<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-19771
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
Delaware 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 Route 17, Mahwah, New Jersey 07430
- ---------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (201) 529-2026
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes No
Number of shares outstanding of the registrant's common stock, as of July 31,
1998: 7,379,178
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1997 and June 30, 1998. . . . . . . . 1
Consolidated Statements of Operations
for the three month and six month periods ended
June 30, 1997 and June 30, 1998. . . . . . . . . . . . . 2
Consolidated Statement of Changes in Shareholders' Equity
for the six month period ended
June 30, 1998 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1997 and June 30, 1998. . . . . . . . . . . . . 4
Schedules to Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1997 and June 30, 1998. . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 8-10
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 11
Item 4 Submission of Matters to a Vote of Security Holders . . . . 11
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company expects," "the Company anticipates," "the Company believes," "the
Company estimates," and other phrases of similar meaning. Whether such
statements ultimately prove to be accurate depends upon a variety of factors
that may affect the business and operations of the Company.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
As of As of
December 31, June 30,
----------- ---------
ASSETS 1997 1998
----------- ---------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,424 $ 1,679
Short-term interest bearing bank deposits 73 2,040
Marketable debt securities 1,600 1,300
Restricted cash 1,786 330
Trade accounts receivable, net 9,003 9,768
Inventory 377 685
Note receivable 2,248 -
Other current assets 1,173(*) 1,062
------- -------
Total current assets 17,684 16,864
------- -------
Investments 70,695 67,989
------- -------
Property and equipment, net 2,181 1,966
------- -------
Other assets:
Intangible assets, primarily goodwill 338 701
Other 1,468(*) 1,336
------- -------
1,806 2,037
------- -------
Total assets $92,366 $88,856
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 2,581 $ 405
Current maturities of long-term debt - banks
and others 1,128 838
Trade accounts payable 2,606 3,272
Accrued payroll, payroll taxes and social benefits 2,464 2,412
Other current liabilities 1,704 747
------- -------
Total current liabilities 10,483 7,674
------- -------
Long-term liabilities:
Long-term debt - banks and others, net of
current maturities 481 491
------- -------
Minority interests 29,094(*) 27,598
------- -------
Shareholders' equity :
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued
and outstanding - 7,708,540 shares and
7,718,540 at December 31, 1997 and
June 30, 1998, respectively 77 77
Additional paid-in capital 34,193 34,346
Retained earnings 19,886(*) 20,518
------- -------
54,151 54,941
Treasury stock, at cost - 339,362 shares
at December 31, 1997 and June 30, 1998 (1,848) (1,848)
------- -------
Total shareholders' equity 52,308 53,093
------- -------
Total liabilities and shareholders' equity $92,366 $88,856
======= =======
(*) Restated figures - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
------------------ ------------------
1997 1998 1997 1998
------------------ ------------------
Sales:
Products $ 9,897 $11,824 $ 4,494 $ 5,059
Services 10,284 9,627 5,647 4,675
------- ------- ------- -------
20,181 21,451 10,141 9,734
------- ------- ------- -------
Cost of sales:
Products 10,228 9,278 3,904 3,481
Services 7,817 7,328 3,852 3,926
------- ------- ------- -------
18,045 16,606 7,756 7,407
------- ------- ------- -------
------- ------- ------- -------
Gross profit 2,136 4,845 2,385 2,327
Research and development
expenses, net 661(*) 758 323(*) 416
Selling, general and
administrative expenses 9,180 7,756 4,789 2,867
------- ------- ------- -------
Operating loss (7,705) (3,669) (2,727) (956)
Interest income 545 125 285 64
Interest expenses (160) (166) (8) (74)
Gain on sale of division - 5,998 - 5,998
Other income (loss), net 23 (382) 21 (427)
------- ------- ------- -------
Income (loss) before
income taxes (7,297) 1,906 (2,429) 4,605
Income tax expense 533(*) 73 49(*) 42
------- ------- ------- -------
Income (loss) after
income taxes (7,830) 1,833 (2,478) 4,563
Minority interests 353(*) 395 108(*) 220
Equity income (loss) in affiliates,
net of minority interests 2,416 (1,596) 1,375 (1,247)
------- ------- ------- -------
Net income (loss) ($5,061) $632 ($995) $3,536
======= ======= ======= =======
Basic net income (loss) per share ($0.69) $0.09 ($0.14) $0.48
======= ======= ======= =======
Weighted average number of shares
outstanding (in thousands) 7,369 7,372 7,369 7,376
======= ======= ======= =======
Diluted net income (loss)
per share ($0.69) $0.09 ($0.14) $0.48
======= ======= ======= =======
Weighted average number of shares
outstanding and common share
equivalents (in thousands) 7,369 7,374 7,369 7,378
======= ======= ======= =======
(*) Restated figures - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
THOUSANDS ADDITIONAL
OF COMMON PAID-IN TREASURY RETAINED
SHARES STOCK CAPITAL STOCK EARNINGS TOTAL
-------- ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 7,709 $77 $34,193 ($1,848) $19,886(*) $52,308
Common stock issued upon
Exercise of warrants 10 - 55 - - 55
Unamortized restricted stock
award compensation - - 98 - - 98
Net income - - - - 632 632
------ ----- ------- ------- ------- -------
Balances, June 30, 1998
(unaudited) 7,719 $77 $34,346 ($1,848) $20,518 $53,093
====== ===== ======= ====== ======= =======
</TABLE>
(*) Restated figures - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
Six months ended
June 30,
-------------------
1997 1998
-------------------
Cash flows from operating activities:
Net income (loss) ($5,061)(*) $ 632
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities - see Schedule A 1,030 (*) (5,850)
------- -------
Net cash used in operating activities (4,031) (5,218)
------- -------
