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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, 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
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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 (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, 2001: 6,961,653
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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 June 30, 2001....................... 1
Consolidated Statements of Operations
for the three and six month periods
ended June 30, 2000 and 2001 ................................... 2
Consolidated Statement of Changes in Shareholders' Equity
for the six month period ended June 30, 2001 .................. 3
Consolidated Statements of Cash Flows
for the six month periods ended June 30, 2000 and 2001 ......... 4
Notes to Consolidated Financial Statements ....................... 5
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 \ we expect(s)", "the Company \ we anticipate(s)", "the Company \ we
believe(s)", "the Company \ we estimate(s)" 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 JUNE 30,
ASSETS DECEMBER 31, 2001
2000 (UNAUDITED)
-------- ---------
Current assets:
Cash and cash equivalents .......................... $ 10,877 $ 5,758
Short-term interest bearing bank deposits
and debt securities .............................. 5,994 6,763
Restricted cash .................................... 302 6,307
Trade accounts receivable, net ..................... 9,989 10,063
Inventory .......................................... 448 609
Other current assets ............................... 1,154 1,634
-------- --------
Total current assets ........................... 28,764 31,134
Investments .......................................... 153 283
Property and equipment, net .......................... 1,535 1,771
Goodwill and other intangible assets, net ............ 2,826 2,506
Long-term deposits ................................... 6,000 --
Other assets ......................................... 543 508
Prepaid employee termination benefits ................ 2,336 2,426
-------- --------
Total assets ....................................... $ 42,157 $ 38,628
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of
long-term debt ................................... $ 591 $ 6,581
Trade accounts payable ............................. 4,347 5,290
Accrued payroll, payroll taxes and social benefits . 1,677 1,885
Other current liabilities .......................... 3,971 3,668
-------- --------
Total current liabilities ...................... 10,586 17,424
-------- --------
Long-term liabilities:
Long-term debt ..................................... 6,015 10
Liability for employee termination benefits ........ 2,935 3,136
-------- --------
Total long-term liabilities ...................... 8,950 3,146
-------- --------
Commitments and contingencies
Minority interests ................................... 40 40
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued - 8,035,334
and 8,111,534 shares at December 31, 2000 and
June 30, 2001, respectively .................... 80 81
Additional paid-in capital ......................... 35,970 36,155
Warrants ........................................... 114 114
Accumulated deficit ................................ (8,813) (12,783)
Treasury stock, at cost - 990,647 and 1,161,214
shares at December 31, 2000 and June 30, 2001,
respectively ..................................... (4,770) (5,549)
-------- --------
Total shareholders' equity ..................... 22,581 18,018
-------- --------
Total liabilities and shareholders' equity ..... $ 42,157 $ 38,628
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
-1-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000* 2001 2000* 2001
-------- -------- -------- --------
Sales:
Products ...................................................... $ 19,841 $ 18,201 $ 10,459 $ 8,948
Services ...................................................... 10,671 7,597 5,331 3,621
-------- -------- -------- --------
30,512 25,798 15,790 12,569
-------- -------- -------- --------
Cost of sales:
Products ...................................................... 15,862 14,385 8,325 6,983
Services ...................................................... 7,802 5,598 3,904 2,582
-------- -------- -------- --------
23,664 19,983 12,229 9,565
-------- -------- -------- --------
Gross profit .............................................. 6,848 5,815 3,561 3,004
Research and development expenses .................................. 540 1,353 146 871
Selling, general and administrative expenses ....................... 8,553 8,694 3,853 4,391
-------- -------- -------- --------
Operating loss ............................................ (2,245) (4,232) (438) (2,258)
Interest income .................................................... 760 646 474 262
Interest expense ................................................... (287) (267) (142) (78)
Other income (expense), net ........................................ (189) (5) (114) 56
-------- -------- -------- --------
Loss from continuing operations before
provision for income taxes .................................. (1,961) (3,858) (220) (2,018)
Provision for income taxes ......................................... 76 112 25 85
-------- -------- -------- --------
Loss from continuing operations .................................... (2,037) (3,970) (245) (2,103)
Gain on sale of discontinued operations, net of income taxes ....... 4,222 -- -- --
Loss from discontinued operations, net of income taxes ............. 104 -- 104 --
-------- -------- -------- --------
Income (loss) before extraordinary item ............................ 2,081 (3,970) (349) (2,103)
Extraordinary loss on early redemption of debt ..................... 943 -- -- --
-------- -------- -------- --------
Net income (loss) ............................................. $ 1,138 $ (3,970) $ (349) $ (2,103)
======== ======== ======== ========
Basic and diluted income (loss) per share:
Loss from continuing operations ............................... $ (0.28) $ (0.57) $ (0.04) $ (0.30)
Discontinued operations ....................................... 0.55 -- (0.01) --
Extraordinary item ............................................ (0.12) -- -- --
-------- -------- -------- --------
Net income (loss) ......................................... $ 0.15 $ (0.57) $ (0.05) $ (0.30)
======== ======== ======== ========
Weighted average number of shares
outstanding - basic and diluted ............................... 7,465 6,937 7,470 6,910
======== ======== ======== ========
* Certain amounts restated or reclassified; see Note 3.
