<PAGE>
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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 JUNE 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 August 14, 1996: 7,369,178
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<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 June 30, 1996 1
Consolidated Statements of Income
for the six month periods and three month periods ended
June 30, 1995 and June 30, 1996 2
Statement of Changes in Shareholders' Equity
for the six month period ended June 30, 1996 3
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1995 and June 30, 1996 4
Schedules to Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1995 and June 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 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
1995 1996
------------ --------
(unaudited)
ASSETS ($ 000)
<S> <C> <C>
Current assets:
Cash and cash equivalents $25,959 $26,812
Short-term interest bearing bank deposits 26,991 30,465
Marketable debt securities 83,965 61,731
Restricted cash 1,366 1,386
Accounts receivable - trade 21,040 19,434
Other receivables 18,876 14,047
Inventory 13,629 16,561
Other current assets 2,415 4,005
-------- --------
Total current assets 194,241 174,441
-------- --------
Investments 1,542 2,113
-------- --------
Property and equipment, net of accumulated depreciation
of $14,726 and $21,512 at December 31, 1995
and June 30, 1996, respectively 71,889 99,388
-------- --------
Other assets:
Capitalized software development costs, net 4,425 5,169
Intangible assets, primarily goodwill 843 691
Other 2,437 2,862
-------- --------
7,705 8,722
-------- --------
Total assets $275,377 $284,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $4,878 $3,504
Current maturities of long-term liabilities 11,493 12,291
Accounts payable - trade 25,300 28,170
Accrued payroll, payroll taxes, and social benefits 6,962 7,496
Other current liabilities 3,758 1,881
-------- --------
Total current liabilities 52,391 53,342
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 12,355 12,290
Long-term liability in respect of customer advances 10,144 8,942
Foreign deferred taxes 1,812 3,634
Other 1,191 1,450
-------- --------
Total long-term liabilities 25,502 26,316
-------- --------
Minority interests 129,730 135,978
-------- --------
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 June 30, 1996, respectively 75 77
Additional paid-in capital 33,742 33,899
Retained earnings 35,785 36,900
-------- --------
69,602 70,876
Treasury stock, at cost - 339,362 shares at
December 31, 1995 and June 30, 1996 (1,848) (1,848)
-------- --------
Total shareholders' equity 67,754 69,028
-------- --------
Total liabilities and shareholders' equity $275,377 $284,664
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- -----------------
1995 1996 1995 1996
------- ------ ------ ------
($000, except per share amounts)
<S> <C> <C> <C> <C>
Sales:
Products $49,498 $63,056 $26,130 $32,454
Services 9,546 9,387 4,970 4,257
------- ------- ------- -------
59,044 72,443 31,100 36,711
------- ------- ------- -------
Cost of sales:
Products 34,654 47,519 18,019 25,479
Services 7,023 7,095 3,626 3,336
------ ------- ------- -------
41,677 54,614 21,645 28,815
------ ------- ------- -------
Gross profit 17,367 17,829 9,455 7,896
Research and development expenses, net 1,166 1,728 592 893
Selling, general and administrative
expenses 7,506 9,080 4,081 4,626
------ ------- ------- -------
Operating income 8,695 7,021 4,782 2,377
Financial income 1,450 3,708 812 1,579
Financial expense (966) (1,723) (527) (759)
Other income, net 28 29 19 12
------ ------- ------- ------
Income before taxes on income 9,207 9,035 5,086 3,209
Taxes on income 1,878 1,650 1,022 489
------- ------- ------- -------
Income after taxes on income 7,329 7,385 4,064 2,720
Minority interests (5,572) (6,144) (3,052) (2,325)
Equity in affiliated companies (127) (126) (34) (53)
-------- -------- -------- -------
Net income $1,630 $1,115 $978 $342
======= ====== ====== =======
Earnings per common and common
equivalent share $0.24 $0.14 $0.14 $0.04
======= ======= ====== =======
Weighted average number of shares
(in thousands) 6,861 7,425 6,885 7,534
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Statement of Changes in Shareholders' Equity (unaudited)
<TABLE>
<CAPTION>
Number Additional
of Common paid-in Treasury Retained
shares stock capital stock earnings Total
-------- ------- --------- -------- --------- -------
($ 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 -- -- (535) -- -- (535)
Common stock issued upon
exercise of options 17,875 1 105 -- -- 106
Net income -- -- -- -- 1,115 1,115
--------- ---- ------- -------- ------- -------
Balance, June 30, 1996 7,708,540 $77 $33,899 ($1,848) $36,900 $69,028
========= ==== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1995 1996
---------- ----------
($ 000)
<S> <C> <C>
Cash flows from operating activities:
Net income $1,630 $ 1,115
Adjustments to reconcile net income to net cash provided
