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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 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)
(201) 529-2026
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
| | Yes |X| No
Number of shares outstanding of the registrant's common stock, as of
May 15, 2003: 7,866,359
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2002 and March 31, 2003..................................................1
Consolidated Statements of Operations
for the three month periods ended March 31, 2002 and 2003...................................2
Consolidated Statement of Changes in Shareholders' Equity
for the three month period ended March 31, 2003............................................3
Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2002 and 2003...................................4
Notes to Consolidated Financial Statements.........................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................16
Item 4. Controls and Procedures....................................................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................18
SIGNATURES ............................................................................................19
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "we
expect", "we anticipate", "we believe", "we estimate" and other phrases of
similar meaning. Whether such statements ultimately prove to be accurate depends
upon a variety of factors that may affect our business and operations. Many of
these factors are described in our most recent Annual Report on Form 10-K as
filed with Securities and Exchange Commission.
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
AS OF AS OF
DECEMBER 31, MARCH 31,
ASSETS 2002 2003
--------------- ---------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,150 $ 945
Restricted cash 241 2,741
Trade accounts receivable, net 12,267 9,902
Inventory 2,217 1,950
Other current assets 1,401 1,052
-------- --------
Total current assets 17,276 16,590
Property and equipment, net 1,972 1,814
Goodwill 4,929 4,929
Other intangible assets, net 404 378
Long-term deposits 5,700 --
Other assets 669 710
Prepaid employee termination benefits 2,355 2,370
-------- --------
Total assets $ 33,305 $ 26,791
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt, net $ 3,755 $ 6,095
Trade accounts payable 5,185 4,036
Accrued payroll, payroll taxes and social benefits 2,098 1,818
Other current liabilities 3,411 3,193
-------- --------
Total current liabilities 14,449 15,142
-------- --------
Long-term liabilities:
Long-term debt 6,278 593
Other liabilities 477 575
Liability for employee termination benefits 3,364 3,341
-------- --------
Total long-term liabilities 10,119 4,509
-------- --------
Minority interests 1,609 1,626
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized - 20,000,000 shares; Issued - 8,161,867 and
8,211,867 shares as of December 31, 2002 and
March 31, 2003, respectively 82 82
Additional paid-in capital 37,687 37,737
Warrants 364 461
Deferred compensation (7) (5)
Accumulated deficit (26,787) (28,548)
Treasury stock, at cost - 845,704 and 847,704 shares (3,913)
at December 31, 2002 and March 31, 2003, respectively (3,915)
Stockholder's note (298) (298)
-------- --------
Total shareholders' equity 7,128 5,514
-------- --------
Total liabilities and shareholders' equity $ 33,305 $ 26,791
======== ========
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)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2002 2003
------------- -------------
Sales:
Products $ 8,701 $ 8,976
Services 4,107 3,892
-------- --------
12,808 12,868
-------- --------
Cost of sales:
Products 6,821 7,300
Services 3,009 2,499
-------- --------
9,830 9,799
-------- --------
Gross profit 2,978 3,069
Research and development expenses 460 153
Selling, general and administrative expenses 4,300 4,302
-------- --------
Operating loss (1,782) (1,386)
Interest income 93 22
Interest expense (94) (354)
Other income (expense), net 27 (14)
Minority interests (4) (17)
-------- --------
Loss before provision for income taxes (1,760) (1,749)
Provision for income taxes 42 12
-------- --------
Net loss $ (1,802) $ (1,761)
======== ========
Basic and diluted loss per share:
Net loss per share - basic and diluted $ (0.25) $ (0.24)
======== ========
Weighted average number of shares outstanding - basic and diluted 7,353 7,345
======== ========
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 (unaudited)
(in thousands)
Number Common Additional
of Shares Stock Paid-In Deferred Treasury Stockholder's Accumulated
Capital Compensation Warrants Stock Note Deficit Total
---------- ---------- ---------- ------------ --------- -------- ------------- ----------- -----
Balances as of
December 31, 2002 8,162 $ 82 $ 37,687 $ (7) $ 364 $ (3,913) $ (298) $(26,787) $ 7,128
Amortization of
deferred
compensation -- -- -- 2 -- -- -- -- 2
Issuance of shares
as compensation 50 -- 50 -- -- -- -- -- 50
Warrants issued for
professional
services -- -- -- -- 97 -- -- -- 97
Purchase of
treasury shares -- -- -- -- -- (2) -- -- (2)
Net loss -- -- -- -- -- -- -- (1,761) (1,761)
----- ------- -------- -------- -------- -------- -------- -------- --------
Balances as of
March 31, 2003 8,212 $ 82 $ 37,737 $ (5) $ 461 $ (3,915) $ (298) $(28,548) $ 5,514
===== ======= ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2002 2003
----------- -------------
Cash flows provided by operating activities:
Net loss $(1,802) $(1,761)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 344 262
Allowance for doubtful accounts (70) 29
Amortization of deferred compensation 2 2
Accretion of discount on convertible note and amortization of
related costs and warrants -- 169
Minority interest and write-off of minority interest balance (36) 17
Unrealized loss on debt securities 39 --