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)
NUMBER ADDITIONAL
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 77 1 185 -- -- -- 186
Purchase of treasury shares, net -- -- -- -- (779) -- (779)
Net loss -- -- -- -- -- (3,970) (3,970)
------- ------- ------- ------- ------- ------- -------
Balances as of June 30, 2001 (unaudited) 8,112 $ 81 $36,155 $ 114 $(5,549) $(12,783) $18,018
======= ======= ======= ======= ======= ======= =======
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,
------------------------
2000* 2001
---------- ----------
Cash flows used in operating activities:
Net income (loss) ...................................................... $ 1,138 $ (3,970)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ...................................... 868 651
Issuance of subsidiary shares to minority interests ................ 87 --
Gain on sale of investment held for sale ........................... (4,989) --
Allowance for doubtful accounts .................................... 192 23
Increase in liability for employee termination benefits ............ 111 201
Loss on sale of property, plant and equipment, net ................. -- 37
Amortization of restricted stock award compensation ................ 73 --
Extraordinary loss on early redemption of debt ..................... 943 --
Non-cash interest expense on convertible debentures and warrants ... 37 --
Write-off of inventory ............................................. -- 26
Receipt of investments for services rendered ....................... -- (130)
Change in operating assets and liabilities:
Increase in accounts receivable and other current assets ......... (1,207) (577)
(Increase) decrease in inventory ................................. 771 (187)
Decrease in other assets ......................................... 401 35
Increase (decrease) in accounts payable and other liabilities .... (1,944) 848
-------- --------
Net cash used in operating activities .............................. (3,519) (3,043)
-------- --------
Cash flows (used in) provided by investing activities:
Short-term bank deposits, net .......................................... (8,065) 696
Restricted cash ........................................................ 207 (5)
Investment in long-term deposits ....................................... (16,076) --
Investment in debt securities .......................................... -- (1,865)
Acquisitions of property and equipment ................................. (393) (600)
Proceeds from sale of property and equipment ........................... 21 --
Proceeds from sale of Tower ............................................ 30,889 --
Proceeds from maturity of long-term deposits ........................... 5,000 --
Proceeds from sale and maturity of debt securities ..................... -- 400
Funding of termination benefits ........................................ (80) (90)
Acquisition of intangible assets ....................................... (9) (4)
-------- --------
Net cash (used in) provided by investing activities ................ 11,494 (1,468)
-------- --------
Cash flows used in financing activities:
Short-term debt, net ................................................... (6,004) (10)
Proceeds of long-term debt ............................................. 6,013 --
Repayments of long-term debt ........................................... (37) (5)
Proceeds from stock options exercises .................................. 51 186
Purchase of treasury shares, net ....................................... (368) (779)
Redemption of convertible debt ......................................... (2,001) --
-------- --------
Net cash (used in) financing activities ............................ (2,346) (608)
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... 5,629 (5,119)
Cash and cash equivalents at beginning of period ......................... 1,379 10,877
-------- --------
Cash and cash equivalents at end of period ............................... $ 7,008 $ 5,758
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 556 $ 230
======== ========
Income taxes ..................................................... $ 3,282 $ 437
======== ========
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.
-4-
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 six-month period ended June 30, 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 June 30, 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 investments 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 June 30, 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.