by operating activities - see Schedule A 7,978 12,569
---------- ----------
Net cash provided by operating activities 9,608 13,684
---------- ----------
Cash flows from (used in) investment activities:
Short-term and long-term bank deposits, net 1,706 (3,446)
Restricted cash, net (47) (97)
Investment in marketable securities (92,155) (138,279)
Proceeds from realization of marketable securities 114,992 162,445
Acquisitions of property and equipment (17,905) (30,277)
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 (1,363) (991)
Investments in other assets (594) (38)
Loans to affiliated company (109) (818)
Net cash acquired in purchase of subsidiary - see Schedule B 272 -
---------- ----------
Net cash provided by (used in) investment activities 4,836 (11,382)
---------- ----------
Cash flows used in financing activities:
Purchase of treasury stock (1,281) -
Short-term debt, net 1,121 (1,297)
Proceeds from long-term debt 1,847 714
Repayments of long-term debt (3,376) (971)
Proceeds from issuance of common stock 741 105
Costs of issuance of shares of subsidiary (38) -
---------- ----------
Net cash used in financing activities (986) (1,449)
---------- ----------
Net increase in cash and cash equivalents 13,458 853
Cash and cash equivalents at beginning of period 6,627 25,959
---------- ----------
Cash and cash equivalents at end of period $20,085 $26,812
========== ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $763 $440
========== ==========
Income taxes $1,568 $1,685
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Schedules to Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1995 1996
---------- ----------
($ 000)
<S> <C> <C>
A. Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 3,720 $ 7,221
Minority interests 5,572 6,144
Earnings on marketable debt securities (1,254) (1,921)
Deferred income taxes 996 1,363
Increase in liability for severance pay 603 270
Equity in affilliated companies 127 126
Other (79) 129
Decrease (increase) in accounts receivable and other current assets (9,239) 4,876
Decrease in liability in respect of customer advances, net - (211)
Increase in inventory (1,524) (2,931)
Increase (decrease) in accounts payable and other current liabilities 8,890 (2,486)
Decrease (increase) in long-term receivables 166 (11)
---------- ----------
$ 7,978 $12,569
========== ==========
B. Net cash acquired on purchase of subsidiary:
Company's shares issued upon acquisition of shares of
subsidiaries consolidated for the first time $ 1,134 -
Working capital, net of cash (220) -
Property and equipment (78) -
Goodwill on acquisition (498) -
Other assets (66) -
---------- ----------
$ 272 -
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<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 $170,000 for the three months and
six months ended June 30, 1996. Certain financial
information which is normally included in financial
statements prepared in accordance with generally accepted
accounting principles, but which is not required for
interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be
read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995. The results of
operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for
the full year.
Note 2: Inventory
Inventory is made up as follows:
December 31, June 30,
----------- --------
1995 1996
------- -------
($ ,000)
Raw materials $ 8,264 $11,037
Work in process 4,774 4,736
Finished goods 591 788
------- -------
$13,629 $16,561
------- -------
Note 3: Legal Proceedings
On June 21, 1996, a suit was filed in United States
District Court by a purported shareholder of Tower, against
Tower and its Co-Chief Executive Officers. According to the
complaint, the plaintiff purchased 200 of Tower's ordinary
shares in May 1996 at $14 3/8 per share. The complaint
seeks to certify a class of all persons who purchased or
otherwise acquired Tower's ordinary shares between May 25,
1995 and June 10, 1996. The complaint alleges, on behalf of
the class, that the defendants made misstatements and
omissions regarding the relationship between Tower and a
major customer and Tower's process development efforts in
connection therewith, in violation of certain U.S. Federal
securities laws. Similar actions have been commenced on
behalf of other purported shareholders in the United States
District Court for the District of New Jersey and the
Southern District of New York against Tower and its
Co-Chief Executive Officers. The Southern District of New
York action also names the Company and the Chairman of the
Board of Tower as defendants.
As of the date of these financial statements, neither Tower
nor any of the other defendants have been served with
process in connection with any of the above actions, no
class has been certified and the defendants' time to answer
or otherwise respond to the complaints has not begun to
run.
Management believes the claims against Tower and the other
defendants to be without merit and
- 6 -
<PAGE>
intends to vigorously defend against them.
