<PAGE>
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 MARCH 31, 1996 COMMISSION FILE NO. 0-19771
-----------------------------------------------
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
------------------------------------------------------
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)
-----------------------------------------
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 April
30, 1996: 7,353,453
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1995 and March 31, 1996 1
Consolidated Statements of Income
for the three months ended
March 31, 1995 and March 31, 1996 2
Statement of Changes in Shareholders' Equity
for the three months ended March 31, 1996 3
Consolidated Statements of Cash Flows
for the three months ended
March 31, 1995 and March 31, 1996 4
Schedules to Consolidated Statements of Cash Flows
for the three months ended
March 31, 1995 and March 31, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1995 1996
--------- -------
(unaudited)
ASSETS ($ 000)
<S> <C> <C>
Current assets:
Cash and cash equivalents $25,959 $17,762
Short-term interest bearing bank deposits 26,991 30,535
Marketable debt securities 83,965 81,128
Restricted cash 1,366 1,378
Accounts receivable -trade 21,040 19,480
Other receivables 18,876 21,636
Inventory 13,629 16,816
Other current assets 2,415 2,859
--------- -------
Total current assets 194,241 191,594
--------- -------
Investments 1,542 1,877
--------- -------
Property and equipment, net of accumulated depreciation
of $14,726 and $17,860 at December 31, 1995 and
March 31, 1996, respectively 71,889 84,516
--------- -------
Other assets:
Capitalized software development costs, net 4,425 4,940
Intangible assets, primarily goodwill 843 767
Other 2,437 2,744
--------- -------
7,705 8,451
--------- -------
Total assets $275,377 $286,438
========= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Short-term debt - banks and others $4,878 $4,275
Current maturities of long-term debt 333 160
Current portion of long-term liability
in respect of customer advances 11,160 11,925
Accounts payable - trade 25,300 27,913
Accrued payroll, payroll taxes, and social benefits 6,962 7,510
Other current liabilities 3,758 2,393
--------- -------
Total current liabilities 52,391 54,176
--------- -------
Long-term liabilities:
Long-term debt, net of current maturities 12,355 12,484
Long-term liability in respect of customer advances 10,144 13,035
Foreign deferred taxes 1,812 2,882
Other 1,191 1,734
--------- -------
Total long-term liabilities 25,502 30,135
--------- -------
Minority interests 129,730 133,581
--------- -------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares;
Issued - 7,590,665 and 7,692,815 shares at
December 31, 1995 and March 31, 1996, respectively 75 77
Additional paid-in capital 33,742 33,759
Retained earnings 35,785 36,558
--------- -------
69,602 70,394
Treasury stock, at cost - 339,362 shares at December 31, 1995
and March 31, 1996 (1,848) (1,848)
--------- -------
Total shareholders' equity 67,754 68,546
--------- -------
Total liabilities and shareholders' equity $275,377 $286,438
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1995 1996
----------- -----------
($000, except per share amounts)
<S> <C> <C>
Sales:
Products $23,368 $30,602
Services 4,576 5,130
----------- -----------
27,944 35,732
----------- -----------
Cost of sales:
Products 16,635 22,040
Services 3,397 3,759
----------- -----------
20,032 25,799
----------- -----------
Gross profit 7,912 9,933
Research and development expenses, net 574 835
Selling, general and administrative expenses 3,425 4,454
----------- -----------
Operating income 3,913 4,644
Financial income 638 2,129
Financial expense (439) (964)
Other income, net 9 17
----------- -----------
Income before taxes on income 4,121 5,826
Taxes on income 856 1,161
----------- -----------
Income after taxes on income 3,265 4,665
Minority interests (2,520) (3,819)
Equity in affiliated company (93) (73)
----------- -----------
Net income $652 $773
----------- -----------
Earnings per common and common
equivalent share $0.10 $0.10
----------- -----------
Weighted average number of shares (in thousands) 6,829 7,310
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Statement of Changes in Shareholders' Equity (unaudited)
<TABLE>
<CAPTION>
Number Additional
of Common paid-in Treasury Retained
shares stock capital stock earnings Total
($ 000, except for share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 7,590,665 $75 $33,742 ($1,848) $35,785 $67,754
Common stock issued in
restricted stock award 100,000 1 587 - - 588
Unamortized restricted stock
award compensation - - (584) - - (584)
Common stock issued upon
exercise of options 2,150 1 14 - - 15
Net income - - - - 773 773
--------- --------- --------- --------- --------- ---------
Balance, March 31, 1996 7,692,815 $77 $33,759 ($1,848) $36,558 $68,546
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1995 1996
-------- -------
($ 000)
<S> <C> <C>
Cash flows from operating activities:
Net income $652 $773
Adjustments to reconcile net income to net cash provided
by operating activities - see Schedule A 2,351 9,949
-------- -------