Decrease in liability for employee termination benefits (60) (23)
Issuance of shares as compensation -- 50
Loss on disposition of property and equipment 13 1
Other (15) 3
Change in operating assets and liabilities:
Funding of termination benefits (2) (15)
Decrease in accounts receivable and current assets 1,126 2,705
Decrease (increase) in inventory (244) 267
Increase (decrease) in accounts payable and other liabilities 1,125 (1,539)
------- -------
Net cash provided by operating activities 420 167
------- -------
Cash flows provided by (used in) investing activities:
Restricted cash (8) 3,200
Proceeds and maturity of debt securities 206 --
Investment in debt securities (253) --
Acquisitions of property and equipment (110) (94)
Proceeds from sale of property and equipment -- 14
------- -------
Net cash provided by (used in) investing activities (165) 3,120
------- -------
Cash flows used in financing activities:
Short-term debt, net (1,187) (232)
Borrowings of long-term debt 646 --
Repayments of long-term debt (23) (3,258)
Purchase of treasury stock -- (2)
------- -------
Net cash used in financing activities (564) (3,492)
------- -------
Net decrease in cash and cash equivalents (309) (205)
Cash and cash equivalents at beginning of period 4,025 1,150
------- -------
Cash and cash equivalents at end of period $ 3,716 $ 945
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 80 $ 169
======= =======
Income taxes $ 43 $ 41
======= =======
Non-cash investing and financing activities:
Issuance of warrants for professional services $ 97
=======
Adjustment of goodwill and intangible assets $ 48
=======
Increase in deferred tax liability associated with adjustment of intangible assets . $ 17
=======
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. ("DSSI") 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 consolidated financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003. 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, 2002.
Certain reclassifications have been made to the Company's prior period's
consolidated financial statements to conform with the current period's
consolidated financial statement presentation.
NOTE 2: FINANCING OF OPERATIONS
As of March 31, 2003, the Company had working capital of $1,448, including
$945 in non-restricted cash and cash equivalents. Net cash used in the first
quarter of 2003 was $205. The primary uses of the Company's cash during the
quarter were the Company's loss, (primarily losses in Comverge and corporate
expenses) and payments of debt, which was partially offset by the release of
previously restricted cash and collections of trade accounts receivables in
excess of reductions in accounts payable.
Of the total working capital at March 31, 2003, approximately $565 was in
the Company's majority owned dsIT subsidiary. Due to Israeli tax and company law
constraints, as well as the significant minority interest in dsIT, such working
capital and cash flows from dsIT's operations are not readily available to
finance U.S. activities.
As further described in Note 9, on April 7, 2003 the Company's Comverge
subsidiary signed and closed on an agreement for private equity financing in the
amount of $13,000, $3,250 of which was invested by the Company and $9,750 of
which was invested by a group of leading energy venture capital investors. At
the same time, Comverge obtained a new credit facility for up to an aggregate of
$6,500 in term loan and a line of credit. In connection with the private equity
financing and the new credit facility, Comverge paid off in full its $5,500 bank
term loan ($3,000 of which was paid down at the end of March 2003 in
contemplation of the financing and $2,500 at closing) and its $2,000 secured
line of credit, which line was also terminated. As a result of the repayment of
the term loan, $1,000 of DSSI's long-term deposit which had been pledged to
Comverge's bank as security for Comverge's loan became unrestricted and is now
freely available to the Company as unrestricted working capital. Comverge's new
credit facility includes a $1,500 term loan, secured by a $1,500 restricted
long-term deposit of DSSI at Comverge's new lender, and a revolving line of
credit of up to $5,000, secured by the assets of Comverge. Comverge has agreed
to prepay the term loan in and permit release of DSSI's $1,500 deposit over the
12 months commencing December 31, 2004, subject to certain conditions.
The Company believes that the proceeds of the financing and new credit
arrangements should provide sufficient financing for Comverge to independently
fund its activities.
- 5 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
dsIT is utilizing approximately $1,300 of its $1,800 lines of credit as of
March 31, 2003. dsIT's lines of credit are denominated in NIS and bearing an
average interest rate of the Israeli prime rate plus 0.9% per annum. The Israeli
prime rate fluctuates and as of March 31, 2003 is 10.4%. The Company believes
that dsIT will have sufficient liquidity to finance its activities from cash
flow from its own operations over the next 12 months. This is based on continued
utilization of its line of credit and improved operating results stemming from
continued cost reductions.
As of May 9, 2003 the Company's wholly owned US operations (i.e., excluding
dsIT and Comverge) had an aggregate of $1,953 in unrestricted cash and cash
equivalents, reflecting a $921 increase from the balance as of December 31,
2002.
The Company believes it has more than sufficient liquidity to finance its
US-based operating activities and its corporate activities for at least the 12
months following the date of this report. The Company intends to finance these
activities from cash on hand and from operating cash flows from expected
profitable operations of the computer hardware segment.
