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 SEPTEMBER 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
October 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 September 30, 1997 1
Consolidated Statements of Operations
for the three month and nine month periods ended
September 30, 1996 and September 30, 1997 2
Statement of Changes in Shareholders' Equity
for the nine month period ended September 30, 1997 3
Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1996 and September 30, 1997 4
Schedules to Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1996 and September 30, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. Other Information
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31, September 30,
ASSETS 1996 1997
--------- ------------
Current assets: (unaudited)
Cash and cash equivalents $ 2,464 $ 1,035
Short-term interest bearing bank deposits 398 400
Marketable debt securities 5,226 -
Restricted cash 1,403 1,786
Trade accounts receivable, net 7,875 8,320
Inventory 953 503
Notes receivable - 2,205
Other current assets 1,740 1,801
--------- ---------
Total current assets 20,059 16,050
--------- ---------
Investments 68,372 73,488
--------- ---------
Property and equipment, net 2,279 2,281
--------- ---------
Other assets:
Capitalized software development costs, net 5,229 4,608
Intangible assets, net 468 349
Note receivable 2,083 -
Other 3,626 4,381
--------- ---------
11,406 9,338
--------- ---------
--------- ---------
Total assets $ 102,116 $ 101,157
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt -banks and others $ 1,962 $ 2,129
Current maturities of long-term debt-banks and others 162 1,135
Trade accounts payable 1,643 2,105
Accrued payroll, payroll taxes and social benefits 2,140 2,571
Other current liabilities 476 1,062
--------- ---------
Total current liabilities 6,383 9,002
--------- ---------
Long-term liabilities -bank and others,
net of current maturities 472 560
--------- ---------
Minority interests 29,283 31,149
--------- ---------
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 34,144
Retained earnings 33,752 28,073
--------- ---------
67,826 62,294
Treasury stock, at cost - 339,362 shares (1,848) (1,848)
--------- ---------
Total shareholders' equity 65,978 60,446
--------- ---------
Total liabilities and shareholders' equity $ 102,116 $ 101,157
========= =========
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)
Nine months ended Three months ended
September 30, September 30,
----------------- -----------------
1996 1997* 1996 1997*
------- ------- ------- ------
Sales:
Products $87,630 $14,903 $24,574 $ 5,006
Services 13,515 14,371 4,128 4,267
------- ------- ------- -------
101,145 29,274 28,702 9,273
------- ------- ------- -------
Cost of sales:
Products 68,263 10,601 20,744 2,802
Services 10,503 11,898 3,408 4,081
------- ------- ------- -------
78,766 22,499 24,152 6,883
------- ------- ------- -------
------- ------- ------- -------
Gross profit 22,379 6,775 4,550 2,390
Research and development expenses, net 3,263 3,108 1,535 195
Selling, general and administrative
expenses 13,272 13,489 4,192 4,489
------- ------- ------- -------
Operating income (loss) 5,844 (9,822) (1,177) (2,294)
Interest income 5,055 631 1,347 86
Interest expenses (2,383) (171) (660) (11)
Other income, net 1,869 55 1,840 32
------- ------- ------- -------
Income (loss) before income taxes 10,385 (9,307) 1,350 (2,187)
Income tax expense (benefit) 3,084 (135) 1,434 (7)
------- -------- ------- -------
Income (loss) after income taxes 7,301 (9,172) (84) (2,180)
Minority interests (6,868) (1,892) (724) (571)
Equity in affiliates (542) 5,385 (416) 1,454
------- ------- ------- -------
Net loss $ (109) ($5,679) $(1,224) ($1,297)
======= ======= ======= =======
Loss per share $ (0.01) $ (0.77) $ (0.17) ($ 0.18)
======= ======= ======= =======
Weighted average number of shares
outstanding (thousands) 7,330 7,369 7,369 7,369
======= ======= ======= =======
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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 -- -- 147 -- -- 147
Net loss -- -- -- -- (5,679) (5,679)
--------- ------- ------- ------- -------- --------
Balances as of
September 30, 1997 7,708,540 $ 77 $34,144 ($1,848) $ 28,073 $ 60,446
========= ======= ======= ======= ======== ========
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)
Nine months ended
September 30,
------------------
1996 1997*
------- -------
Cash flows from operating activities:
Net loss $ (109) $(5,679)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities - see Schedule A 18,072 250
------- -------
Net cash provided by (used in) operating activities 17,963 (5,429)
------- -------
Cash flows from investment activities:
Decrease (Increase) in short-term interest bearing
bank deposits (1,678) 35
Increase in restricted cash (97) (330)
Investments in marketable securities (152,148) (25,223)
Proceeds from realization of marketable securities 181,312 30,787
Acquisitions of property and equipment (46,929) (748)
Proceeds from sale of property and equipment 39 39
Proceeds from sale of shares in non-affiliated company 80 -
Investments in capitalized software development