Net cash provided by operating activities 3,003 10,722
-------- -------
Cash flows from investment activities:
Short-term and long-term bank deposits, net 1,742 (3,529)
Restricted cash, net (47) (97)
Investment in marketable securities (43,167) (64,327)
Proceeds from realization of marketable securities 63,025 68,211
Acquisitions of property and equipment (11,211) (17,552)
Proceeds from sale of property and equipment 39 39
Investments in capitalized software development costs, net (836) (635)
Investments in other assets (601) (310)
Loans to affiliated company (105) (172)
-------- -------
Net cash provided by (used in) investment activities 8,839 (18,372)
-------- -------
Cash flows from financing activities:
Purchase of treasury stock (1,281) -
Short-term debt, net 454 (518)
Proceeds from long-term debt 827 363
Repayments of long-term debt (2,354) (407)
Proceeds from issuance of common stock - 15
-------- -------
Net cash used in financing activities (2,354) (547)
-------- -------
Net increase (decrease) in cash and cash equivalents 9,488 (8,197)
Cash and cash equivalents at beginning of period 6,627 25,959
-------- -------
Cash and cash equivalents at end of period $16,115 $17,762
======== =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $267 $216
======== =======
Income taxes $872 $894
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules to Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1995 1996
----- ----
($ 000)
<S> <C> <C>
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $1,712 $3,365
Minority interests 2,520 3,819
Earnings on marketable securities (589) (1,042)
Deferred income taxes 1,022 862
Increase in liability for severance pay 370 539
Equity in affilliated company 93 73
Other (25) 4
Increase in accounts receivable and other current assets (3,611) (1,671)
Increase in liability in respect of customer advances, net - 3,657
Increase in inventory (697) (3,186)
Increase in accounts payable and other current liabilities 1,450 3,543
Decrease (increase) in long-term receivables 106 (14)
------ ------
$2,351 $9,949
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments, all of a normal
recurring nature, necessary for a fair presentation have been
reflected herein. Certain financial information which is normally
included in financial statements prepared in accordance with
generally accepted accounting principles, but which is not required
for interim reporting purposes, has been omitted. The accompanying
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. The
results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results to be expected for the full
year.
Note 2: Inventory
Inventory is made up as follows: December 31, March 31
1995 1996
------------ --------
($,000)
-------
Raw materials $ 8,264 $ 9,137
Work in process 4,774 7,346
Finished goods 591 333
------- -------
$13,629 $16,816
------- -------
-6-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company conducts its business through two business segments: Computer
Software Services and Systems (the "Computer Segment") and Semiconductor
Manufacturing (the "Semiconductor Segment").
Results of Operations
Three Months Ended March 31, 1995 and 1996
The following tables set forth certain information with respect to the
results of operations of the Company and its two business segments for the first
quarters of 1995 and 1996, the percentage of total revenues during each quarter
attributable to selected components of operating statement data, and the quarter
to quarter percentage changes in such components.
<TABLE>
<CAPTION>
First Quarter
------------------------------------ Increase
1995 1996 (Decrease)
-------------- -------------- from 1995
Dollar % of Dollar % of --------------
Amount Sales Amount Sales Amount %
------ ----- ------ ----- ------ -----
($,000) ($,000) ($,000)
<S> <C> <C> <C> <C> <C> <C>
Semiconductor Segment
Sales 20,800 28,062 7,262 34.9%
Gross profit 6,347 30.5% 7,952 28.3% 1,605 25.3%
Research and development expenses, net 395 1.9% 714 2.5% 319 80.8%
Selling, general, administrative expenses 1,323 6.4% 1,784 6.4% 461 34.8%
Operating income 4,629 22.3% 5,454 19.4% 825 17.8%
Computer Segment
Sales 7,144 7,670 526 7.4%
Gross profit 1,565 21.9% 1,981 25.8% 416 26.6%
Research and development expenses, net 179 2.5% 121 1.6% (58) (32.4)%
Selling, general, administrative expenses 1,584 22.2% 2,197 28.6% 613 38.7%
Operating loss (198) (2.8)% (337) (4.4)% (139) 70.2%
Corporate
Selling, general, administrative expenses 518 473 (45) (8.7)%
Combined
Sales 27,944 35,732 7,788 27.9%
Gross profit 7,912 28.3% 9,933 27.8% 2,021 25.5%
Research and development expenses, net 574 2.1% 835 2.3% 261 45.5%
Selling, general, administrative expenses 3,425 12.3% 4,454 12.5% 1,029 30.0%
Operating income 3,913 14.0% 4,644 13.0% 731 18.7%
Net income 652 2.3% 773 2.2% 121 18.6%
</TABLE>
-7-
<PAGE>
Sales. The increase in Semiconductor Segment sales was primarily due to
increased shipments, (accounting for approximately 96.6% of the increase) made
possible by increased manufacturing capacity and by the realization of higher
average wafer sales prices. The increase in Computer Segment sales was primarily
due to increased sales from the Segment's Israeli operations.
