<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 SEPTEMBER 30, 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
November 11, 1996: 7,369,178
<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 September 30, 1996 1
Consolidated Statements of Income
for the nine month periods and three month periods ended
September 30, 1995 and September 30, 1996 2
Statement of Changes in Shareholders' Equity
for the nine month period ended September 30, 1996 3
Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1995 and September 30, 1996 4
Schedules to Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1995 and September 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
----------- ------------
1995 1996
----------- -----------
(unaudited)
ASSETS ($ 000)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,959 $ 18,918
Short-term interest bearing bank deposits 26,991 28,711
Marketable debt securities 83,965 56,802
Restricted cash 1,366 1,395
Accounts receivable - trade 21,040 15,545
Other receivables 18,876 16,523
Inventory 13,629 14,986
Other current assets 2,415 3,317
----------- -----------
Total current assets 194,241 156,197
----------- -----------
Investments 1,414 928
----------- -----------
Property and equipment, net of accumulated depreciation of $14,726
and $25,222 at December 31, 1995 and September 30, 1996, respectively 71,889 107,385
----------- -----------
Other assets:
Capitalized software development costs, net 4,425 5,286
Intangible assets, primarily goodwill 843 508
Note receivable -- 2,000
Loans to affiliated companies 349 1,742
Other 2,216 2,225
----------- -----------
7,833 11,761
----------- -----------
Total assets $ 275,377 $ 276,271
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 4,878 $ 1,881
Current maturities of long-term liabilities 11,493 10,023
Accounts payable - trade 25,300 22,364
Accrued payroll, payroll taxes, and social benefits 6,962 5,297
Other current liabilities 3,758 4,397
----------- -----------
Total current liabilities 52,391 43,962
----------- -----------
Long-term liabilities:
Long-term debt, net of current maturities 12,355 12,245
Long-term liability in respect of customer advances 10,144 9,920
Foreign deferred taxes 1,812 4,204
Other 1,191 1,387
----------- -----------
Total long-term liabilities 25,502 27,756
----------- -----------
Minority interests 129,730 136,700
----------- -----------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares;
Issued - 7,590,665 and 7,708,540 shares at
December 31, 1995 and September 30, 1996, respectively 75 77
Additional paid-in capital 33,742 33,948
Retained earnings 35,785 35,676
----------- -----------
69,602 69,701
Treasury stock, at cost - 339,362 shares at December 31, 1995
and September 30, 1996 (1,848) (1,848)
----------- -----------
Total shareholders' equity 67,754 67,853
----------- -----------
Total liabilities and shareholders' equity $ 275,377 $ 276,271
=========== ===========
</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>
Nine months ended Three months ended
September 30, September 30,
---------------------------- ----------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
($000, except per share amounts)
<S> <C> <C> <C> <C>
Sales:
Products $ 78,037 $ 87,630 $ 28,539 $ 24,574
Services 14,772 13,515 5,226 4,128
----------- ----------- ----------- -----------
92,809 101,145 33,765 28,702
----------- ----------- ----------- -----------
Cost of sales:
Products 54,382 68,263 19,728 20,744
Services 11,101 10,503 4,079 3,408
----------- ----------- ----------- -----------
65,483 78,766 23,807 24,152
----------- ----------- ----------- -----------
----------- -----------
Gross profit 27,326 22,379 9,958 4,550
Research and development expenses, net 1,775 3,263 609 1,535
Selling, general and administrative expenses 11,886 13,272 4,380 4,192
----------- ----------- ----------- -----------
Operating income (loss) 13,665 5,844 4,969 (1,177)
Financial income 3,551 5,055 4,033 1,347
Financial expense (1,724) (2,383) (2,690) (660)
Gain on changes in ownership interests in subsidiaries 26,339 -- 26,303 --
Other income, net 17 1,869 25 1,840
----------- ----------- ----------- -----------
Income before taxes on income 41,848 10,385 32,640 1,350
Taxes on income 2,977 3,084 1,099 1,434
----------- ----------- ----------- -----------
Income (loss) after taxes on income 38,871 7,301 31,541 (84)
Minority interests (20,463) (6,868) (14,891) (724)
Equity in affiliated companies (147) (542) (20) (416)
----------- ----------- ----------- -----------
