discontinued operations ........................... -- 0.56
Extraordinary item ................................ (0.05) (0.12)
--------- ---------
Net income per share .............................. $ 0.37 $ 0.20
========= =========
(1) The gross gain on the sale of our interest in Tower of $4,989 has been
reclassified from other income (loss), net, to discontinued operations, to
properly reflect the sale as a discontinued operation (see (2) below). In
addition, $82 originally classified as interest expense was reclassified as
extraordinary loss.
(2) The gain on sale of discontinued operations, net of taxes of $4,222 has been
reclassified from other income (loss), net, to properly reflect the sale of
our interest in Tower as a discontinued operation. Taxes related to the sale
of $460 previously provided for in the second quarter of 2000 and $307
identified in the fourth quarter of 2000 have been offset against the gain
in the first quarter of 2000.
(3) The extraordinary loss on early redemption of debt was restated to include
an additional $521 loss that had been previously deferred and $82 that had
originally been classified as interest expense.
NOTE 4: SEGMENT INFORMATION
CONSULTING
AND
DEVELOPMENT UTILITY COMPUTER
SERVICES SOLUTIONS HARDWARE OTHER(*) TOTAL
------------ ----------- ---------- --------- ----------
Three months ended March 31, 2001:
Revenues from external customers $3,780 $3,389 $6,014 $46 $13,229
Intersegment revenues 3 314 25 - 342
Segment profit (loss) (378) (1,122) 257 (8) (1,251)
Three months ended March 31, 2000:
Revenues from external customers $5,058 $4,441 $5,124 $69 $14,692
Intersegment revenues 182 244 16 - 442
Segment profit (loss) (2) (849) 230 12 (609)
- -----------
(*) Represents operations of a VAR software operation in Israel that did not
meet the quantitative thresholds of FAS 131.
RECONCILIATION OF SEGMENT PROFIT TO CONSOLIDATED NET PROFIT (LOSS)
Three months ended March 31, 2001:
Total loss for reportable segments $ (1,243)
Other operational segment loss (8)
--------
Total (1,251)
Unallocated amounts: Net loss of corporate headquarters (616)
-------
Total consolidated net loss $(1,867)
=======
Three months ended March 31, 2000:
Total loss for reportable segments $ (621)
Other operational segment profit 12
--------
Total (609)
Unallocated amounts: Net profit of corporate headquarters* 2,096
-------
Total consolidated net income $1,487
=======
- ---------------------
(*) Includes a gain, net of income taxes, of $4,222 from the sale of Tower
shares and an extraordinary loss of $943 on early redemption of debt.
- 6 -
DATA SYSTEMS AND SOFTWARE INC.
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, 2000 (the "2000 10-K").
During the periods included in this report, we operated in three
reportable segments: utility solutions, computer hardware and computer
consulting and development services. The following analysis should be read
together with the segment information provided in Note 4 to the interim
financial statements included in this quarterly report.
CONSULTING AND DEVELOPMENT SERVICES
Sales in this segment declined throughout the last half of 2000 and into
the first quarter of 2001. Although we are increasing our marketing efforts and
are actively pursuing additional business, we do not expect significant
improvement in the next few quarters due to the impact of the downturn in the
hi-tech industry on demand for consulting and development services.
UTILITY SOLUTIONS
Sales of the segment declined in the second half of 2000. Sales improved in
the first quarter of 2001 over sales in the immediately preceding quarter but
remained below the level of the first quarter of 2000. Gross profit margins of
the segment improved due to an improved sales mix. We expect these trends to
continue into the second quarter, although visibility is limited by the
uncertainty related to energy deregulation in the U.S.
COMPUTER HARDWARE
Sales and profits in the computer hardware segment continued at the levels
of the immediately preceding quarter, and were better than those of the first
quarter of 2000. We expect second quarter 2001 results to be in line with those
of the first quarter of 2001.
