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 31,1997 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,
1997: 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, 1996 and March 31, 1997 1
Consolidated Statements of Operations
for the three month periods ended
March 31, 1996 and March 31, 1997 2
Statement of Changes in Shareholders' Equity
for the three month period ended March 31, 1997 3
Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 1996 and March 31, 1997 4
Schedules to Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 1996 and March 31, 1997 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 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1996 1997
--------- ---------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 2,464 $ 1,636
Short-term interest bearing bank deposits 398 400
Marketable debt securities 5,226 3,000
Restricted cash 1,403 1,451
Trade accounts receivable, net 7,875 9,072
Inventory 953 561
Other current assets 1,740 1,326
--------- ---------
Total current assets 20,059 17,446
--------- ---------
Investments 68,372 69,668
--------- ---------
Property and equipment, net 2,279 2,388
--------- ---------
Other assets:
Capitalized software development costs, net 5,229 4,475
Intangible assets, primarily goodwill , net 468 428
Note receivable 2,083 2,124
Other 3,626 3,981
--------- ---------
11,406 11,008
--------- ---------
Total assets $ 102,116 $ 100,510
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 1,962 $ 2,066
Current maturities of long-term debt - banks and others 162 162
Trade accounts payable 1,643 434
Accrued payroll, payroll taxes and social benefits 2,140 2,165
Other current liabilities 476 2,559
--------- ---------
Total current liabilities 6,383 7,386
--------- ---------
Long-term liabilities -bank and others, net of current maturities 472 601
--------- ---------
Minority interests 29,283 29,894
--------- ---------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized - 20,000,000 shares; Issued - 7,708,540 shares 77 77
Additional paid-in capital 33,997 34,046
Retained earnings 33,752 30,354
--------- ---------
67,826 64,477
Treasury stock, at cost - 339,362 shares (1,848) (1,848)
--------- ---------
Total shareholders' equity 65,978 62,629
--------- ---------
Total liabilities and shareholders' equity $ 102,116 $ 100,510
========= =========
</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 Operations (unaudited)
(dollars in thousands, except per share data)
Three months ended
March 31,
--------------------
1996 1997*
-------- -------
Sales:
Products $ 30,602 $ 5,403
Services 5,130 4,547
-------- -------
35,732 9,950
-------- -------
Cost of sales:
Products 22,040 3,938
Services 3,759 3,965
-------- -------
25,799 7,903
-------- -------
Gross profit 9,933 2,047
Research and development expenses, net 835 2,547
Selling, general and administrative expenses 4,454 4,301
-------- -------
Operating income (loss) 4,644 (4,801)
Financial income 2,129 260
Financial expenses (964) (152)
Other income, net 17 2
-------- -------
Income (loss) before income taxes 5,826 (4,691)
Income tax expense (benefit) 1,161 (164)
-------- -------
Income (loss) after income taxes 4,665 (4,527)
Minority interests (3,819) (635)
Equity in affiliates (73) 1,764
-------- -------
Net income (loss) $ 773 ($3,398)
======== =======
Earnings (loss) per common and common
equivalent share $ 0.10 ($ 0.46)
======== =======
Weighted average number of shares (in thousands) 7,310 7,371
======== =======
- ----------
* Reflects the results of Tower Semiconductor Ltd. on the equity method. See
Note 2.
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Number Additional
of Common paid-in Treasury Retained
shares stock capital stock earnings Total
--------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances as of
January 1, 1997 7,708,540 $ 77 $33,997 ($1,848) $ 33,752 $ 65,978
Unamortized
restricted stock
award compensation -- -- 49 -- -- 49
Net loss -- -- -- -- (3,398) (3,398)
--------- ------- ------- ------- -------- --------
Balances as of
March 31, 1997 7,708,540 $ 77 $34,046 ($1,848) $ 30,354 $ 62,629
========= ======= ======= ======= ======== ========
</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
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 773 $(3,398)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities - see Schedule A 9,949 1,341
------- -------
Net cash provided by (used in) operating activities 10,722 (2,057)
------- -------
Cash flows used in investment activities:
Short-term and long-term bank deposits, net (3,529) 12
Restricted cash, net (97) -
Investment in marketable securities (64,327) (15,325)
Proceeds from realization of marketable securities 68,211 17,607
Acquisitions of property and equipment (17,552) (364)
Proceeds from sale of property and equipment 39 32
Investments in capitalized software development
costs, net (635) (177)
Investments in other assets (310) (708)
Loans to affiliates (172) -
Net effect of change in reporting from equity
to consolidation method - see Schedule B - 102
------- -------
Net cash provided by (used in) investment activities (18,372) 1,179
------- -------
Cash flows from (used in) financing activities:
Proceeds from issuance of common stock, net 15 49
Short-term debt, net (518) 55
Proceeds from long-term debt 363 -
Repayments of long-term debt (407) (54)
------- -------
Net cash provided by (used in) financing activities (547) 50
------- -------
Net decrease in cash and cash equivalents (8,197) (828)
Cash and cash equivalents at beginning of period 25,959 2,464
------- -------
Cash and cash equivalents at end of period $17,762 $ 1,636