Gross Profit. The decrease in the gross profit margin in the Semiconductor
Segment was due to manufacturing yield problems from a specialized process
during the first quarter of 1996. The increase in gross profit margin of the
Computer Segment was entirely attributable to the Company's Israeli operations,
and resulted from increased higher margin fixed price projects.
Research and Development Expenses. The increase in research and development
expenses (net of government grants) in the Semiconductor Segment reflected
higher process development expenses related to the implementation of Tower's
technology advancement plan. The decrease in research and development expenses
(net of government grants) in the Computer Segment was primarily attributable to
a concentration on development efforts of the Professional Help Desk ("PHD") and
Electric Power Supply Management System ("EPSM") projects (the costs related to
which are included in capitalized software), and a reduction in expenditures on
new projects.
Selling, General and Administrative Expenses ("SG&A"). The increase in
Computer Segment SG&A as a percentage of segment sales was attributable to
increased marketing efforts in anticipation of future sales, particularly for
the PHD product.
Operating Income. The increased operating losses in the Computer Segment
were attributable to the increased SG&A described above, in anticipation of
future sales.
Financial Income and Expense. The entire increase in financial income was
attributable to the monetary balances in Tower, primarily due to its public
offering in July 1995.
Financial Condition
As of March 31, 1996 DSSI and its wholly-owned subsidiaries had working
capital of $12.8 million including cash and cash equivalents of $1.8 million and
marketable securities and short term bank deposits of $9.5 million.
As of March 31, 1996, DSI had working capital of $3.7 million, including
short term bank deposits and marketable securities of $1.5 million. Certain bank
deposits serve as collateral for bank loans and guarantees.
As of March 31, 1996 Tower had working capital of $120.8 million, including
cash and cash equivalents of $15.9 million and marketable securities and short
term bank deposits of $100.7 million. In the first quarter of 1996 Tower
generated cash from operations of $12.5 million and received grants from The
Investment Center of the Israel Ministry of Industry and Trade (under the
"Approved Enterprise" program described below) of $6.7 million. During the first
quarter of 1996, Tower used $25.3 million for the purchase of fixed assets,
primarily in connection with implementing its capacity expansion plan described
below. Tower financed the acquisitions, in part, with the use of amounts
received in its public offering in July 1995.
Tower's banks have agreed to make available to Tower, at its request, short
term credits in the aggregate amount of $30 million, subject to certain
covenants.
Tower is in the process of implementing capacity expansion and technology
advancement plans for 1996 and 1997. Tower currently plans to increase its
monthly wafer start capacity at its existing facility to
-8-
<PAGE>
approximately 20,000 by the end of 1996 and 23,000 by the end of 1997. At the
same time, Tower intends to advance the process technologies used for the
manufacture of semiconductor products for its customers, ramping up Tower's 0.6
micron process to volume production in 1996 and introducing Tower's 0.5 micron
process technology in 1997.
Tower estimates that the aggregate cost for implementing its capacity
expansion and technology advancement plans contemplated by its current expansion
will be between $220 million and $250 million. The Investment Center has agreed
to fund, in the form of additional "Approved Enterprise" grants up to $81.6
million (34% of up to $240 million) of Tower's expenditures for building and
equipment related to these plans. Tower believes that this amount (of which
approximately $35 million had been spent through March 31, 1996) will be
sufficient to implement its capacity expansion and technology advancement plans.
Tower plans to finance the remainder of this amount from cash-on-hand, cash from
operations and short-term borrowings. Receipt of grants under Tower's "Approved
Enterprise" program is subject to various conditions. If Tower fails to obtain
the full amount of grants that it anticipates receiving from The Investment
Center (whether due to failure to satisfy any condition or otherwise), the cost
to Tower of implementing its expansion plans will be higher, Towers
profitability will be lower and Tower may require significant additional
financing to implement such plans. The grants and tax benefits derived from
Towers "Approved Enterprise" status are conditioned upon fulfillment of the
conditions stipulated by the Investment Law. In the event of a failure by Tower
to comply with these conditions and criteria, the grants and tax benefits could
be canceled, in whole or in part, and Tower would be required to refund the
amount of the canceled benefits, adjusted for inflation and interest. Management
believes that Tower has operated and will continue to operate in compliance with
all the "Approved Enterprise" conditions and criteria applicable to it, although
there can be no assurance of this, and that the possibility that it will be
required to refund grants or tax benefits that it derives from its "Approved
Enterprise" status is remote.