Net income (loss) $ 18,261 ($ 109) $ 16,630 ($ 1,224)
=========== =========== =========== ===========
Earnings (loss) per common and common
equivalent share $ 2.55 ($ 0.01) $ 2.17 ($ 0.17)
=========== =========== =========== ===========
Weighted average number of shares (in thousands) 7,165 7,364 7,675 7,373
=========== =========== =========== ===========
</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 -- -- (486) -- -- (486)
Common stock issued upon
exercise of options 17,875 1 105 -- -- 106
Net loss -- -- -- -- (109) (109)
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1996 7,708,540 $ 77 $ 33,948 ($ 1,848) $ 35,676 $ 67,853
========= ========= ========= ========= ========= =========
</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>
Nine months ended
September 30,
----------------------------
1995 1996
----------- -----------
($ 000)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 18,261 ($ 109)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities - see Schedule A 2,891 18,072
----------- -----------
Net cash provided by operating activities 21,152 17,963
----------- -----------
Cash flows used in investment activities:
Short-term and long-term bank deposits, net 2,127 (1,678)
Restricted cash, net (55) (97)
Investment in marketable securities (224,949) (152,148)
Proceeds from realization of marketable securities 167,909 181,312
Acquisitions of property and equipment (33,391) (46,929)
Proceeds from sale of property and equipment 39 39
Proceeds from sale of shares in a non-affiliated company -- 80
Investments in capitalized software development costs, net (1,927) (1,655)
Investments in other assets (831) (36)
Loans to affiliated companies (266) (1,760)
Net cash acquired (transferred) on purchase (sale) of subsidiaries - see Schedule B 272 (130)
----------- -----------
Net cash used in investment activities (91,072) (23,002)
----------- -----------
Cash flows from (used in) financing activities:
Net proceeds from public offering of securities of subsidiary 87,965 --
Proceeds from issuance of common stock 2,240 106
Purchase of treasury stock (1,281) --
Short-term debt, net 1,166 (1,810)
Customer advances - long-term 4,170 --
Proceeds from long-term debt 2,048 714
Repayments of long-term debt (3,432) (1,012)
----------- -----------
Net cash provided by (used in) financing activities 92,876 (2,002)
----------- -----------
Net increase (decrease) in cash and cash equivalents 22,956 (7,041)
Cash and cash equivalents at beginning of period 6,627 25,959
----------- -----------
Cash and cash equivalents at end of period $ 29,583 $ 18,918
=========== ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 745 $ 622
=========== ===========
Income taxes $ 2,123 $ 1,724
=========== ===========
</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>
Nine months ended
September 30,
----------------------------
1995 1996
----------- -----------
($ 000)
<S> <C> <C>
A. Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization $ 6,108 $ 12,017
Gain on changes in ownership interests in subsidiaries (26,339) --
Gain on sale of ownership interests in affiliated company -- (1,710)
Minority interests 20,463 6,868
Earnings on marketable debt securities (1,095) (1,991)
Deferred income taxes 414 2,484
Increase in liability for severance pay 572 322
Equity in affilliated companies 147 542
Other 404 199
Decrease (increase) in accounts receivable and other current assets (11,743) 6,067
Increase in inventory (2,584) (2,205)
Increase (decrease) in accounts payable and other current liabilities 16,544 (3,038)
Decrease in liability in respect of customer advances, net -- (1,483)
----------- -----------
$ 2,891 $ 18,072
=========== ===========
B. Net cash acquired (transferred) on purchase (sale) of subsidiaries:
Company's shares issued upon acquisition of shares of
subsidiaries consolidated for the first time $ 1,134 --
Receivables assumed upon sale of subsidiary -- (589)
Investment recorded -- (23)
Working capital, net of cash (220) 212
Property and equipment (78) 260
Goodwill on acquisition (498) 142
Other assets (66) --
Other liabilities -- (132)
----------- -----------
$ 272 ($ 130)
=========== ===========
C. Non - cash activities:
Issuance of common stock realted to business acquisitions $ 1,134 --
=========== ===========
Receivables assumed upon the sale of a subsidiary -- $ 589
=========== ===========
</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 necessary for a fair presentation
