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, 1998
Commission file number 0-19771
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
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)
Registrant's telephone number, including area code (201) 529-2026
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 April 30,
1998: 7,369,178
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1997 and March 31, 1998 ............. 1
Consolidated Statements of Operations
for the three month periods ended
March 31, 1997 and 1998 ................................ 2
Consolidated Statement of Changes in Shareholders' Equity
for the three month period ended
March 31, 1998 ......................................... 3
Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 1997 and 1998 ................................ 4
Schedules to Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 1997 and 1998 ................................ 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
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 Company.
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31, March 31,
ASSETS 1997 1998
---------- ----------
Current assets: (unaudited)
Cash and cash equivalents $ 1,424 $ 1,400
Short-term interest bearing bank deposits 73 223
Marketable debt securities 1,600 0
Restricted cash 1,786 330
Trade accounts receivable, net 9,003 10,346
Inventory 377 841
Note receivable 2,248 2,289
Other current assets 1,446 1,250
-------- --------
Total current assets 17,957 16,679
-------- --------
Investments 70,695 70,091
-------- --------
Property and equipment, net 2,181 2,475
-------- --------
Other assets:
Capitalized software development costs, net 4,630 4,674
Intangible assets, net 338 755
Other 1,670 1,486
-------- --------
6,638 6,915
-------- --------
Total assets $ 97,471 $ 96,160
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 2,581 $ 1,909
Current maturities of long-term debt - banks and others 1,128 1,181
Accounts payable 2,606 4,960
Accrued payroll, payroll taxes and social benefits 2,464 2,685
Other current liabilities 1,704 1,590
-------- --------
Total current liabilities 10,483 12,325
-------- --------
Long-term liabilities -bank and others, net of current maturities 481 561
-------- --------
Minority interests 30,272 29,859
-------- --------
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 34,193 34,242
Retained earnings 23,813 20,944
-------- --------
58,083 55,263
Treasury stock, at cost - 339,362 shares (1,848) (1,848)
-------- --------
Total shareholders' equity 56,235 53,415
-------- --------
Total liabilities and shareholders' equity $ 97,471 $ 96,160
======== ========
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)
(dollars in thousands, except per share data)
Three months ended
March 31,
--------------------
1997 1998
-------- --------
Sales:
Products $ 5,403 $ 6,765
Services 4,637 4,862
-------- --------
10,040 11,627
-------- --------
Cost of sales:
Products 6,324 5,797
Services 3,965 3,402
-------- --------
10,289 9,199
-------- --------
Gross profit (loss) (249) 2,428
Research and development expenses 161 298
Selling, general and administrative expenses 4,391 4,799
-------- --------
Operating loss (4,801) (2,669)
Interest income 260 61
Interest expense (152) (92)
Other income, net 2 45
-------- --------
Loss before income taxes (4,691) (2,655)
Income tax expense (benefit) (164) 23
-------- --------
Loss after income taxes (4,527) (2,678)
Minority interests (635) 414
Equity (loss) in affiliates 1,764 (605)
-------- --------
Net loss ($ 3,398) ($ 2,869)
======== ========
Basic net loss per share ($0.46) ($0.39)
======== ========
Weighted average number of shares (in thousands) 7,369 7,369
======== ========
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
(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, 1998 7,708,540 $ 77 $ 34,193 ($ 1,848) $ 23,813 $ 56,235
Unamortized
restricted stock
award compensation 0 0 49 0 0 49
Net loss 0 0 0 0 (2,869) (2,869)
--------- --------- --------- --------- --------- ---------
Balances as of
March 31, 1998 7,708,540 $ 77 $ 34,242 ($ 1,848) $ 20,944 $ 53,415
========= ========= ========= ========= ========= =========
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 Cash Flows
(dollars in thousands)
Three months ended
March 31,
--------------------
1997 1998
-------- --------
Cash flows from operating activities:
Net loss ($ 3,398) ($ 2,869)
Adjustments to reconcile net loss to net cash used
in operating activities - see Schedule A 1,341 1,799
-------- --------
Net cash used in operating activities (2,057) (1,070)
-------- --------
Cash flows from investment activities:
Short-term and long-term bank deposits, net 12 (150)
Restricted cash, net 0 1,456
Investment in marketable securities (15,325) -
Proceeds from realization of marketable securities 17,607 1,600
Acquisitions of property and equipment (364) (630)
Proceeds from sale of property and equipment 32 115
Acquisition of intangible assets - (500)
Investments in capitalized software development costs (177) (43)
Increase in other assets (708) (23)