NOTE 3: INVENTORY
Inventory consists of the following: As of As of
December 31, March 31,
2002 2003
---- ----
Raw materials, spare parts and supplies $1,396 $1,666
Work-in-process 161 161
Finished goods and merchandise 660 123
------ ------
$2,217 $1,950
====== ======
NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS
The table below presents the carrying amount of goodwill, by segment. There
were no acquisitions or impairments of goodwill recorded during the three-month
period ended March 31, 2003.
Software Energy
Consulting and Intelligence
C Development Solutions Total
---------------- ---------------- --------
Segment balances as of December 31, 2002
and March 31, 2003 $4,430 $ 499 $4,929
====== ====== ======
The following table presents certain information regarding the Company's
amortizable intangible assets as of March 31, 2003 and December 31, 2002. All
intangibles assets are being amortized over their estimated useful lives, as
indicated below, with no estimated residual values.
As of March 31, 2003
---------------------------------------------
Weighted
average Gross
amortization carrying Accumulated Net
period amount amortization amount
----------------- --------- ------------ ---------
Amortizing intangible assets:
Licenses 5.0 yrs $568 $568 $ -
Patents 15.0 yrs 288 74 214
Software licenses 4.6 yrs 260 96 164
------- ------------ -------
Total $1,116 $738 $ 378
======== ============ =======
- 6 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
As of December 31, 2002
------------------------------------------------
Weighted
average Gross Net
amortization carrying Accumulated carrying
period amount amortization amount
-------------- ---------- ------------------ ------------
Amortizing intangible assets:
Licenses 5.0 yrs $568 $563 $ 5
Patents 15.0 yrs 288 70 218
Software licenses 4.6 yrs 260 79 181
------------ ----------------- ------------
Total $1,116 $712 $404
============ ================= ============
Amortization in respect of license, patents and software licenses
intangible amounted to $131 and $26 for the three months ended March 31, 2002
and 2003, respectively (2002 includes amortization of $48 with respect to
acquired backlog fully amortized in 2002).
Amortization expense with respect to intangible assets for each of the next
five years and thereafter is estimated as follows:
Year ended March 31,
2004 $76
2005 48
2006 47
2007 43
2008 29
Thereafter 135
-----------
$378
===========
NOTE 5: WARRANTY PROVISION
The Company generally warrants its products against certain manufacturing
and other defects. These product warranties are provided for specific periods of
time and/or usage of the product depending on the nature of the product, the
geographic location of its sale and other factors. The accrued product warranty
costs are based primarily on historical experience of actual warranty claims as
well as current information on repair costs. Warranty claims expense for the
three month period ended March 31, 2003 amounted to $3.
The following table provides the changes in the Company's provision for
product warranties for the three-month period ended March 31, 2003:
Warranty provision as at January 1, 2003 $52
Accruals for warranties issued during the period 3
Warranty settlements made during the period (3)
-----------
Warrant provision as of March 31, 2003 $52
===========
The Company's Comverge subsidiary provides its customers a warranty on its
products for periods ranging from six to 12 months. Such warranties are
accounted for in accordance with SFAS No. 5 "Accounting for Contingencies". dsIT
defers a portion of its revenues on projects and recognizes them over the
warranty period so as to cover any costs related to these warranties. To date
the Company has not incurred material costs related to warranty obligations in
excess of the revenues deferred.
- 7 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
The Company's product license and services agreements include a limited
indemnification provision for claims from third parties relating to the
Company's intellectual property included in the Company's products and projects.
Such indemnification provisions are accounted for in accordance with SFAS No. 5.
The indemnification is generally limited to the amount paid by the customer and
to date there have not been material claims under such indemnification
provisions.
NOTE 6: STOCK-BASED COMPENSATION
In December 2002, Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment to FASB Statement No. 123" was issued. SFAS No. 148 amended SFAS No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 related to disclosures about the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of SFAS No. 148 are
applicable to both interim and annual financial statements ending after December
15, 2002, and as such have been incorporated below.
SFAS No. 123, permits companies to (i) recognize as expense the fair value
of stock-based awards, or (ii) continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB 25"), and provide pro forma net income and
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
continues to apply the provisions of APB 25 and provide the pro forma
disclosures in accordance with the provisions of SFAS Nos. 123 and 148 to its
Stock Option and Incentive Plan. Under APB 25, the Company has not recorded any
stock-based employee and director compensation cost associated with its stock
option plan, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to its stock option plan:
Three Months Ended March 31,
----------------------------
2002 2003
---- ----
Net loss as reported..........................................................$(1,802) $(1,761)
Plus: Stock-based employee and director compensation expense included
in reported net loss 2 52
Less: Total stock-based employee compensation expense determined under
fair value based method for all awards 508 109
------- -------
Pro forma net loss............................................................$(2,308) $(1,818)
======= =======
Net loss per share:
Basic and diluted - as reported..........................................$(0.25) $ (0.24)
======= =======
Basic and diluted - pro forma............................................$(0.31) $ (0.25)
======= =======
The pro forma information in the above table also gives effect to the
application of SFAS No. 123 on the share option plans of the Company's
subsidiaries.