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 216 $ 57
======= =======
Income taxes $ 894 $ 23
======= =======
</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
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1996 1997
------- -------
<S> <C> <C>
A. Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization $ 3,365 $ 264
Minority interests 3,819 635
Write-down of capitalized software development and other costs - 1,967
Earnings on marketable debt securities (1,042) (56)
Deferred income taxes 862 159
Increase in liability for severance pay 539 183
Equity in affiliates 73 (1,764)
Gain on sale of property, plant and equipment, net - (1)
Other 4 (318)
Increase in accounts receivable and other current assets (1,671) (1,322)
Decrease (increase) in inventory (3,186) 240
Increase in long-term receivables (14) (41)
Increase in accounts payable and other current liabilities 3,543 1,395
Increase in customer advances, net 3,657 -
------- -------
$ 9,949 $ 1,341
======= =======
B. Net effect of change in reporting from
equity method to consolidation of subsidiary:
Working capital, net of cash - (18)
Intercompany loans - 1,157
Other assets - (1,037)
------- -------
- $ 102
======= =======
C. Non - cash activities:
Issuance of common stock related to business acquisitions $ 1,134 -
======= =======
</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 previously
capitalized software development and other deferred costs, which reduced net
income by approximately $2.0 million during the first quarter of 1997. Certain
financial information which is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but which
is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
Note 2. Investment in Tower
Although the Company retained effective control of Tower, as a result of a
change in its voting control of Tower's shares, the Company ceased to
consolidate Tower's financial statements as of December 31, 1996. As the
Company's consolidated statement of operations for the three months ended March
31, 1997 does not include Tower's balances while that of the comparable period
in 1996 does, the Company's statement of operations for the first three months
of 1997 and 1996 are not directly comparable.
Summarized income statement information of Tower for the three months
ended March 31, 1997 is as follows:
($,000)
-------
Sales $29,121
Gross Profit 8,059
Research and development 1,309
Sales, general and administrative 1,917
Operating income 4,833
Note 3: Implementation of Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("FAS
128"), which establishes new standards for computing and presenting net income
per share. The statement is effective for periods ending after December 15,
1997. Accordingly, the Company will adopt the standard beginning with its fourth
quarter of 1997. Had FAS 128 been adopted, net income (loss) per common and
common equivalent share amounts would not have been materially different for the
periods presented.
Note 4: Inventory
Inventory includes almost exclusively merchandise and finished goods.
- 6 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company commenced providing consulting and development services for
computer software and systems in Israel in 1986 and in the United States in
1991. In March 1993, the Company diversified its business through the
acquisition of a facility in Israel that manufactures semiconductors using CMOS
process technology and the proprietary IC designs of its customers. From March
1993 through the end of 1996, the Company conducted its business through two
business segments: the Computer Segment and the Semiconductor Segment. Due to
changes in the Company's voting control in Tower, the balance sheets as at
December 31, 1996 and March 31, 1997 do not include Tower balances. Commencing
in 1997, the Company accounts for its interest in Tower's results using the
equity method, including its prorata share of Tower's net income as equity
income.
Capitalized software development costs reflected on the balance sheet at
March 31, 1997, were $4.5 million, all of which related to the Company's EPSM
product. Applicable accounting principles require that capitalized software
costs be periodically reviewed and written down to net realizable value. The
Company took significant write downs of such costs in the first quarter of 1997
and has taken such writedowns in prior periods. Possible writedowns of
capitalized software costs associated with EPSM may significantly affect
oerating results in 1997 and/or future periods. The Company's future operating
results are also subject to the outcome of various other factors and are subject
to various other risks and uncertainties. See "Item 1. Business-Factors Which
May Affect Future Results" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 (the "1996 10-K").
Results of Operations
The following tables set forth certain information with respect to the
results of operations of the Company for the three months ended March 31, 1996
and 1997, the percentage of total revenues during each period attributable to
selected components of operations statement data, and the period to period
actual and percentage changes in such components.
The statement of operations for the three months ended March 31, 1997
reflects Tower's activity on the equity method while the statement of operations
for the comparable period in 1996 reflects Tower's activity on a fully
consolidated basis. Therefore, the balances for the two periods are not directly
comparable. Following is an analysis comparing the statement of operations for
the Company in the first three months of 1997 to that of what was the Computer
Segment for the comparable period in 1996.