costs, net (1,655) (693)
Investments in other assets (36) (970)
Loans to affiliates (1,760) -
Net effect of change in reporting from equity
to consolidation method - see Schedule B - 102
Net cash transferred on sale of subsidiary - see Schedule C (130) -
------- -------
Net cash provided by (used in) investment activities (23,002) 2,999
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 106 -
Increase (decrease) in short-term debt, net (1,810) 113
Proceeds from long-term debt 714 1,018
Repayments of long-term debt (1,012) (130)
------- -------
Net cash provided by (used in) financing activities (2,002) 1,001
------- -------
------- -------
Net decrease in cash and cash equivalents (7,041) (1,429)
Cash and cash equivalents at beginning of period 25,959 2,464
------- -------
Cash and cash equivalents at end of period $18,918 $ 1,035
======= =======
Supplemental cash flow information:
Interest paid during the period $ 622 $ 129
======= =======
Income taxes paid during the period $ 1,724 $ 162
======= =======
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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
Schedules to Consolidated Statements of Cash Flows
(dollars in thousands)
Nine months ended
September 30,
------------------
1996 1997*
------- -------
A. Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization $12,017 $ 829
Gain on sale of ownership interests in affiliated company (1,710) -
Minority interests 6,868 1,892
Write-down of capitalized software development - 1,967
Earnings on marketable debt securities (1,991) (92)
Deferred income taxes 2,484 262
Increase in liability for severance pay 322 140
Equity in affiliates 542 (5,385)
Decrease (increase) in accounts receivable
and other current assets 6,067 (1,422)
Decrease (increase) in inventory (2,205) 298
Increase (decrease) in accounts payable and
other current liabilities (3,038) 2,018
Increase in long-term receivables (1,483) (123)
Other 199 (134)
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$18,072 $ 250
======= =======
2nd. 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)
------- -------
- $ 102
======= =======
3rd. Net cash transferred on sale of subsidiary:
Receivables assumed $ (589)
Investment recorded (23)
Working capital, net of cash 212
Property and equipment 260
Goodwill on acquisition 142
Other liabilities (132)
-------
$ (130)
=======
4th. Non-cash activities:
Receivables assumed upon sale of subsidiary $ 589
======
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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
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 $2.0 million during the first nine months of 1997.
Certain financial information, which is normally included in financial
statements prepared in accordance with generally accepted accounting principles
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
Note 2. Investment in Tower
Although the Company continued to have effective control of Tower, as a
result of a change in its voting control of Tower's shares, the Company ceased
to consolidate Tower's financial statements as of December 31, 1996. As the
Company's consolidated statements of operations for the three months and nine
months ended September 30, 1997 do not include Tower's balances while those for
the comparable periods in 1996 do, the Company's statements of operations for
the periods in 1997 and those in 1996 are not directly comparable.
Summarized income statement information of Tower for the three months and
nine months ended September 30, 1997 is as follows:
Nine months ended Three months ended
September 30, 1997 September 30, 1997
------------------ ------------------
($,000)
-------
Sales $94,912 $35,018
Gross profit 28,015 10,287
Research and development 5,535 2,296
Sales, general and administrative 6,350 2,431
Operating income 16,130 5,560
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 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 loss per common and common equivalent share
amounts would not have been materially different for the periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information"("FAS 131"), 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 131 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 131.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("FAS
130"), 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 130 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 investment in Tower Semiconductor Ltd.("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
September 30, 1997 do not include Tower balances. Commencing with 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 as
of September 30, 1997 were $4.6 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 nine months ended
September 30, 1996 and 1997, including the percentage of total revenues during
each period attributable to selected components of operations statement data,
and for the period to period actual and percentage changes in such components.
The statements of operations for the three months and nine months ended
September 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 statements for the 1997
periods are not directly comparable to those of 1996.