Net effect of change in reporting from equity
to consolidation method - see Schedule B 102 -
-------- --------
Net cash provided by investment activities 1,179 1,825
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 49 -
Proceeds from exercise of option warrants of subsidiary - (3)
Short-term debt, net 55 (672)
Repayments of long-term debt (54) (104)
-------- --------
Net cash provided by (used in) financing activities 50 (779)
-------- --------
Net decrease in cash and cash equivalents (828) (24)
Cash and cash equivalents at beginning of period 2,464 1,424
-------- --------
Cash and cash equivalents at end of period $ 1,636 $ 1,400
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 57 $ 61
======== ========
Income taxes $ 23 $ 50
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules to Consolidated Statements of Cash Flows
(dollars in thousands)
Three months ended
March 31,
------------------
1997 1998
------- -------
A. Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization $ 264 $ 384
Minority interests 635 (435)
Write-down of capitalized software development and other costs 1,967 -
Earnings on marketable debt securities (56) (6)
Deferred income taxes 159 433
Increase in liability for severance pay 183 136
Equity in affiliates (1,764) 604
Gain on sale of property, plant and equipment, net (1) (42)
Other (318) 169
Increase in accounts receivable and other current assets (1,322) (1,501)
Decrease (increase) in inventory 240 (465)
Increase in long-term receivables (41) (41)
Increase in accounts payable and other current liabilities 1,395 2,476
Increase in customer advances, net - 87
------- -------
$ 1,341 $ 1,799
======= =======
B. Net effect of change in reporting from
equity method to consolidation of subsidiary:
Working capital, net of cash ($ 18)
Intercompany loans 1,157
Other assets (1,037)
-------
$ 102
=======
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)
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 discontinuation of CybrCard
development and marketing activity, although most of the entries in this regard
were included in the financial statements for the year ended December 31, 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, 1997. Certain amounts
included in the Consolidated Statements of Operations for the three month period
ended March 31, 1997, have been reclassified to conform with current
presentation. The results of operations for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
Note 2. Investment in Tower
Although the Company has effective control of Tower, the Company does not
have voting control of more than 50% of Tower's shares and is consolidating
Tower's operations on an equity basis.
Summarized statement of operations information of Tower is as follows:
Three months ended
March 31,
-------------------
1997 1998
-------------------
Sales $29,121 $23,187
Gross profit 8,059 990
Research and development 1,309 2,140
Sales, general and administrative 1,917 1,947
Operating income (loss) 4,833 (3,097)
Note 3: Implementation of Accounting Standards
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits". SFAS No. 132 revises and
standardizes employers' disclosures regarding pension and other post-retirement
benefit plans. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. Management has evaluated the effect on its financial
reporting from the adoption of this statement and believes that it is in
compliance with this disclosure.
Note 4: Inventory
Inventory includes almost exclusively merchandise and finished goods.
Note 5: Acquisition
In January 1998, the Company acquired certain assets and licensed
intellectual property from Lucent Technologies, Inc. This technology will be
used by the Company's recently formed Comverge Technologies subsidiary which
will market the Customer Connection for Utilities (CCU) to customers in the US.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price of $1.25 million has been allocated to the
assets acquired based on their estimated fair value at the date of acquisition.
Of the purchase price, $500,000 has been allocated to the license agreement and
is being amortized over the five year period of this agreement. The valuation of
the acquired assets is preliminary and as a result, the allocation of the
acquisition costs among the tangible and intangible assets may change.
- 6 -
Note 6: Subsequent Events
In 1996 the Company sold its shares in Mobile Information Systems Ltd., a
joint venture of the Company's subsidiary DSI Israel and Geotek Communications,
Inc. ("Geotek") to Geotek in exchange for a $2 million unsecured note, bearing
annual interest of 8.25%, payable July 1, 1998. In February 1998, the Company
signed an agreement with Geotek, modifying the note to permit its conversion
into shares of Geotek Common Stock. In April 1998 the Company received from
Geotek, 3,000,000 Geotek shares. Based on the agreement with Geotek, the
delivery of these shares represented payment of approximately $1.7 million of
the approximately $2.3 million principal of and accrued interest on the note.