-5-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria intangible assets acquired in a purchase method business combination
must meet, to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $1,848 and unamortized other intangible assets in the
amount of $336, all of which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill and other
intangible assets was $794 and $324 for the year ended December 31, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
consolidated financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
-6-
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 six and three month periods ended June 30, 2000
is as reported in Form 10-K which differs from the data previously reported on
Form 10-Q as described below:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------------- -------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED ADJUSTED REPORTED ADJUSTED
---------- ---------- ---------- ---------
Income (loss) from continuing operations $2,308 $(2,037)(1) $(807) $(245)(4)
Gain on sale of discontinued
operations, net of income taxes -- 4,222(2) -- --
Loss from discontinued
operations, net of income taxes (104) (104) (104) (104)
Extraordinary loss on early redemption of debt (340) (943)(3) -- --
------ ------- ----- ----
Net income (loss) $1,864 $ 1,138 $(911) $(349)
====== ======= ===== ====
Basic and diluted income (loss) per share:
Income (loss) from continuing operations $0.31 $(0.28) $(0.11) $(0.04)
Discontinued operations (0.01) 0.55 (0.01) (0.01)
Extraordinary item (0.05) (0.12) -- --
------ ------ ------- ------
Net income (loss) per share $ 0.25 $ 0.15 $(0.12) $(0.05)
====== ====== ======= ======
(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).
Taxes related to the sale of $460 previously provided for in the second
quarter of 2000 have been offset against the gain. In addition, $184
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.
(3) The extraordinary loss on early redemption of debt was restated to include
an additional $419 loss that had been previously deferred and $184 that had
originally been classified as interest expense.
(4) Taxes related to the sale of our interest in Tower of $460 previously
provided for in the second quarter of 2000 have been offset against the
gain on sale of discontinued operations, recognized in the first quarter on
a restated basis. In addition, $102 originally classified as interest
expense was reclassified as extraordinary loss, recognized in the first
quarter on a restated basis.
-7-
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
NOTE 4: SEGMENT INFORMATION
CONSULTING
AND TOTAL
DEVELOPMENT UTILITY COMPUTER REPORTABLE
SERVICES SOLUTIONS HARDWARE SEGMENTS OTHER (*) TOTAL
----------- --------- -------- ---------- --------- -----
Six months ended June 30, 2001:
Revenues from external customers $7,120 $6,108 $12,486 $25,714 $84 $25,798
Intersegment revenues 90 603 57 750 -- 750
Segment profit (loss) (662) (3,023) 806 (2,879) (8) (2,887)
Six months ended June 30, 2000:
Revenues from external customers $10,309 $10,466 $9,550 $30,325 $149 $30,474
Intersegment revenues 187 675 177 1,039 -- 1,039
Segment profit (loss) 58 (971) 192 (721) 29 (692)
Three months ended June 30, 2001:
Revenues from external customers $3,340 $2,719 $6,472 $12,531 $38 $12,569
Intersegment revenues 87 289 32 408 -- 408
Segment profit (loss) (284) (1,901) 549 (1,636) -- (1,636)
Three months ended June 30, 2000:
Revenues from external customers $5,251 $6,025 $4,426 $15,702 $80 $15,782
Intersegment revenues 5 431 161 597 -- 597
Segment profit (loss) 60 (122) (38) (100) 17 (83)
-----------
(*) Represents the 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)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 2001 2000 2001
----------- ------------ ------------ -----------
Total loss for reportable segments $ (721) $(2,879) $ (100) $ (1,636)
Other operational segment profit (loss) 29 (8) 17 --
----------- ------------ ------------ -----------
Total (692) (2,887) (83) (1,636)
Unallocated amounts:
Net profit (loss) of corporate headquarters 1,830* (1,083) (266) (467)
----------- ------------ ------------ -----------
Total consolidated net income (loss) $ 1,138 $(3,970) $ (349) $(2,103)
=========== ============ ============ ===========
-----------
(*) 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.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
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 our 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: computer consulting and development services, utility solutions and
computer hardware. The following analysis should be read together with the
segment information provided in Note 4 to the interim consolidated financial
statements included in this quarterly report, which information is hereby
incorporated by reference into this Item 2.
CONSULTING AND DEVELOPMENT SERVICES
Sales and gross profits in the second quarter and first six months of 2001
decreased in comparison to the same periods in 2000. This decrease reflects the
impact of the continued downturn in the hi-tech industry in general and the
demand for consulting and development services in particular. In comparison to
the immediately preceding quarter, although sales did continue to decrease, we
witnessed an increase in gross profit and decrease in operating losses as a
result of a relatively sharp decrease in direct costs, primarily due to reduced
severance expenses. We currently do not expect the hi-tech downturn and
resulting trend of decreasing sales to improve in the next few quarters. In
addition, there are fewer workdays in the third quarter, due to the summer
vacations and holidays, further decreasing expected segment sales.