- 8 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
NOTE 7: WARRANTS
On February 25, 2003, the Company engaged a third-party for the purposes of
providing investor awareness and business advisory services for a period of one
year. The Company is to pay a monthly advisory fee, totaling $90 over the period
of the agreement. In addition, the Company granted the third-party common stock
purchase warrants for the purchase of 120,000 shares of the Company's common
stock (60,000 at $2.00 per share and 60,000 at $2.50 per share). The warrants
become fully vested on May 26, 2003 and expire on February 25, 2005. The Company
used the Black-Scholes valuation method to estimate the fair value of the
warrants, using a risk free interest rate of 1.75%, their contractual life of
two years, an annual volatility of 88% and no expected dividends. The Company
estimated the fair value of the warrants to be approximately $97, which is being
charged to selling, general and administrative expense over the one-year life of
the service agreement on a straight-line basis.
NOTE 8: SEGMENT INFORMATION
SOFTWARE
CONSULTING ENERGY
AND INTELLIGENCE COMPUTER
DEVELOPMENT SOLUTIONS HARDWARE OTHER (*) TOTAL
----------- ------------ -------- --------- -----
Three months ended March 31, 2003:
Revenues from external customers $ 3,230 $ 4,700 $ 4,930 $ 8 $ 12,868
Intersegment revenues -- 284 20 -- 304
Segment gross profit 863 1,313 885 8 3,069
Segment income (loss) (21) (1,125) 50 (6) (1,102)
Three months ended March 31, 2002:
Revenues from external customers $ 3,835 $ 4,654 $ 4,256 $ 63 $ 12,808
Intersegment revenues 19 271 17 -- 307
Segment gross profit 789 1,440 714 35 2,978
Segment income (loss) (174) (851) (26) 20 (1,031)
___________
(*) Represents the operations of a VAR software operation in Israel that did
not meet the quantitative thresholds of SFAS No. 131.
RECONCILIATION OF SEGMENT LOSS TO CONSOLIDATED NET LOSS
Three months ended
March 31,
-----------------------
2002 2003
Total loss for reportable segments $(1,051) $(1,096)
Other operational segment income (loss) 20 (6)
-------- --------
Total operating loss (1,031) (1,102)
Net loss of corporate headquarters (771) (659)
-------- --------
Total consolidated net loss $(1,802) $(1,761)
======= ========
NOTE 9: SUBSEQUENT EVENTS
(a) Comverge equity financing
On April 7, 2003, the Company and its Comverge subsidiary signed and closed
on a definitive agreement with a syndicate of venture capital firms raising an
aggregate of $13,000 in capital funding. The Company purchased $3,250 of the
Series A Convertible Preferred Stock issued by Comverge in the equity financing.
- 9 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
A syndicate of venture capital firms purchased the remaining $7,750 of the
Series A Convertible Preferred Stock issued by Comverge, and one member of the
syndicate also purchased $2,000 of a Series A-1 Convertible Preferred Stock of
Comverge. The Company remains Comverge's largest shareholder, owning
approximately 50.6% of the outstanding capital stock of Comverge (42.6% on a
fully diluted basis). The Company holds approximately 26% of all the preferred
stock issued by Comverge in the private equity financing, in addition to owning
approximately 80% of Comverge's common stock. The Company's investment was
primarily financed by $3,000 of cash previously restricted (classified as a
long-term deposit at December 31, 2002
The venture capital firm which purchased the Series A-1 Preferred Stock
entered into an agreement with Comverge pursuant to which Comverge granted to
the venture capital firm an option to put its shares of Series A-1 Preferred
Stock to Comverge for $2,000. The put is exercisable from April 8, 2004 to April
18, 2004. This agreement also grants to Comverge a right to call from the
venture capital firm its Series A-1 Preferred Stock for $2,000, which call right
expires on April 18, 2004, and its Series A Preferred Stock, which call right
expires on July 8, 2003 at a call price equal to the purchase price of the
Preferred Stock plus an 8% annual dividend.
The Series A Preferred Stock will have priority over Comverge common stock
and other preferred stock for dividends and liquidations (which includes a sale
of Comverge). Additionally, the Series A Preferred Stock have anti-dilution
protection for stock issuances by Comverge below the per share purchase price of
the Series A Preferred Stock (subject to customary exceptions such as employee
stock options) as well as approval rights for major corporate transactions,
stock issuances, declaration or payment of dividends, changing corporate
governance documents, liquidation or dissolution of Comverge and other corporate
matters. The Series A Preferred Stock is also convertible into Comverge common
stock at the holder's option or upon an initial public offering with gross
proceeds of at least $30,000 and an offering price at least five times the
original purchase price of the Series A Preferred Stock.