These shares were subsequently sold by the Company for approximately $1.8
million. The approximately $610,000, which remains outstanding on the note, is
to be paid by Geotek either by way of transferring additional shares to the
Company, subject to Geotek registering the resale of such shares, or in
accordance with the aforementioned terms of the note. The Company has not
created a reserve against the balance of the note.
In April 1998 the Company sold certain assets and the technology related
to its PHD product to Computer Associates International, Inc. for approximately
$7 million. The Company will recognize a gain of approximately $5 million before
taxes in the second quarter of 1998 in connection with this transaction.
- 7 -
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 is an authorized direct seller and
value-added-reseller ("VAR") of computer hardware products. Through its
investment in Tower Semiconductor Ltd.("Tower"), the Company also engages in the
manufacture of semiconductors.
Although it has effective control of Tower, due to the fact that the
Company does not have legal voting control of more than 50% of Tower's shares,
the Company accounts for its interest in Tower's results using the equity
method, including its pro-rata share of Tower's net income (loss) as equity
income (loss).
Capitalized software development costs reflected on the balance sheet as of
March 31, 1998 were $4.7 million, all of which related to the Company's EPSM
product. Applicable accounting principles require that capitalized software
costs be periodically reviewed and written down to net realizable value. The
Company took significant writedowns of such costs in the first quarter of 1997
and has taken such writedowns in prior periods. Possible writedowns of currently
capitalized software costs associated with EPSM may significantly affect
operating results in 1998 and future periods. Research and development costs
associated with the EPSM product during 1998 are expected to be expensed, as the
product is nearing completion and most of the ongoing costs relate to product
maintenance and enhancement.
The Company's future operating results are also subject to the outcome of
various other factors and are subject to various other risks and uncertainties.
See "Item 1.Business - Factors Which May Affect Future Results" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the three months ended March 31, 1997
and 1998, including the percentage of total revenues during each period
attributable to selected components of operations statement data, and for the
period to period percentage changes in such components.
Three months ended March 31, Change
--------------------------------------------- from
1997 1998 1997
-------------------- -------------------- --------
% of % of % of
($,000) sales ($,000) sales 1997
-------- -------- -------- -------- --------
Sales $ 10,040 100% $ 11,627 100% 16%
Cost of sales 10,289 102 9,199 79 (11)
-------- ----- -------- ---- -----
Gross profit (249) (2) 2,428 21
R&D expenses 161 2 298 3 85
SG&A expenses 4,391 44 4,799 41 9
-------- ----- -------- ---- -----
Operating loss (4,801) (48) (2,669) (23) 44
Interest income (expense), net 108 1 (31) (--) 129
Other income, net 2 -- 45 --
-------- ----- -------- ---- -----
Loss before income taxes (4,691) (47) (2,655) (23) 43
Income tax (benefit) expense (164) (2) 23 -- 114
-------- ----- -------- ---- -----
Loss after income taxes (4,527) (45) (2,678) (23) 41
Equity income (loss), net of
minority interests 1,129 11 (191) (2) (117)
-------- ----- -------- ---- -----
Net loss ($ 3,398) (34%) ($ 2,869) (25%) (16)
======== ===== ======== ==== =====
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SALES. The increase in sales in the three months ended March 31, 1998 as
compared to the same period in 1997 was due to a 33% increase in Computer -VAR
sales and a 27% increase in sales from consulting and development services in
the Company's Israeli operations. This increase was partially offset by a
decrease in sales from the United States consulting services.
GROSS PROFIT. The increase in gross profit in the three months ended March
31, 1998, as compared to the same period in 1997, was primarily due to one time
writedowns of development expenses in the first quarter of 1997. In addition,
gross profits increased by over 40%, in the Company's other activities.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). The increase in R&D during the
three months ended March 31, 1998 as compared to the same period in 1997, was
due to the Company's EPSM product development expenses, as the product is
nearing completion and development expenses can not be capitalized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in SG&A
in the three months ended March 31, 1998, by 9%, as compared to the same period
in 1997, was primarily due to increased professional fees. In both periods a
significant portion of SG&A expenses were attributable to marketing efforts
related to the Company's PHD and CybrCard products. These efforts have since
been discontinued. See "Financial Condition".