have been reflected herein. In addition to adjustments of a normal recurring
nature, such adjustments included the write-down of certain plant design costs
and inventory, which in the aggregate reduced net income by approximately
$170,000 during the second quarter of 1996. Certain financial information
which is normally included in financial statements prepared in accordance with
generally accepted accounting principles, but which is not required for interim
reporting purposes, has been omitted. The accompanying consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
Note 2: Inventory
Inventory is made up as follows:
December 31, September 30,
1995 1996
------------- -------------
($,000)
Raw materials $ 8,264 $10,979
Work in process 4,774 3,676
Finished goods 591 331
--------- ---------
$ 13,629 $14,986
========= =========
Note 3: Legal Proceedings
Between June and September 1996, five suits were filed in the United States on
behalf of a purported class of the shareholders of Tower, against Tower, its
Co-chief Executive Officers, and its Chairman of the Board of Directors. Two
of the actions were also brought against the Company. The complaints seek to
certify a class of all persons who purchased or otherwise acquired Tower's
ordinary shares between May 25, 1996 and June 10, 1996. The complaints allege,
on behalf of the class, that the defendants made misstatements and omissions
regarding (i) the relationship between Tower and a major customer and (ii)
Tower's process development efforts in connection therewith, in violation of
certain U.S. Federal securities laws. In November 1996, the court granted an
order consolidating three of the actions and appointing lead plaintiffs and
plaintiffs' counsel. Under the order, the plaintiffs are required to file an
amended consolidated complaint before the end of 1996.
The Company believes the aforementioned suits to be without merit and intends
to vigorously defend itself against them. Tower has indemnified the defendants,
up to the limits permitted by the Israel Companies Ordinance, from any liability
arising out of the actions. The Company believes that it has sufficient
insurance to cover the costs of defense of the actions and of any adverse
determination or settlement.
-6-
<PAGE>
Note 4: Recent Developments
Semiconductor Segment
In June 1996, Tower announced that it and a major customer had mutually agreed
on the terms for terminating the agreement for the purchase by the major
customer of wafers from Tower. A formal agreement between the parties was
signed in September 1996. Sales to the major customer accounted for 10%, 11%,
13% and 9% of the Semiconductor segments' sales for the nine months ended
September 30, 1995 and 1996 and the three months ended September 30, 1995 and
1996, respectively.
During the first half of 1996 and continuing into the third quarter of 1996,
there was a general downturn in the market for semiconductor products.
Commencing in the second quarter of 1996, Tower experienced reductions in
orders from customers and downward pressure on prices. As a result, Tower
operated substantially below capacity during the third quarter of 1996.
In July 1996, Tower terminated the employment of approximately 120 employees.
Tower's obligations for employee termination benefits were fully covered by
regular deposits made by Tower into recognized severance and pension funds, by
insurance policies purchased by Tower, and by the liability on the balance
sheet in respect of such benefits. Accordingly, any additional costs related
to the aforementioned termination of employment were not material.
Computer Segment
Effective July 1, 1996, the Company sold 95% of its interest in Atir Ltd. and
ceased to consolidate the results of Atir subsequent to that date. The Company
maintains a 5% interest which it reflects under the cost method. The sale had
no material profit or loss effect.
Effective July 1, 1996, the Company's Decision Systems Israel Ltd. ("DSI")
subsidiary sold its 50% interest in MIS Information Systems Holdings Ltd. to
Geotek Technologies, Inc. ("Geotek"). DSI sold its interest in exchange for a
$2 million unsecured note which bears interest at an annual rate of 8.25%,
payable on or before July 1, 1998. The Company recorded a gain of
approximately $1.7 million.
Note 5: Taxes on Income
Taxes on income for the three months ended September 30, 1996 include
approximately $1.5 million in respect of a dividend to be distributed by the
Company's Tower subsidiary in the fourth quarter of 1996.