UTILITY SOLUTIONS
Sales in this segment during the second quarter and first six months of
2001 were lower than those in the comparable periods of 2000. Although we are
investing heavily in marketing and development of products, adding to our
already comprehensive basket of products, to meet utility needs, these efforts
have not yet resulted in increased sales. In comparison to the immediately
preceding quarter, sales decreased due to reduced load control product sales,
partially offset by an increase in our Maingate product sales, primarily to Gulf
Power. While the market is showing signs of growing awareness, we are meeting
increased competition to our load control products. Although we currently have
numerous proposals to potential customers pending for virtually all our
products, the utility industry characteristically has a long sales cycle and it
is difficult to project when these proposals will result in new sales, if at
all. We believe that the combination of our increased marketing efforts over the
past year, and heightened industry awareness of the need to invest in products
increasing efficiency, will ultimately result in increased sales.
COMPUTER HARDWARE
Sales and profits in this segment continued to increase to record highs in
the second quarter and first six months of 2001. During the current periods we
also recorded improved profit margins. The improved results in this segment, are
a direct result of the aggressive marketing efforts we have made, and will
continue to be required, in order to maintain this level of activity. The market
for hardware sales is highly competitive and there is no assurance that we can
maintain this level of activity.
-9-
RESULTS OF OPERATIONS
The following table sets forth certain information with respect to our
results of operations for the three and six month periods ended June 30, 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.
Six months ended June 30, Three months ended June 30,
---------------------------------------------- ------------------------------------------------
Change Change
from from
2000 2000
to to
2000* 2001 2001 2000* 2001 2001
---------------- ----------------- ----- ----------------- ------------------- -----
% of % of % of % of % of % of
($,000) sales ($,000) sales 2000 ($,000) sales ($,000) sales 2000
-------- ----- -------- ----- ----- ------- ------ -------- ------- ------
Sales ......................... $ 30,512 100% $ 25,798 100% (15)% $ 15,790 100% $ 12,569 100% (20)%
Cost of sales ................. 23,664 78 19,983 77 16 12,229 77 9,565 76 (22)
-------- --- -------- --- -------- --- -------- ---
Gross profit .............. 6,848 22 5,815 23 (15) 3,561 23 3,004 24 (16)
R&D expenses .................. 540 2 1,353 5 151 146 1 871 7 497
SG&A expenses ................. 8,553 28 8,694 34 2 3,853 24 4,391 35 14
-------- --- -------- --- -------- --- -------- ---
Operating loss ............ (2,245) (7) (4,232) (16) 89 (438) (3) (2,258) (18) 415
Interest income, net .......... 473 2 379 1 (20) 332 2 184 1 (45)
Other income (expense) ........ (189) (1) (5) 0 (97) (114) (1) 56 0 (149)
-------- --- -------- --- -------- --- -------- ---
Loss from continuing
operations before income tax (1,961) (6) (3,858) (15) 97 (220) (1) (2,018) (16) 817
Provision for income taxes .... 76 (0) 112 0 47 25 (0) 85 1 240
-------- --- -------- --- -------- --- -------- ---
Loss from continuing
operations after income taxes (2,037) (7) (3,970) (15) 95 (245) (2) (2,103) (17) 759
Gain on sale of discontinued
operations, net of income
taxes ....................... 4,222 14 -- -- (100) -- -- -- -- --
Loss from discontinued
operations, net of
income taxes ................ 104 (0) -- -- (100) 104 1 -- -- (100)
-------- --- -------- --- -------- --- -------- ---
Net income (loss) before
extraordinary item ........ 2,081 (3,970) (15) (291) (349) (2) (2,103) (17) 503
Extraordinary loss on early
redemption of convertible
debentures .................. 943 (3) -- -- (100) -- -- -- --
-------- --- -------- --- -------- --- -------- ---
Net income (loss) ......... $ 1,138 4% $ (3,970) (15)% (449)% $ (349) (2)% $ (2,103) (17)% 503%
======== === ======== ==== ======== === ======== ===
(*) Certain amounts restated or reclassified; see Note 3 to the interim
financial statements included in this quarterly report.