OPERATING LOSS. The decrease in the operating loss in the three months
ended March 31, 1998, as compared to the same period in 1997, was attributable
to the aforementioned increase in gross profits, partially offset by the
increase in R&D and SG&A.
SHARE OF AFFILIATED COMPANY'S NET INCOME (LOSS). The decrease in the equity
income (loss), net of minority interests, was a result of a loss in Tower,
primarily attributable to lower sales and capacity utilization, as well as
increased R&D. See "Financial Condition".
NET LOSS. The decrease in the net loss in the three months ended March 31,
1998, as compared to the same period in 1997, was attributable to a decrease in
operating losses in the Company's computer activities, as described above,
partially offset by the equity losses from Tower.
Financial Condition
As of March 31, 1998, DSSI and its wholly-owned subsidiaries had working
capital of $1.9 million, including cash and cash equivalents of $1.7 million.
Although there is no legal restriction, preventing disposition of the Company's
investments in its less than wholly owned subsidiaries, or the distribution to
the Company of their earnings, cash of these subsidiaries (including DSSI's
principal subsidiaries, DSI Israel and Tower) is generally not available for use
by DSSI or other subsidiaries. In the past, DSSI has financed the operations of
its wholly owned subsidiaries from the proceeds of a public offering in 1993, an
institutional private placement in June 1994 and the receipt of cash dividends
from Tower in December 1996 and 1997.
The decrease in working capital as compared with the working capital at
December 31, 1997 was due to operating losses during the first quarter of 1998,
primarily attributable to the Company's investment in the production and
marketing of its PHD and CybrCard products.
In February 1998, the Company discontinued all CybrCard development and
marketing activity due to the high costs involved in continued marketing
efforts. In April 1998 the Company sold certain assets and the technology
related to its PHD product to Computer Associates International, Inc. for
approximately $7 million, and will recognize a capital gain of approximately $5
million before tax in the second quarter of 1998. DSSI, through one of its
wholly owned subsidiaries, has at its disposal $2.2 million of bank credit,
secured by accounts receivable of this subsidiary, none of which is being
currently used. DSSI believes that it has adequate liquidity to finance its
ongoing corporate activities.
- 9 -
DSI Israel has satisfied its financial and operating requirements
principally through cash from operations and the net proceeds of its initial
public offering in December 1992. As of March 31, 1998, DSI Israel had working
capital of $2.7 million, net of short term bank credit of $759,000. DSI Israel
has at its disposal additional bank credit should it require. Certain of its
bank deposits serve as collateral for bank loans and guarantees.
Although the Company has effective control of Tower the Company does not
have voting control of more than 50% of Tower's shares and, therefore, includes
the results of Tower's operations on an equity basis. Tower has satisfied its
financial and operating requirements principally through cash from operations,
Investment Center grants, an advance from a customer and the net proceeds of its
public offerings in 1994 and 1995. As of March 31, 1998, Tower had working
capital of $91 million, including cash, short-term bank deposits and marketable
securities of $85.2 million.
Upon announcing its financial results for the first quarter of 1998, Tower
also announced that it expected losses of approximately $5 million in the second
quarter of 1998.
Impact of Inflation and Currency Fluctuations
Approximately 70% 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
three months ended March 31, 1998 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 inflation in Israel were to exceed the devaluation of
the NIS against the dollar or the timing of such devaluation lags behind
inflation in Israel, as it occasionally has in the past.
The Company does not engage in any hedging activities.
As of March 31, 1998, 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.
- 10 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1997 10-K for a discussion of
material litigation to which the Company is a party.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27.1 - Financial Data Schedule
Reports on Form 8-K
Report of the Company on form 8-K dated February 9, 1998.
Report of the Company on form 8-K dated February 17, 1998.
- 11 -
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: May 14, 1998
By: /s/ Yacov Kaufman
------------------------
Yacov Kaufman
Chief Financial Officer
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