-7-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company conducts its business through two business segments: Computer
Software Services and Systems (the "Computer Segment") and Semiconductor
Manufacturing (the "Semiconductor Segment").
Results of Operations
Three and Nine Months Ended September 30, 1995 and 1996
The following tables set forth certain information with respect to the results
of operations of the Company and its two business segments for the three months
and nine months ended September 30, 1995 and 1996, the percentage of total
revenues during each period attributable to selected components of income
statement data, and the period to period changes and percentage changes in such
components.
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30,
------------------------------------------------------------ Change
1995 1996 from 1995
------------------------- ------------------------- ----------------------
Dollar % of Dollar % of Dollar
amount sales amount sales amount %
------ ----- ------ ----- ------ -
($,000) ($,000) ($,000)
<S> <C> <C> <C> <C> <C> <C>
Semiconductor segment:
Sales 26,060 19,575 (6,485) -24.9%
Gross profit 8,377 32.1% 2,510 12.8% (5,867) -70.0%
R&D expenses, net 489 1.9% 983 5.0% 494 101.0%
SG&A expenses 1,719 6.6% 1,455 7.4% (264) -15.4%
Operating income 6,170 23.7% 72 0.4% (6,098) -98.8%
Computer segment:
Sales 7,705 9,127 1,422 18.5%
Gross profit 1,581 20.5% 1,938 21.2% 357 22.6%
R&D expenses, net 120 1.6% 552 6.0% 432 360.0%
SG&A expenses 2,149 27.9% 2,179 23.9% 30 1.4%
Operating loss (689) -8.9% (793) -8.7% (104) 15.1%
Corporate:
SG&A expenses 512 456 (56) -10.9%
Combined:
Sales 33,765 28,702 (5,063) -15.0%
Gross profit 9,958 29.5% 4,448 15.5% (5,510) -55.3%
R&D expenses, net 609 1.8% 1,535 5.3% 926 152.1%
SG&A expenses 4,380 13.0% 4,090 14.2% (290) -6.6%
Operating income (loss) 4,969 14.7% (1,177) -4.1% (6,146) -123.7%
Net income (loss) 16,630 49.3% (1,224) -4.3% (17,854) -107.4%
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30,
----------------------------------------------------- Change
1995 1996 from 1995
---------------------- --------------------- ----------------------------
Dollar % of Dollar % of Dollar
amount sales amount sales amount %
------ ----- ------ ----- ------ -
($,000) ($,000) ($,000)
<S> <C> <C> <C> <C> <C> <C>
Semiconductor segment:
Sales 70,808 76,125 5,317 7.5%
Gross profit 22,356 31.6% 16,589 21.8% (5,767) -25.8%
R&D expenses, net 1,310 1.9% 2,476 3.3% 1,166 89.0%
SG&A expenses 4,826 6.8% 5,625 7.4% 799 16.6%
Operating income 16,220 22.9% 8,488 11.2% (7,732) 47.7%
Computer segment:
Sales 22,001 25,020 3,019 13.7%
Gross profit 4,970 22.6% 5,688 22.7% 718 14.4%
R&D expenses, net 465 2.1% 787 3.1% 322 69.2%
SG&A expenses 5,615 25.5% 6,396 25.6% 781 13.9%
Operating loss (1,110) -5.0% (1,495) -6.0% (385) -34.7%
Corporate:
SG&A expenses 1,445 1,149 (296) -20.5%
Combined:
Sales 92,809 101,145 8,336 9.0%
Gross profit 27,326 29.4% 22,277 22.0% (5,049) -18.5%
R&D expenses, net 1,775 1.9% 3,263 3.2% 1,488 83.8%
SG&A expenses 11,886 12.8% 13,170 13.0% 1,284 10.8%
Operating income 13,665 14.7% 5,844 5.8% (7,821) -57.2%
Net income (loss) 18,261 19.7% (109) -0.1% (18,370) -100.6%
</TABLE>
Sales. The decrease in Semiconductor Segment sales in the third quarter of
1996 as compared to the same period in 1995 was primarily due to a decrease of
25.1% in shipments resulting from the termination of a purchase agreement with
a major customer and the general downturn in the market for semiconductor
products, as well as a decrease of 0.6% in the average unit selling price. The
increase in Computer Segment sales in the third quarter of 1996 as compared to
the same period in 1995 was due to increased sales from the Segment's United
States operations, partially offset by a decrease in sales from the segment's
Israeli operations, resulting primarily from the sale of the Company's Atir
subsidiary.