Set forth below is an analysis comparing statement of operations data for the
Company in the first three months and nine 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 September 30, Change Nine months ended September 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 9,273 9,127 146 2% 29,274 25,020 4,254 17%
Gross profit 2,390 26% 2,040 22% 350 .17% 6,775 23% 5,790 23% 985 17%
R&D expenses, net 195 2% 552 6% ( 357) -65% 3,108 11% 787 3% 2,321 295%
SG&A expenses 3,961 43% 2,281 25% 1,680 74% 11,964 41% 6,498 26% 5,670 87%
Operating loss (1,766) -19% ( 793) -9% ( 973) -123% (8,297) -28% (1,495) -6% (6,802)455%
Semiconductor segment:
Sales 19,575 76,125
Gross profit 2,510 13% 16,589 22%
R&D expenses, net 983 5% 2,476 3%
SG&A expenses 1,455 7% 5,625 7%
Operating income 72 0% 8,488 11%
Corporate:
SG&A expenses 528 456 72 16% 1,525 1,149 376 33%
Equity income, net 873 - 873 3,290 - 3,290
Combined:
Sales 9,273 28,702 29,274 101,145
Gross profit 2,390 26% 4,550 16% 6,775 23% 22,379 22%
R&D expenses, net 195 2% 1,535 5% 3,108 11% 3,263 3%
SG&A expenses 4,489 48% 4,192 15% 13,489 47% 13,272 13%
Operating income (loss)(2,294) -25% (1,177) -4% (9,822) -34% 5,844 6%
Net loss (1,297) -14% (1,224) -4% (73) -0% (5,679) -19% (109) -0% (5,568)
SALES. The increase in Computer Segment sales in the three months ended
September 30, 1997 as compared to the same period in 1996 was due to increased
sales from the segment's Israeli operations which increased by 45%. This
increase was partially offset by a decrease in sales from the segment's United
States operations. The increase in Segment sales in the nine months ended
September 30, 1997 as compared to the same period in 1996 was due to increased
sales from the segment's United States operations, in the first six months of
1997, primarily attributable to a 42% increase in Computer - VAR sales. This
increase was 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 three months ended September 30, 1997, as compared to the
same period in 1996, was primarily due to the aforementioned increase in sales
without a commensurate increase in direct expenses in the Company's Israeli
operations. The increase in gross profits in the nine months ended September 30,
1997 was attributable to increased profits in the segment's United States
operations, primarily during the first six months of 1997, partially offset by a
decrease in gross profits in the segment's Israeli operations during that
period.
RESEARCH AND DEVELOPMENT EXPENSES. The decrease in research and
development expenses in the Computer Segment during the three months ended
September 30, 1997 as compared to the same period in 1996, was primarily
attributable to the Company's PHD(TM) and CybrCard product development nearing
completion.
The increase in research and development expenses in the Computer Segment
during the nine months ended September 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 INCOME (LOSS). The increase in the operating loss in the three
months and nine months ended September 30, 1997 was primarily attributable to
the aforementioned increase in marketing expenses and, additionally with regard
to the nine month period, to increased research and development expenses in the
first six months of 1997.
SHARE OF AFFILIATED COMPANY'S NET INCOME (LOSS). Had the Company
incorporated Tower's results for the three months and nine months ended
September 30, 1996 using the equity method, the equity income (loss) for those
periods would have been $1.2 million loss and $837,000 income respectively, as
compared to $0.9 million and $3.3 million for the same periods in 1997. The
increase in Tower's net income was primarily attributable to higher sales and
capacity utilization.
NET LOSS. The increase in the net loss in the three months and nine months
ended September 30, 1997 was attributable to increased losses in the Company's
Computer Segment, primarily as a result from the aforementioned.
Financial Condition
As of September 30, 1997, DSSI and its wholly-owned subsidiaries had
working capital of $3.9 million including cash and cash equivalents of $968,000.
In October 1997, the Company received a cash dividend from Tower of $2.7 million
net of Israeli taxes. The decrease in working capital as compared with working
capital at December 31, 1996 was due to operating losses during 1997, which were
primarily attributable to the Company's continuing investment in the development
and marketing of its PHD and CybrCard products. The Company has begun to
implement a program to reduce expenditures related to these products and is also
seeking outside financing for these products. There is no assurance that the
Company will be successful in reducing its expenditures related to these
products. Continued operating losses related to the Company's investment in
these products may have a material adverse effect on the Company's liquidity and
financial condition.
As of September 30, 1997, the Company's DSI Israel subsidiary had working
capital of $3.4 million, including cash and short term bank deposits of
$463,000. 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
nine months ended September 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 nine 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.
As of September 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
The Registrant's Annual Meeting of Stockholders (the "Meeting") was held
on August 21, 1997. The following individuals were elected as directors
of the Registrant at the Meeting:
George Morgenstern
Robert L. Kuhn
Maxwell M. Rabb
Harvey Eisenberg
Allen L. Schiff
Samuel Fogel
Sheldon Krause
The election of directors was the only matter voted upon at the meeting.
Set forth below is the number of votes cast for, against or withheld, as
well as the number of abstentions and/or broker non-votes with respect
to the election of directors.
There were 5,167,291 votes for and 842,325 votes withheld for the
election of each of the nominees, except for Mr. Morgenstern, with
respect to whom there were 5,160,091 votes for and 849,525 votes
withheld.
Item 6: Exhibits and Reports on Form 8-K
Exhibits
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: November 13, 1997
By: /s/ Yacov Kaufman
------------------------------
Yacov Kaufman
Chief Financial Officer
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