SALES. The decrease in sales in both the second quarter and first six
months of 2001, as compared to the comparable periods in 2000, was primarily due
to decreased utility solutions and consulting and development services segment
sales. Utility solutions segment sales decreased by $3.4 and $4.4 million in the
second quarter and first six months of 2001, respectively, as compared to the
same periods last year. The decrease in utility solutions sales was due to
non-recurring sales during the 2000 periods of backlog and component inventory,
purchased as part of the acquisition of the Scientific-Atlanta Control Systems
Division. Consulting and development services segment sales decreased by $1.9
million and $3.2 million in the second quarter and first six months of 2001,
respectively, as compared to the same periods last year, primarily as a result
of the general down turn in the hi-tech industry, which has resulted in
decreased demand for software services. These decreases were partially offset by
computer hardware sales, which increased by $2.1 million and $3.0 million in the
second quarter and first six months of 2001, respectively, as compared to the
same periods last year.
GROSS PROFIT. The decrease in gross profit in the second quarter and first
six months of 2001, as compared to the same periods last year was due to the
aforementioned decrease in sales, while the gross profit margins for these
periods remained relatively stable. Although gross profit margins improved in
both the utility solutions and computer hardware segments, this did not result
in a more significant improvement in total profit margins, as the computer
hardware segment, which has relatively lower profit margins compared to the
other segments, accounted for a larger percentage of total sales.
RESEARCH AND DEVELOPMENT ("R&D"). The increase in R&D expenses, primarily
in the second quarter of 2001, was due to a concentrated effort in the utility
solution segment, to bring to market a more varied set of solutions, while
consolidating and integrating products already offered by our Comverge
subsidiary. Among the technologies developed are 900 MHz communication
capabilities to enhance our DCU load control product, latest generation CDPD
technology upgrade for our CDC product and upgrade and enhancement of the
control system software for our Maingate system currently being installed at
Gulf Power.
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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, where SG&A increased by $497,000 and $853,000 in the second
quarter and the first six months of 2001, respectively, as compared to the same
periods in 2000. This increase was due primarily to increased marketing and
administrative costs, which we are making to take advantage of the current
heightened market awareness of the need for products which foster more efficient
energy utilization.
GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF INCOME TAXES. The gain, net
of taxes, in the first six months of 2000, was from the sale of our Tower
investment, in the first quarter of that year.
FINANCIAL CONDITION
As of June 30, 2001 we had working capital of $13.7 million, including
non-restricted cash, cash equivalents and short-term interest bearing deposits
and debt securities of $12.5 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 June 30, 2001
as compared to our balance sheet as of December 31, 2000 in restricted cash,
long-term deposits, short-term debt and long-term debt reflects the change in
the classification of this loan from long-term to short-term debt. In addition,
during the first six months of 2001 we acquired our own shares at a net cost of
$779,000.
We believe we have adequate liquidity to finance our activities for the
foreseeable future.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
We are required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that we evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in our statement of operations.
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As of the date of adoption, we expect to have unamortized goodwill in the
amount of $1,848 and unamortized other intangible assets in the amount of $336,
all of which will be subject to the transition provisions of Statements 141 and
142. Amortization expense related to goodwill and other intangible assets was
$794 and $324 for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on our consolidated financial statements
at the date of this report, including whether any transitional impairment losses
will be required to be recognized, as the cumulative effect of a change in
accounting principle.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in
interest rates due to our investment in debt securities and our bank debt. We do
not employ specific strategies, such as the use of derivative instruments or
hedging, to manage our interest rate exposures. We currently have $1.5 million
invested 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. Our investment in debt securities is managed
by a company controlled by one of our directors.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Meeting") was held on
June 21, 2001. The holders of 6,487,049 shares of common stock were present
either in person or by proxy. There were 4,329,687 broker non-votes at the
meeting. The following three matters were voted on and approved at the Meeting:
1. The following persons were elected as directors of the Company:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
George Morgenstern 5,887,055 599,994
Robert L. Kuhn 5,887,055 599,994
Harvey Eisenberg 5,887,055 599,994
Sheldon Krause 5,887,055 599,994
Susan K. Malley 5,887,055 599,994
Maxwell M. Rabb 5,886,455 600,594
Allen I. Schiff 5,887,055 599,994
2. The adoption of an amendment to the 1994 Stock Incentive Plan to
increase the number of shares subject thereto was approved as follows:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
1,337,405 814,100 5,857
3. The adoption of an amendment to the 1994 Stock Option Plan for Outside
Directors to increase the number of shares subject thereto was approved
as follows:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
1,262,658 883,547 11,157
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.1 Employment Agreement dated as of March 30, 2001 between
Comverge Technologies, Inc. and Joseph D. Esteves.
(b) 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 & SOFTWARE INC.
Dated: August 6, 2001
By: /S/ YACOV KAUFMAN
--------------------------
Yacov Kaufman
Chief Financial Officer
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