The Company has entered into various agreements with Comverge, the
syndicate of venture capital investors and certain of Comverge's common
stockholders. These agreements provide for, among other things, restrictions on
the transfer of the Series A Preferred Stock and Comverge common stock, the
voting of the Company's Series A Preferred Stock and Comverge common stock, the
Company's right to receive quarterly and annual financial reports from Comverge
and registration rights for the Company's Series A Preferred Stock and Comverge
common stock. Under Comverge's Amended and Restated Certificate of
Incorporation, the holders of Comverge common stock have the right to elect two
of the five directors on Comverge's Board. Certain preferred shareholders other
than the Company have the right to elect the other three directors. Pursuant to
a voting agreement, one of the directors elected by the holders of the Comverge
common stock must be the CEO of Comverge. The Company's chairman and CEO and
Comverge's CEO were elected as directors by the Comverge common stockholders.
In connection with the agreement, Comverge secured a $6,500 credit facility
with a leading financial institution. In connection with the private equity
financing and this new credit facility, Comverge paid off $3,000 of its bank
term loan at the end of March 2003 in contemplation of the financing and paid
off the remaining $2,500 bank loan outstanding as of March 31, 2003 and the
$2,000 secured line of credit, which line was also terminated. As a result of
the repayment of the term loan, $1,000 of DSSI's long-term deposit which had
been pledged to Comverge's bank as security for Comverge's loan became
unrestricted and is now freely available to the Company as unrestricted working
capital.
Comverge's new credit facility includes a $1,500 term loan secured by a the
pledge of a $1,500 restricted long-term deposit at Comverge's new lender, and a
revolving line of credit of up to $5,000 secured by the assets of Comverge.
Comverge agreed to make certain prepayments on the term loan and the new lender
agreed to the release of amounts equal to such payments from the pledge account,
subject to certain conditions, as follows:
- 10 -
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollars in thousands)
o Three payments of $500 on December 31, 2003, June 30, 2004 and December 31,
2004 if (a) Comverge raises at least $2,000 in additional equity financing
by July 6, 2003 or (b) the put option held by the holder of the Series A-1
Preferred Stock has not been exercised by April 18, 2004 (in which case the
December 31, 2003 payment would be made on April 28, 2004);
o Two payments of $750 on December 31, 2003 and June 30, 2004 if (a) Comverge
raises at least $5,000 in additional equity financing by July 6, 2003 or
(b) the put option held by a member of the syndicate has not been exercised
by April 18, 2004 and Comverge raises at least $3,000 in additional equity
financing by July 6, 2003 (in which case the balance of the December 31,
2003 payment would be made on April 28, 2004);
o If none of the other triggering events have occurred, then the Company will
not be entitled to the release of the $1,500 until April 1, 2006, although
Comverge will use commercially reasonable efforts to cause the release of
the money to the Company before that date.
Until December 31, 2003, the Company has the option to purchase from
Comverge up to $1,500 million of Series A-2 Convertible Preferred Stock. The
amount of Series A-2 Preferred Stock that the Company may purchase from Comverge
will be limited to the number of shares that could be purchased by the principal
balance of the $1,500 term loan as of the date the Company gives notice of
exercising the Series A-2 option. The Series A-2 Preferred Stock has the same
purchase price as the Series A-1 Preferred Stock, but is junior in priority in
liquidation (which includes the sale of Comverge) to both the Series A and
Series A-1 Preferred Stock. In all other respects the Series A-2 Preferred Stock
has the same rights as the Series A Preferred Stock and the Series A-1 Preferred
Stock.
The Company is evaluating the agreements related to the equity financing
and the ongoing management of Comverge to determining whether or not Comverge
continues to be a controlled subsidiary of the Company; no determination has
been made as of the date of issuance of these financial statements. If it is
determined that Comverge is no longer a controlled subsidiary, effective the
second quarter of 2003, the Company would no longer consolidate Comverge's
balance sheets and results of operations into the Company's consolidated balance
sheets and consolidated statements of operations and would account for the
investment in Comverge on the equity method.
(b) Acquisition
In April 2003, Comverge acquired certain assets of Sixth Dimension in
exchange for 877,000 shares of Comverge common stock.
(c) Issuance of shares to Comverge lender
In March 2003, the Company received a notice of conversion from the lender
under Comverge's line of credit for the conversion of $600 principal amount of
the debt outstanding under the line at a conversion price of $1.50 per share. In
April 2003, following the repayment in full of all amounts outstanding under the
line, the Company, in lieu of the conversion, issued 400,000 shares of its
common stock to the lender under the same terms as the conversion and at an
amount equal to the aggregate conversion price of $600.
(d) Issuance of shares to holder of convertible note
On May 5, 2003, the Company issued 102,196 shares in lieu of payment of a
$200,000 monthly installment of principal on a convertible note. The Company has
the option to pay the remaining $400,000 principal balance of the note by
delivering shares of common stock, subject to the terms of the note.
- 11 -
DATA SYSTEMS & SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 below under "Factors That May Influence Future Results"
and in "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, 2002,
(the "2002 10-K").
OVERVIEW AND TREND INFORMATION
During the periods included in this report, we operated in three reportable
segments: software consulting and development, energy intelligence solutions,
and computer hardware. The following analysis should be read together with the
segment information provided in Note 8 to the interim unaudited consolidated
financial statements included in this quarterly report, which information is
hereby incorporated by reference into this Item 2.