Note 4: Recent Developments
During the first half of 1996, there has been a general
downturn in the market for semiconductor products.
Commencing in the second quarter of 1996, Tower has
experienced reductions in orders from customers and
downward pressures on prices from both current and
potential customers.
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 such major customer of wafers
from Tower. Sales to the such customer accounted for 7.9%
and 13.6% of sales for the six months ended June 30, 1995
and 1996, respectively.
As a result of the developments described above, Tower is
operating its manufacturing facility significantly below
capacity.
In July 1996 Tower reduced its work-force by approximately
120 employees, or 16%. Tower's obligations for employee
termination benefits to such employees are fully covered by
deposits previously made by Tower into recognized severance
and pension funds, by insurance policies purchased, or by
amounts previously accrued. Accordingly, any additional
costs related to the aforementioned work-force reductions
are not expected to be material.
Tower has filed a request with the Investment Center of the
State of Israel for the approval of a new $990 million
Approved Enterprise program for the expansion of Tower's
manufacturing capacity by the construction of a new plant
adjacent to its current facility. The Investment Center has
not taken action with respect to the application, other
than to notify the Tower that no funds were available in
the Investment Center's budget for 1996 to fund the plan,
if and when approved. In July 1996, the Israeli government
proposed certain changes to its Approved Enterprise program
which, if adopted, would result in a reduction in the grant
payable under new Approved Enterprise programs, including a
change in the rate of grants applicable to the municipality
in which Tower's facility is located. The financial
statements reflect the write-down during the three months
ended June 30, 1996 of certain design costs associated with
the specific location of the proposed new facility.
-7-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company conducts its business through two business segments:
Computer Software Services and Systems (the "Computer Segment") and
Semiconductor Manufacturing (the "Semiconductor Segment").
Results of Operations
Three and Six Months Ended June 30, 1995 and 1996
The following tables set forth certain information with respect to the
results of operations of the Company and its two business segments for
the three months and six months ended June 30, 1995 and 1996, the
percentage of total revenues during each period attributable to
selected components of income statement data, and the period to period
changes and percentage changes in such components.
<TABLE>
<CAPTION>
Three months ended June 30, Change
--------------------------- ------
1995 1996 from 1995
---- ---- ---------
Dollar % of Dollar % of Dollar
amount sales amount sales amount %
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Semiconductor segment: ($,000) ($,000) ($,000)
- ---------------------
Sales 23,948 28,488 4,540 19.0%
Gross profit 7,630 31.9% 6,128 21.5% (1,502) -19.7%
R&D expenses, net 427 1.8% 779 2.7% 352 82.4%
SG&A expenses 1,784 7.4% 2,385 8.4% 601 33.7%
Operating income 5,419 22.6% 2,964 10.4% (2,455) -45.3%
Computer segment:
- ----------------
Sales 7,152 8,223 1,071 15.0%
Gross profit 1,825 25.5% 1,768 21.5% (57) -3.1%
R&D expenses, net 165 2.3% 114 1.4% (51) -30.9%
SG&A expenses 1,882 26.3% 2,020 24.6% 138 7.3%
Operating income (222) -3.1% (366) -4.5% (144) 64.9%
Corporate:
- ---------
SG&A expenses 415 221 (194) -46.7%
Combined:
- --------
Sales 31,100 36,711 5,611 18.0%
Gross profit 9,455 30.4% 7,896 21.5% (1,559) -16.5%
R&D expenses, net 592 1.9% 893 2.4% 301 50.8%
SG&A expenses 4,081 13.1% 4,626 12.6% 545 13.4%
Operating income 4,782 15.4% 2,377 6.5% (2,405) -50.3%
Net income 978 3.1% 342 0.9% (636) -65.0%
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 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 44,748 56,550 11,802 26.4%
Gross profit 13,977 31.2% 14,079 24.9% 102 0.7%
R&D expenses, net 821 1.8% 1,493 2.6% 672 81.9%
SG&A expenses 3,107 6.9% 4,170 7.4% 1,063 34.2%
Operating income 10,049 22.5% 8,416 14.9% (1,633) -16.3%
Computer segment:
- ----------------
Sales 14,296 15,893 1,597 11.2%
Gross profit 3,390 23.7% 3,750 23.6% 360 10.6%
R&D expenses, net 345 2.4% 235 1.5% (110) -31.9%
SG&A expenses 3,466 24.2% 4,217 26.5% 751 21.7%
Operating income (421) -2.9% (702) -4.4% (281) 66.7%
Corporate:
- ---------
SG&A expenses 933 693 (240) -25.7%
Combined:
- ---------
Sales 59,044 72,443 13,399 22.7%
Gross profit 17,367 29.4% 17,829 24.6% 462 2.7%
R&D expenses, net 1,166 2.0% 1,728 2.4% 562 48.2%
SG&A expenses 7,506 12.7% 9,080 12.5% 1,574 21.0%
Operating income 8,695 14.7% 7,021 9.7% (1,674) -19.3%
Net income 1,630 2.8% 1,115 1.5% (515) -31.6%
</TABLE>
Sales. The increase in Semiconductor Segment sales in the second
quarter of 1996 as compared to the same period in 1995 was primarily
due to an increase in shipments of 23.4%, partially offset by a
decrease of approximately 3.6% in the average selling price. The
increase in Computer Segment sales in the second quarter of 1996 as
compared to the same period in 1995 was primarily due to increased
sales from the Segment's United States operations.