The increase in Semiconductor Segment sales in the first nine months of
1996 as compared to the same period in 1995 was primarily due to an increase in
shipments of 8.0% due to the relatively strong market for semiconductor
products in the first half of 1996, partially offset by a decrease of 0.4% in
the average selling price. The increase in Computer Segment sales in the nine
month ended September 30, 1996 as compared to the same period in 1995 was a
result of increases in sales from
-9-
<PAGE>
both the Israeli and United States operations of the segment, partially offset
by the decrease in sales resulting from the sale of Atir, effective as of July
1, 1996.
Gross Profit. The decrease in gross profit as a percentage of Semiconductor
Segment sales for the three months and nine months ended September 30, 1996 as
compared to the same periods in 1995 was primarily attributable to the impact
of increased direct costs associated with the expansion of the Company's
manufacturing capacity and the operation of the plant below capacity during the
1996 periods. The increase in gross profit as a percentage of Computer Segment
sales was primarily due to improved profitability in the Company's Databit
computer hardware subsidiary.
Research and Development Expenses. The increase in research and development
expenses (net of government grants) in the Semiconductor Segment reflected
increased process development expenses related to the implementation of Tower's
technology advancement plan. The increase in research and development expenses
in the Computer Segment was primarily attributable to write-downs of previously
capitalized software of the Professional Help Desk and Electric Power Supply
Management projects during the third quarter of 1996.
Selling, General and Administrative Expenses ("SG&A"). The decrease in SG&A
in the Semiconductor Segment for the three months ended September 30, 1996 as
compared to the same period in 1995 was primarily attributable to lower profit
sharing expenses as a result of reduced profitability. The increase in SG&A in
the Semiconductor Segment for the nine months ended September 30, 1996 as
compared to the same period in 1995, was primarily attributable to a write-down
of certain accumulated costs related to the specific location of a new
manufacturing facility being contemplated by Tower.
Operating Income. The decrease in operating income was primarily
attributable to the aforementioned decrease in gross profit and increase in
research and development costs.
Financial Income and Expense. The decrease in financial income over
financial expense for the three months ended September 30, 1996 compared with
the same period in 1995 was primarily attributable to the Company's Tower
subsidiary, which had lower monetary balances, higher exchange rate expenses
and higher loan interest expenses during the current period. The increase in
financial income for the nine months ended September 30, 1996 as compared to
the same period in 1995 was primarily attributable to increased monetary
balances in Tower, principally as a result of its public offering in July 1995.
Other Income. The increase in other income for the three months and nine
months ended September 30, 1996 was almost entirely attributable to the gain
from the sale of the Company's interest in MIS Information Systems Holdings
Ltd.
Taxes on Income. The increase in taxes on income as a percentage of income
before taxes was primarily attributable to (1) the recording of taxes payable
on a dividend to be distributed by the Company's Tower subsidiary in the fourth
quarter of 1996 and (2) the recording in the third quarter of 1995 of a
non-taxable gain on changes in ownership interests in subsidiaries related to
the a public offering of stock by the Company's Tower subsidiary of
approximately $26.3 million.
Financial Condition
As of September 30, 1996, DSSI and its wholly-owned subsidiaries had
working capital of $9.0 million including cash and cash equivalents of $2.1
million and marketable securities and short term bank deposits of $4.6 million.