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, 2000
and 2001, 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 from
2000* 2001 2000 to 2001
-------------------- -------------------- --------------
($,000) % of sales ($,000) % of sales % of 2000
-------- -------- -------- -------- ---------
Sales $14,722 100% $13,229 100% (10)%
Cost of sales 11,435 78 10,418 79 (9)
-------- -------- -------- --------
Gross profit 3,287 22 2,811 21 (14)
R&D expenses 394 3 482 3 22
SG&A expenses 4,700 32 4,303 33 (8)
-------- -------- -------- --------
Operating loss (1,807) (12) (1,974) (15) 9
Interest income (expense), net 1 195 1 38
141
Other expense, net (75) (1) (61) 0 (19)
-------- -------- -------- --------
Loss from continuing operations before (1,741) (12) (1,840) (14) 6
provision for income taxes
Provision for income taxes 51 - 27 0 (47)
-------- -------- -------- --------
Loss from continuing operations (1,792) (12) (1,867) (14) 4
Gain on sale of discontinued operations, net
of income taxes 4,222 28 - - 100
-------- -------- -------- --------
Income (loss) before extraordinary item 2,430 16 (1,867) (14) (177)
Extraordinary loss on early redemption of debt
(943) (6) - - (100)
-------- -------- -------- --------
Net income (loss) $1,487 10% $(1,867) (14)% (226)%
======== ======== ======== ========
(*) Certain amounts restated or reclassified: see Note 3 to the the interim
financial statements included in this quarterly report.
- 7 -
SALES. The $1.5 million decrease in sales in the first quarter of 2001, as
compared to the same quarter in 2000, was attributable to a $1.3 million
decrease in sales from the consulting and development services segment and a
$1.1 million decrease in sales from the utility solutions segment, offset by a
$890,000 increase in computer hardware sales. The decrease in sales of the
consulting and development services segment was primarily attributable to a
decrease in the number of consultants, both in the US and in Israel. The
decrease in utility solutions sales in the first quarter of 2001 as compared to
the first quarter of 2000, was due to non-recurring sales during the 2000 period
of backlog and component inventory sold at cost, purchased as part of the
acquisition of the Scientific-Atlanta Control System Division.
GROSS PROFIT. The 14% decrease in gross profit and the decrease in gross
profit margin, was primarily due to the decrease in sales and increase in lower
margin computer hardware sales in the first quarter of 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in SG&A
was due primarily to a $470,000 decrease in corporate expenses, as compared with
SG&A of the first quarter of last year which included non-recurring bonuses of
$550,000 partially offset by increases in SG&A in the utilities solutions
segment due to increased marketing activity.
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF INCOME TAXES. The gain, net
of taxes, in the first quarter of 2000, was from the sale of our Tower
investment.
FINANCIAL CONDITION
As of March 31, 2001 we had working capital of $15.8 million, including
non-restricted cash, cash equivalents and short-term interest bearing deposits
and debt securities of $14.3 million. In February 2000 we took a $6 million term
loan from a bank which is secured by a $6 million bank deposit.. The loan bears
interest at a rate of LIBOR plus 0.75% per annum and is repayable in a single
payment in February 2002. The changes on our balance sheet as of March 31, 2001
as compared to our balance sheet as of December 31, 2001 in restricted cash,
long-term deposits, short-term debt and long-term debt reflects the change in
the classification of this loan from long-tern to short-term debt. In addition,
during the first quarter of 2001 we acquired 181,900 of our own shares at a cost
of $809,000.
We believe we now have adequate liquidity to finance our activities for the
foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in
interest rates so we seek debt financing to make capital expenditures. We do not
employ specific strategies, such as the use of derivative instruments or
hedging, to manage our interest rate exposures. Since December 31, 2000, we have
invested $851,000 in debt securities with maturities in excess of one year.
These debt securities are classified as trading securities and expose us to
interest rate risk with respect to the effect fluctuations of market interest
rates have on the valuation of these securities.
-8-
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Contract for Asset Management Services between the
Registrant and Malley Associates Capital Management, Inc.
(b) Reports on Form 8-K
None
- 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, 2001
By: /s/ Yacov Kaufman
-------------------
Yacov Kaufman
Chief Financial Officer
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