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<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31, Change
-------------------------------------- from
1997 1996 1996
---------------- ----------------- -----------------
% of % of
($,000) sales ($,000) sales ($,000) %
------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Computer segment:
Sales 9,950 7,670 2,280 30%
Gross profit 2,047 21% 1,981 26% 66 3%
R&D expenses, net 2,547 26% 121 2% 2,426
SG&A expenses 3,941 40% 2,197 29% 1,944 88%
Operating loss (4,441) -45% (337) -4% (4,104)
Semiconductor segment:
Sales 28,062
Gross profit 7,952 28%
R&D expenses, net 714 3%
SG&A expenses 1,784 6%
Operating income 5,454 19%
Corporate:
SG&A expenses 360 473 (113) -24%
Equity income 1,764 (73)
Combined:
Sales 9,950 35,732
Gross profit 2,047 21% 9,933 28%
R&D expenses, net 2,547 26% 835 2%
SG&A expenses 4,301 43% 4,454 13%
Operating income (loss) (4,801) -48% 4,644 13%
Net income (loss) (3,398) -34% 773 2% (4,170)
</TABLE>
SALES. The increase in Computer Segment sales in the first quarter of 1997
as compared to the same period in 1996 was due to increased sales from the
Segment's United States operations, attributable to a 159% increase in Computer
- - VAR sales and nearly tripling PHD-TM software sales. These were partially
offset by a decrease in sales from the segment's Israeli operations, resulting
primarily from the sale of the Company's Atir subsidiary during 1996.
GROSS PROFIT. The decrease in gross profit as a percentage of Computer
Segment sales was primarily due to decreased profitability in the Company's
Israeli operations, resulting from increased labor costs.
RESEARCH AND DEVELOPMENT EXPENSES. The increase in research and
development expenses in the Computer Segment was primarily attributable to
write-downs of previously capitalized software of the PHD and Cybrcard (TM)
multimedia entertainment product during the first quarter of 1997. These write
downs resulted from the Company's ongoing reassessment of the likely realizable
value of these costs in light of the short market cycle and rapid rate of change
in the PC-software environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in
SG&A was primarily attributable to increased marketing efforts of the Company's
PHD and Cybrcard multimedia entertainment products.
OPERATING LOSS. The increase in the operating loss was primarily
attributable to the aforementioned increase in research and development costs
and marketing expenses.
- 8 -
<PAGE>
SHARE OF AFFILIATED COMPANY'S NET INCOME. Had the Company incorporated
Tower's results for the first quarter of 1996 using the equity method, equity
income for that quarter would have been $1.4 million as compared to $1.0 million
for the first quarter of 1997. The decrease in Tower's net income was primarily
attributable to (i) increased research and development expenses related to
Tower's technology advancement plan, (ii) increased marketing expenses, (iii)
decrease in financial income as a result of a decrease in cash and cash
equivalents as Tower implements its investment program and (iv) a decrease in
the Company's ownership in Tower.
NET INCOME (LOSS). The decrease in net income, resulting in a net loss in
the first quarter of 1997, was primarily attributable to increased losses in the
Company's Computer Segment, primarily as a result from the aforementioned write
downs of previously capitalized software, other research and development
expenses and marketing expenses.
Financial Condition
As of March 31, 1997, DSSI and its wholly-owned subsidiaries had working
capital of $7.6 million including cash and cash equivalents of $1.5 million and
marketable securities and short term bank deposits of $3.0 million.
As of March 31, 1997, DSI had working capital of $2.5 million, including
marketable securities and short term bank deposits of $400,000. 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. 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 1997 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.
The Company does not engage in any other hedging activities.
As of March 31, 1997, 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.
- 9 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1996 10-K for a discussion of material
litigation to which the Company is a party.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
Exhibits
Exhibit 11.1 - Calculation of Primary Earnings per Common Share
Exhibit 27.1 - Financial Data Schedule
Reports on Form 8-K
None
- 10 -
<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 19, 1997
By: /s/ Yacov Kaufman
------------------------------
Yacov Kaufman
Chief Financial Officer
Exhibit 11.1
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Calculation of Primary Earnings Per Common Share
Three months ended
March 31,
---------------------------
1996 1997
---------- -----------
Net income $ 754,673 $(3,396,021)
========== ===========
Weighted average number of:
Common shares outstanding 7,281,574 7,369,178
Dilutive common equivalents 28,027 2,139
---------- -----------
Total 7,309,601 7,371,317
========== ===========
Earnings per share $ 0.10 $ (0.46)
========== ===========
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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,487
<SECURITIES> 3,000
<RECEIVABLES> 9,072
<ALLOWANCES> 0
<INVENTORY> 561
<CURRENT-ASSETS> 17,446
<PP&E> 2,388
<DEPRECIATION> 0
<TOTAL-ASSETS> 100,510
<CURRENT-LIABILITIES> 7,386
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 62,552
<TOTAL-LIABILITY-AND-EQUITY> 100,510
<SALES> 5,403
<TOTAL-REVENUES> 9,950
<CGS> 3,938
<TOTAL-COSTS> 7,903
<OTHER-EXPENSES> 152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,691)
<INCOME-TAX> (164)
<INCOME-CONTINUING> (4,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,398)
<EPS-PRIMARY> ($0.46)
<EPS-DILUTED> ($0.46)
</TABLE>