-10-
<PAGE>
As of September 30, 1996, Tower had working capital of $99.7 million,
including cash and cash equivalents of $16.7 million and marketable securities
and short term bank deposits of $79.9 million. In the first nine months of 1996
Tower generated cash from operations of $22.6 million and received grants from
The Investment Center of the Israel Ministry of Industry and Trade of $24.0
million. During the first nine months of 1996, Tower used $46.6 million, net of
the aforementioned government grants, for the purchase of fixed assets,
primarily in connection with implementing its expansion and technology
advancement plans.
The decrease in cash and marketable securities, and increase in property
and equipment since December 31, 1995 was attributable to the purchase by Tower
of equipment related to its expansion and technology advancement plan.
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 declared a dividend payable on November 22, 1996 of $1.50 a share
which will result in a total cash outlay by Tower of approximately $19.8
million. Out of this amount, DSSI will receive cash of approximately $4.1
million after applicable Israeli withholding taxes.
As of September 30, 1996, DSI had working capital of $3.4 million,
including cash and cash equivalents of $98,000 and marketable securities and
short term bank deposits of $973,000. Certain DSI bank deposits serve as
collateral for bank loans and guarantees.
Impact of Inflation and Currency Fluctuations
Approximately 90% of the Company's sales are denominated in dollars. The
remaining portion is primarily denominated in New Israel Shekels ("NIS") that
are linked to the dollar. 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 nine months 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. 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.
Tower has commitments outstanding in Japanese yen incurred for certain
capital equipment expenditures. Tower purchases forward exchange contracts to
reduce its financial exposure to fluctuations in the Japanese yen/US dollar
exchange rate resulting from such commitments. The Company does not engage in
any other hedging activities.
As of September 30, 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.
-11-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
Between June and September 1996, five suits were filed in the United States
on behalf of a purported class of the shareholders of Tower, against Tower, its
Co-chief Executive Officers, and its Chairman of the Board of Directors. Two of
the actions were also brought against the Company. The complaints seek to
certify a class of all persons who purchased or otherwise acquired Tower's
ordinary shares between May 25, 1996 and June 10, 1996. The complaints allege,
on behalf of the class, that the defendants made misstatements and omissions
regarding (i) the relationship between Tower and a major customer and (ii)
Tower's process development efforts in connection therewith, in violation of
certain U.S. Federal securities laws. In November 1996, the court granted an
order consolidating three of the actions and appointing lead plaintiffs and
plaintiffs' counsel. Under the order, the plaintiffs are required to file an
amended consolidated complaint before the end of 1996.
The Company believes the aforementioned suits to be without merit and
intends to vigorously defend itself against them. Tower has indemnified the
defendants, up to the limits permitted by the Israel Companies Ordinance, from
any liability arising out of the actions. The Company believes that it has
sufficient insurance to cover the costs of defense of the actions and of any
adverse determination or settlement.
Other than as set forth above, the Company is not involved in any legal
proceedings that management believes, individually or in the aggregate, may
have a material adverse effect on the Company.
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Meeting") was held on
October 22, 1996. The following individuals were re-elected as directors of the
Company at the Meeting:
George Morgenstern
Robert L. Kuhn
Maxwell M. Rabb
Harvey Eisenberg
Allen L. Schiff
Sheldon Krause
No other matters were voted upon at the meeting.
Item 6: Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27.1 - Financial Data Schedule
Reports on Form 8-K
None
<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: November 14, 1996
By: /s/
-------------------------------
Yacov Kaufman
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 49,024
<SECURITIES> 56,802
<RECEIVABLES> 15,545
<ALLOWANCES> 0
<INVENTORY> 14,986
<CURRENT-ASSETS> 156,197
<PP&E> 132,607
<DEPRECIATION> (25,222)
<TOTAL-ASSETS> 276,271
<CURRENT-LIABILITIES> 43,962
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 67,776
<TOTAL-LIABILITY-AND-EQUITY> 276,271
<SALES> 87,630
<TOTAL-REVENUES> 101,145
<CGS> 68,263
<TOTAL-COSTS> 78,766
<OTHER-EXPENSES> 2,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,385
<INCOME-TAX> 3,084
<INCOME-CONTINUING> 7,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109)
<EPS-PRIMARY> ($0.01)
<EPS-DILUTED> ($0.02)
</TABLE>