Software Consulting and Development
Revenues were 7% lower than last quarter and 15% below those in the first
quarter of 2002. This decrease is due to the continued general weakness in the
global hi-tech markets and in the software consulting and development market in
particular. We currently do not see the market improving and as a result while
we are continuing to increase our marketing efforts, we are constantly
implementing cost cutting measures so as to avoid losses in the segment, until
the market improves. Despite the continued decrease in revenues, as a result of
the cost cutting measures taken in 2002, gross profits and operating income
improved in the first quarter of 2003, compared to the first quarter of 2002.
Energy Intelligence Solutions
After putting in place its management team and reorganizing its product and
service offerings in 2002, in the first quarter of 2003 Comverge began to invest
in the resources required to take Comverge to its next business level,
refocusing its activity from research and development to marketing and sales.
With the capital raised from its recent private equity financing and new credit
facility, Comverge has the capital it needs to finance and expand its business.
Computer Hardware
The improved results in this segment in the first quarter of 2003, as
compared to the first quarter of 2002, reflect the low level of sales in the
first quarter of 2002 following 9/11 and improved profit margins. Although we do
not expect sales to return to the record levels of the fourth quarter of 2002,
we expect sales in the second and third quarters to exceed those of the
corresponding periods in 2002. Due to the competitive market conditions, there
can be no assurance we will be able to maintain the current level of
profitability in the segment's operations.
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RESULTS OF OPERATIONS
The following table sets forth certain information with respect to the
consolidated results of operations of the Company for the three months ended
March 31, 2002 and 2003, including the percentage of total revenues during each
period attributable to selected components of the operations statement data and
for the period to period percentage changes in such components.
Three months ended March 31,
------------------------------------------------------ Change from
2002 2003 2002 to 2003
-------------------------- ------------------------- --------------
($,000) % of sales ($,000) % of sales % of 2002
------------ ------------- ------------ ------------ --------------
Sales $12,808 100% $12,868 100% 0%
Cost of sales 9,830 77 9,799 76 0
------------ ------------- ------------ ------------
Gross profit 2,978 23 3,069 24 3
R&D expenses 460 4 153 1 (67)
SG&A expenses 4,300 34 4,302 33 0
------------ ------------- ------------ ------------
Operating loss (1,782) (14) (1,386) (11) 22
Interest expense, net (1) 0 (332) (3) 33,200
Other income (expense), net 27 0 (14) 0 (152)
Minority interest (4) 0 (17) 0 325
------------ ------------- ------------ ------------
Loss before provision for income taxes (1,760) (14) (1,749) (14) 1
Provision for income taxes 42 0 12 0 (71)
------------ ------------- ------------ ------------
Net loss $(1,802) (14)% $(1,761) (14)% 2%
============ ============= ============ ============
Sales. Sales in the first quarter of 2003 were $12.9 million, marginally
above the $12.8 million of sales in the first quarter of 2002.
Sales in our computer hardware segment increased by $0.6 million, or 16%,
from $4.3 million in the first quarter of 2002, to $4.9 million in 2003. This
increase is primarily due to lower sales in the first quarter of 2002, following
the downturn experienced in the aftermath of 9/11. However, as expected,
computer hardware segment sales in the first quarter of 2003 were 46% below the
level of the fourth quarter of 2002, due to sales of $4.5 million in the fourth
quarter of 2002 to one customer that were not repeated in the first quarter of
2003. The increase in segment sales, as compared to the first quarter of 2002,
was offset by a decrease in software consulting and development sales, from $3.8
million in the first quarter of 2002, to $3.2 million in the first quarter of
2003. This decrease was due to the continued general weakness in the global
hi-tech markets and in the software consulting and development market in
particular. Sales in our energy intelligence solution segment in the first
quarter of 2003 were $4.7 million, similar to those of the first quarter of
2002.
Gross profit. Gross profit in the first quarter of 2003 was $3.1 million
increasing by $0.1 million, or 3%, compared to the first quarter of 2002, with
gross profit margins improving, from 23% in the first quarter of 2002, to 24% in
the first quarter of 2003. The increase in gross profits was primarily
attributable to an increase in gross profit in the computer hardware segment,
partially offset by a decrease in the energy intelligence solutions segment.
In the computer hardware segment gross profit increased by $0.2 million, or
24%, from $0.7 million in the first quarter of 2002, to $0.9 million in the
first quarter of 2003. This increase was due to the increase in sales as well
as an improvement in the gross profit margin, which increased from 17% of sales
in the first quarter of 2002 to 18% in the first quarter of 2003. Both increases
are primarily due to the slightly improved business environment since the
beginning of 2002.
Gross profit in the energy intelligence solution segment decreased by
$0.1 million, or 9%, from $1.4 million in the first quarter 2002 to $1.3 million
in the first quarter 2003. This decrease was attributable to a decrease in gross
profit margin, from 31% of sales in the first quarter of 2002 to 28% of sales in
the first quarter of 2003, due to a proportionately larger mix of lower margin
Maingate and LCR product sales to certain customers in 2003, when compared to
2002.