The increase in Semiconductor Segment sales in the first six
months of 1996 as compared to the first six months of 1995 was
primarily due to an increase in shipments of 28.3%, partially offset
by a decrease of 1.3% in the average selling price. The increase in
Computer Segment sales in the six month ended June 30, 1996 as
compared to the same period in 1995 was a result of increases in both
the Israeli and United States operations.
Gross Profit. The decrease in gross profit as a percentage of
Semiconductor Segment sales for the three months ended June 30, 1996
as compared to the same period 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 period. The decrease in gross profit
margin during the six months ended June 30, 1996 as compared to the
same period in 1995,
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<PAGE>
was attributable to the factors referred to in the foregoing sentence
as well as to manufacturing yield problems from a specialized process
during the first quarter of 1996. The decrease in the gross profit of
the Computer Segment stemmed primarily from the Israel operations and
was attributable to higher costs related to fixed price projects, as
well as increased direct labor costs.
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 concentrating
development efforts on the Professional Help Desk and Electric Power
Supply Management System projects (the costs related to which are
included in capitalized software), while reducing expenditures on new
projects.
Selling, General and Administrative Expenses ("SG&A"). The
increase in SG&A in the Semiconductor Segment 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 attributable
to decreased gross profit in the second quarter of 1996, and the
increased research and development expenses in the Semiconductor
segment and increased SG&A described above.
Financial Income and Expense. The increase in financial income was
primarily attributable to increased monetary balances in Tower,
primarily as a result of its public offering in July 1995.
Financial Condition
As of June 30, 1996 DSSI and its wholly-owned subsidiaries had
working capital of $11.7 million including cash and cash equivalents
of $1.9 million and marketable securities and short term bank deposits
of $7.2 million.
As of June 30, 1996, DSI had working capital of $3.9 million,
including cash and cash equivalents of $550,000 and marketable
securities and short term bank deposits of $1.1 million. Certain DSI
bank deposits serve as collateral for bank loans and guarantees.
As of June 30, 1996 Tower had working capital of $105.5 million,
including cash and cash equivalents of $24.4 million and marketable
securities and short term bank deposits of $83.9 million. In the first
six months of 1996 Tower generated cash from operations of $18.2
million and received grants from The Investment Center of the Israel
Ministry of Industry and Trade (under the "Approved Enterprise"
program described below) of $20.7 million. During the first six months
of 1996, Tower used $50.9 million for the purchase of fixed assets,
primarily in connection with implementing its expansion and technology
advancement plans.
The decrease in marketable securities since December 31, 1995 is
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.
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<PAGE>
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 six 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 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 June 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.
Recent Developments
In March 1996, the Tower experienced lower than expected
manufacturing yields form one of its specialized, advanced processes,
negatively impacting results for the first quarter of 1996. As a
result, Tower modified its plans for 1996 and 1997, scaling back its
capacity expansion plan and increasing the resources allocated to
Tower's technology advancement plan, as well as to improvements in
infrastructure and operating procedures.
In June 1996, Tower announced that Tower and Hewlett-Packard had
mutually agreed on the terms for ending the agreement for the purchase
by Hewlett-Packard of wafers from Tower. Sales to Hewlett-Packard
accounted for 7.9% and 13.6% of Tower's sales in the six months ended
June 30, 1995 and 1996, respectively.