Tower has submitted to The Investment Center a request for the grant of 34%
of up to $1 billion to construct a new 8" wafer fabrication facility adjacent to
Towers current facility. The application has not yet been acted upon. While
Tower has conducted certain preliminary design work related to the contemplated
new facility, no decision has been made to proceed with its construction.
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. Such sales transactions are negotiated in dollars but,
for the convenience of the customer, are settled in NIS. 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 first quarter of 1996
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 of, and the extent to which, any increase in the rate of inflation
in Israel over the rate of inflation in the United States is not offset by the
devaluation of the NIS in relation to the dollar. During the year ending
December 31, 1995 the NIS was devalued against the dollar by approximately 3.9%
while the consumer price index in Israel increased by 8.1%. During the first
quarter of 1995 and the first quarter of 1996, the dollar declined against the
NIS by approximately 1.7% and 0.8%, respectively, while the consumer price index
in Israel increased by 0.24%, and 2.8%, respectively. 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 continues, as in the past years, to exceed the devaluation of the NIS
against the dollar or if the timing of such devaluation lags behind inflation in
Israel.
-9-
<PAGE>
Tower has commitments outstanding in Japanese Yen incurred for certain
capital equipment expenditures. Tower purchases forward exchange contracts to
reduce its financial exposure to fluctuation in the Japanese Yen/US dollar
exchange rate resulting from such commitments. The Company does not engage in
any other hedging activities.
As of March 31, 1996, 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.
Recent Developments
In March 1996, Tower experienced lower than expected manufacturing yields
using a specialized advanced process, negatively impacting results for the first
quarter of 1996. At the same time, Tower modified its capacity expansion plan
for 1996 and 1997, lowering its 6" monthly wafer target for the end of 1996 to
20,000 from the previously planned 22,000 and its target for the end of 1997 to
23,000 from the previously planned 27,000, with the capital expenditures for
1996 expected to be the same as previously planned. Tower also made certain
other changes to its plans for 1996 and 1997, with increased allocation of
resources to R&D associated with Tower's technology advancement plan as well as
to improvements in infrastructure and operating procedures.
During the first part of 1996, there appeared to be a downturn in a number
of the end-product markets for Tower's products, particularly personal computers
and peripherals, as well as indications of a downturn in the market cycle for
semiconductor projects generally. Tower has also experienced some softening in
orders from its customers which it expects to affect future shipments.
Market downturns in the semiconductor market often result in production
overcapacity and accelerated erosion of sales prices for semiconductor products,
particularly for more mature technologies. There is no assurance that Tower's
business and profitability, and the profitability of the Company, will not be
adversely affected by cyclical downturns in the semiconductor market and/or end
product markets.
-10-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 - Calculation of Primary Earnings Per Common Share
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - The Company filed a Current Report on Form 8-K
(Items 5 and 7) on March 27, 1996, regarding the adoption of a
stockholder rights plan. No financial statements were included with
such report.
-11-
<PAGE>
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 13, 1996
By /s/ Yacov Kaufman
-----------------------------
Yacov Kaufman
Chief Financial Officer
-12-
Exhibit 11.1
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Calculation of Primary Earnings Per Common Share
<TABLE>
<CAPTION>
Three months ended March 31,
1995 1996
--------- ---------
<S> <C> <C>
Net income $651,324 $754,673
========= =========
Weighted average number of:
Common shares outstanding 6,803,586 7,259,628
Dilutive common equivalents 25,871 49,973
--------- ---------
Total 6,829,457 7,309,601
========= =========
Earnings per share $0.10 $0.10
========= =========
</TABLE>
Earnings per share assuming full dilution are identical to primary earnings per
share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 46,119
<SECURITIES> 81,128
<RECEIVABLES> 19,480
<ALLOWANCES> 0
<INVENTORY> 16,816
<CURRENT-ASSETS> 191,594
<PP&E> 102,376
<DEPRECIATION> 17,860
<TOTAL-ASSETS> 286,438
<CURRENT-LIABILITIES> 54,176
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 68,469
<TOTAL-LIABILITY-AND-EQUITY> 286,438
<SALES> 30,602
<TOTAL-REVENUES> 35,732
<CGS> 22,040
<TOTAL-COSTS> 25,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 964
<INCOME-PRETAX> 5,826
<INCOME-TAX> 1,161
<INCOME-CONTINUING> 4,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 773
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