- 13 -
Gross profit in the software consulting and development segment marginally
increased to $0.9 million in the first quarter of 2003 from $0.8 million in the
first quarter of 2002, despite the decrease in sales. This increase was due to
the increase in gross profit margin from 21% of sales in the first quarter of
2002, to 27% of sales in the first quarter of 2003. The improved gross profit
margin was attributable to cost cutting measures taken during 2002 and improved
cost structure of new projects contracted over the last year.
Research and development expenses ("R&D"). R&D expenses decreased from $0.5
million in the first quarter of 2002, to $0.2 million in the first quarter of
2003. This decrease was due to the continued decrease in R&D expenditures in the
energy intelligence solution segment, as it shifted its emphasis from R&D to
marketing and sales through 2002.
Selling, general and administrative expenses ("SG&A"). SG&A was virtually
unchanged at $4.3 million in the first quarter of 2003, as compared to the first
quarter of 2002. However, within our segments, we had a $0.2 million decrease in
corporate SG&A, as well as a $0.2 million decrease in SG&A at our software
consulting and development segment. These decreases were offset by a $0.4
million increase in SG&A in the energy intelligence solution segment. The
decreases in corporate and software consulting and development segment overhead
were attributable to cost cutting measures taken through 2002, while the
increase in SG&A in our energy intelligence solution segment was due to the
increased marketing and administrative efforts invested in putting into
place the infrastructure required to take the segment to its next business
level.
Interest expense. Prior to the investment recently secured for our energy
intelligence solution segment, we raised capital through issuing convertible
debentures and utilized lines of credit to finance our activities. We incurred
finance expenses in connection with the capital raised including interest and
amortization of non-cash costs associated with the convertible debt and warrants
issued. Although the interest associated with the utilization of lines of credit
is expected to continue at the current level, the amortization expenses are
expected to decrease over the coming quarters. Of the $354,0000 of interest
expense during the first quarter of 2003, $144,000 was related to the accretion
of discounts and the amortization of related costs in connection with
convertible debt and warrants.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had working capital of $1.5 million, including
$0.9 million in non-restricted cash and cash equivalents. Net cash used in the
first quarter of 2003 was $0.2 million, primarily financing our loss,
(attributable to losses in Comverge and corporate expenses) and payments of
debt, which was partially offset by the release of previously restricted cash
and collections of trade accounts receivables in excess of reductions in
accounts payable. Of the total working capital at March 31, 2003, $0.6 million
was in our majority owned dsIT subsidiary. Due to Israeli tax and company law
constraints as well as the significant minority interest in dsIT, such working
capital and cash flows from dsIT's operations are not readily available to
finance U.S. activities.
As of May 9, 2003 the Company's wholly owned US operations (i.e., excluding
dsIT and Comverge) had an aggregate of $1,953 in unrestricted cash and cash
equivalents, reflecting a $921 increase from the balance as of December 31,
2002.
We believe we have more than sufficient liquidity to finance our US-based
operating activities and our corporate activities for at least the 12 months
following the date of this report. We intend to finance these activities from
cash on hand and from operating cash flows from expected profitable operations
of the computer hardware segment.
- 14 -
For further detail, see Notes 2 and 9 to the interim unaudited consolidated
financial statements included in this quarterly report.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations and commitments at March 31, 2003, excluding
certain severance arrangements described below, principally include obligations
associated with our outstanding indebtedness, future minimum operating lease
obligations and contractual obligations to our CEO for payments for his
post-retirement consulting services to us, are as set forth in the table below.
Cash Payments Due During Year Ending March 31,
-----------------------------------------------------------
(amounts in thousands)
---------------------
Contractual Obligations Total 2004 2005 2006 After 2006
----- ----- ----- ----- ----------
Long-term debt related to US operations $3,300 $2,300 $1,000 $ -- $ --
Long-term debt related to Israeli operations 946 357 259 188 142
Guarantees 558 558 -- -- --
Operating leases 5,094 1,654 1,385 1,018 1,037
Consulting agreement with CEO 1,525 1,525 -- -- ---
------ ------ ------ ------ -------
Total contractual cash obligations $11,423 $6,394 $2,644 $1,206 $1,179
======= ====== ====== ====== ======
We expect to finance these contractual commitments from cash on hand and
cash generated from operations.
Previously, we accrued a loss for contingent performance of bank
guarantees. Our remaining commitment under these guarantees is $0.6 million at
March 31 2003. We have collateralized a portion of these guarantees by means of
a deposit of $0.2 million as of March 31, 2003. The obligation is presented as a
current liability, though it is uncertain as to when actual payment may be made.
Under Israeli law and labor agreements, dsIT and Comverge`s subsidiary in
Israel are required to make severance payments to dismissed employees and to
employees leaving employment in certain other circumstances. The obligation for
severance pay benefits, as determined by the Israeli Severance Pay Law, is based
upon length of service and last salary. These obligations are substantially
covered by regular deposits with recognized severance pay and pension funds and
by the purchase of insurance policies. As of March 31, 2003, we had a total of
$3.3 million in potential severance obligations, of which approximately $2.4
million was funded with cash to insurance companies and approximately $0.9
million was unfunded. The entire $3.3 million was accrued for as of March 31,
2003.