During the first half of 1996 there was a downturn in the market
for semiconductor products generally. Commencing in the second quarter
of 1996, Tower experienced (i) reductions in orders from its
customers, including significant reduction in orders from a customer
(other than Hewlett-Packard) which accounted for 9% of sales in 1995,
and (ii) downward pressures on prices from both current and potential
new customers.
In July 1996 Tower reduced its work-force by approximately 120
employees or 16%. Tower's obligations for employee termination
benefits to such employees are fully covered by deposits previously
made by Tower into recognized severance and pension funds, by
insurance policies purchased, or by amounts previously accrued.
Accordingly, any additional costs related to the
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<PAGE>
aforementioned work-force reductions are not expected to be material.
As a result of (i) the end of the agreement with Hewlett-Packard,
(ii) the reduction in orders from Tower's customers and (iii) the
prevailing weakness in the demand for semiconductor products
generally, Tower is currently operating its manufacturing facility
substantially below capacity. Tower may not be able to maintain
profitable operations at its current capacity utilization levels.
Although Tower is attempting to add new customers and obtain
additional orders from current customers, there is no assurance that
Tower will succeed in attracting additional orders from new or
existing customers in the near future, if at all.
In light of the fact that Tower is currently operating
significantly below capacity and the current weakness of demand in the
semiconductor market, Tower does not currently intend to significantly
increase the overall capacity of its facility. Tower intends, however,
to continue to make significant expenditures during the remainder of
1996 to fund its process technology advancement program and to
purchase equipment to increase Tower's capacity to manufacture wafers
using its current 0.6 micron process and the advanced processes
currently under development by Tower.
-12-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
On June 21, 1996, a putative class action suit was filed in United
States District Court for the Eastern District of New York by Moshe
Balsam, a purported shareholder of Tower, against Tower and its
Co-Chief Executive Officers. According to the complaint, the plaintiff
purchased 200 of Tower's ordinary shares in May 1996 at $14 3/8 per
share. The complaint seeks to certify a class of all persons who
purchased or otherwise acquired Tower's ordinary shares between May
25, 1995 and June 10, 1996. The complaint alleges, on behalf of the
class, that in violation of Section 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 thereunder, the defendants made misstatements and
omissions regarding the relationship between Tower and Hewlett-Packard
Company and Tower's process development efforts in connection
therewith. Similar actions have been commenced on behalf of other
purported shareholders in the United States District Court for the
District of New Jersey and the Southern District of New York against
Tower and its Co-Chief Executive Officers. The Southern District of
New York action also names the Company and the Chairman of the Board
of Tower as defendants.
To date, neither Tower nor any of the other defendants have been
served with process in connection with any of the above actions, no
class has been certified and the defendants' time to answer or
otherwise respond to the complaints has not begun to run.
Management believes the claims against Tower and the other
defendants to be without merit and intends to vigorously defend
against them.
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.
-13-
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11.1 - Calculation of Primary Earnings Per Common Share
Exhibit 27.1 - Financial Data Schedule
-14-
<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 & SOFTWARE INC.
Dated: August 14, 1996
By /s/ Yacov Kaufman
------------------------------
Yacov Kaufman
Chief Financial Officer
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Calculation of Primary Earnings Per Common Share
Exhibit 11.1
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------- ---------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,630,453 $1,063,810 $979,129 $308,981
========== ========== ======== ========
Weighted average number of:
Common shares outstanding 6,830,305 7,310,514 6,856,760 7,361,402
Dilutive common equivalents 30,502 114,814 28,127 172,626
---------- ---------- -------- --------
Total 6,860,807 7,425,328 6,884,887 7,534,028
========== ========== ======== ========
Earnings per share $0.24 $0.14 $0.14 $0.04
========== ========== ======== ========
</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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 58,663
<SECURITIES> 61,731
<RECEIVABLES> 19,434
<ALLOWANCES> 0
<INVENTORY> 16,561
<CURRENT-ASSETS> 174,441
<PP&E> 120,900
<DEPRECIATION> (21,512)
<TOTAL-ASSETS> 284,664
<CURRENT-LIABILITIES> 53,342
<BONDS> 0
<COMMON> 77
0
0
<OTHER-SE> 68,951
<TOTAL-LIABILITY-AND-EQUITY> 284,664
<SALES> 63,056
<TOTAL-REVENUES> 72,443
<CGS> 47,519
<TOTAL-COSTS> 54,614
<OTHER-EXPENSES> 1,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,035
<INCOME-TAX> 1,650
<INCOME-CONTINUING> 7,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,115
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