We are obligated to pay our Chief Executive Officer consulting fees over a
seven-year period upon his retirement on December 31, 2003. Although it is
currently contemplated those payments will begin on January 1, 2004, the CEO has
the option to terminate his employment agreement and begin his consulting period
prior to December 31, 2003. During the first four years of the consulting
period, we would have to pay the CEO 50% of his salary in effect at the time of
termination and 25% of that salary during the last three years of the consulting
period, plus contributions to a non-qualified defined contribution retirement
plan equal to 25% of the consulting fee. At the start of the consulting period,
we are also required to fund amounts payable for the term of the consulting
period, by the purchase of an annuity or similar investment product. The CEO`s
base salary for 2003 (including cost of living adjustments) is $460,000.
We also have obligations under various agreements and other arrangements
with officers and other employees with respect to severance arrangements
and multiyear employment agreements as described below.
- 15 -
Under an employment agreement with the Chief Financial Officer, we also
have obligations to pay severance, upon termination of his employment for any
reason other than for cause. Under this agreement, we must pay him (i) an amount
equal to 150% of his last month`s salary multiplied by the number of years
(including partial years) that the CFO worked for us, plus (ii) an amount equal
to six times his last month`s salary. The severance obligation would be reduced
by the amount contributed by us to certain Israeli pension and severance funds
pursuant to the CFO`s employment agreement. As of March 31, 2003, the unfunded
portion of such severance obligation was $71,000.
Our Comverge subsidiary may in certain circumstances be liable to make
severance payments to its CEO and its Executive Vice President. Under the
employment agreement with the CEO of Comverge, if his employment is terminated
without cause, Comverge would have to pay him one year of base salary, or if
there has been an IPO for Comverge, three years of base salary plus up to 15%
of any excess parachute payment. The Comverge CEO`s salary for 2002 was
$250,000 per annum.
Under the employment agreement with Comverge's Executive Vice President, if
such officer's employment agreement were terminated without cause, Comverge
would have to pay to such officer three months of base salary ($205,000 during
2002) for each year (or partial year) of service to Comverge up to a maximum of
one year of salary. The Executive Vice President's employment commenced in
March 2001. Comverge is not obligated to make any severance payments under
these agreements if the CEO or the Executive Vice President voluntary terminates
his employment agreement.
We also have severance arrangements under an employment agreement with
the Chief Executive Officer of dsIT to pay severance under certain circumstances
If his employment agreement is terminated by the Company or by him for reasons
other than for cause, we must pay him (i) an amount equal to last month`s
salary multiplied by the number of years (including partial years) that he
worked for Endan and dsIT. Our severance obligation would be reduced by the
amounts contributed by to certain Israeli pension and severance funds pursuant
to his employment agreement. As of March 31, 2003, the unfunded portion of such
severance obligation was approximately $33,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in
interest rates on the $5.2 million of debt incurred to finance our capital
expenditures as well as long-term debt and current maturities of long-term debt,
$590,000 and $350,000 as of March 31, 2003, respectively, to finance our
operations. Of our $940,000 of long-term debt in Israel (which is denominated in
NIS), $70,000 is linked to the U.S. dollar, $90,000 is linked to the Israeli
consumer price index and $780,000 is unlinked. Our convertible note, with a face
value of $800,000, has a fixed rate of interest of 10%; however, the conversion
feature of our convertible note is exposed to fluctuations in the price of our
common stock. Additionally, our monetary assets and liabilities (net liability
of approximately $690,000) in Israel are exposed to fluctuations in exchange
rates. We do not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate or foreign currency exchange
rate exposures.
- 16 -
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Chief Financial
Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in the reports we file under the Securities Exchange Act of 1934, within the
time periods specified in the SEC's rules and forms.
CHANGES IN CONTROLS AND PROCEDURES
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation.
- 17 -
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Report on Form 8-K, dated February 27, 2003 filed on March 3, 2003
relating to the transfer the listing of our common stock to the Nasdaq
SmallCap Market
Report on Form 8-K, dated February 28, 2003 filed on March 3, 2003
announcing the agreement in principle our subsidiary for a venture
capital financing for our Comverge Technologies, Inc. subsidiary.
- 18 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: May 15, 2003
By: /S/ YACOV KAUFMAN
--------------------------------------
Yacov Kaufman
Vice President and Chief Financial Officer
- 19 -
I, George Morgenstern, the Chief Executive Officer of Data Systems &
Software Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Data Systems &
Software Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 By: \S\ GEORGE MORGENSTERN
-----------------------------
George Morgenstern
Chief Executive Officer
- 20 -
I, Yacov Kaufman, the Chief Financial Officer of Data Systems & Software
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Data Systems &
Software Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 By: \S\ YACOV KAUFMAN
-------------------------
Yacov Kaufman
Chief Financial Officer
- 21 -