Cash flows provided by investing activities:
Short-term and long-term bank deposits, net 23 (1,967)
Restricted cash, net (300) 1,456
Investment in marketable securities (22,224) (4,099)
Proceeds from realization of marketable securities 26,380 4,416
Net proceeds from sale of division -See schedule C - 6,595
Acquisitions of property and equipment (505) (743)
Proceeds from sale of property and equipment 32 128
uisition of intangible assets - (500)
Investments in capitalized software
development costs, net (298)(*) -
(Increase) decrease in other assets (597) 1,070
Net effect of change in reporting from
consolidation to equity method - see Schedule B 102 -
------- -------
Net cash provided by investing activities 2,613 6,356
------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net - 55
Proceeds from sale of shares received in
partial conversion of note receivable - 1,871
Short-term debt, net 469 (2,176)
Proceeds of long-term debt 25 -
Repayments of long-term debt (92) (633)
------- -------
Net cash provided by (used in)
financing activities 402 (883)
------- -------
------- -------
Net increase (decrease) in cash and cash equivalents (1,016) 255
Cash and cash equivalents at beginning of period 2,464 1,424
------- -------
Cash and cash equivalents at end of period $1,448 $1,679
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 86 $ 135
======= =======
Income taxes $ 98 $ 127
======= =======
(*) Restated figures - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
Six months ended
June 30,
-------------------
1997 1998
-------------------
A. Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization $ 537 $ 319
Minority interests 1,162 (*) (1,494)
Write-down of capitalized software
development costs 1,995 -
Allowance for writeoff against note receivable - 610
Earnings on marketable debt securities (83) (17)
Deferred income taxes 923 (*) -
Increase in liability for severance pay 198 103
Equity in affiliates (3,931) 1,596
Gain on sale of division - See schedule C - (5,998)
Gain on sale of securities (192)
Gain on sale of property, plant
and equipment, net - (37)
Amortization of restricted stock
award compensation 98 98
Other (31) 5
Increase in accounts receivable
and other current assets (2,084)(*) (1,137)
(Increase) decrease in inventory 57 (307)
Decrease (increase) in long-term receivables (275) 131
Increase in accounts payable
and other current liabilities 2,464 220
Increase in customer advances, net - 250
------- -------
$1,030 ($5,850)
======= =======
B. Net effect of change in reporting from
consolidation to equity method - see Note 3:
Working capital, net of cash ($18)
Investment recorded 1,157
Other assets (1,037)
-------
$102
=======
C. Assets/liabilities transferred upon sale of division:
Trade accounts receivable, net $ 754
Property and equipment, net 405
Accrued payroll, payroll taxes
and social benefits (111)
Other current liabilities (452)
-------
$ 596
=======
D. Non - cash activities:
Receipt of 3,000,000 shares in partial
conversion of note receivable from Geotek. $1,871
=======
(*) Restated figures - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated 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. Such adjustments included, in
addition to adjustments of a normal recurring nature, the discontinuation of
CybrCard development and marketing activity, although most of the entries in
this regard were included in the financial statements for the year ended
December 31, 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, 1997. Certain amounts included in the Consolidated
Statements of Operations for the three and six month periods ended June 30,
1997, have been reclassified to conform with current presentation. The
results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Note 2. Restatement of Consolidated Financial Statements
Subsequent to the issuance of the Company's Financial Statements for the
first quarter of 1998, a subsidiary filed restated financial statements which
have a material effect on the Company's financial statements. The
subsidiary's restatement was in response to an order of the Israel Securities
Authority ("ISA") which required primarily the expensing of previously
capitalized software development costs. The Company's consolidated financial
statements for the periods presented herein reflect the restatement of
financial statements for the year ended December 31, 1997 and the quarter
ended March 31, 1998. The Company will be filing amendments to its Form 10-K
for the year ended December 31, 1997 and Form 10-Q for the three months ended
March 31, 1998, to reflect the restatement.
Note 3. Investment in Tower
Although the Company has effective control of Tower, the Company does not
have voting control of more than 50% of Tower's shares and as a result is
consolidating Tower's operations on an equity basis.
Summarized statement of operations information of Tower is as follows:
Six months ended Three months ended
June 30, June 30,
----------------- ------------------
1997 1998 1997 1998
----------------- ------------------
Sales $59,928 $37,759 $30,807 $14,572
Gross profit (loss) 17,742 (2,248) 9,683 (3,238)
Research and development 3,239 4,210 1,930 2,070
Sales, general and administrative 3,870 4,038 1,953 2,091
Operating income (loss) 10,633 (10,496) 5,800 (7,399)
Note 4: Implementation of Accounting Standards
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 132 "Employers' Disclosure About
Pensions and Other Postretirement Benefits". SFAS No. 132 revises and
standardizes employers' disclosures regarding pension and other post-retirement
benefit plans. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. Management has evaluated the effect on its financial
reporting from the adoption of this statement and believes that it is in
compliance with this disclosure.
Note 5: Inventory
Inventory consists almost exclusively of merchandise and finished goods.
- 6 -
<PAGE>
Note 6: Acquisition and sale
In January 1998, the Company acquired certain assets and licensed
intellectual property from Lucent Technologies, Inc. This technology will be
used by the Company's recently formed Comverge Technologies subsidiary which
will market the Customer Connection for Utilities (CCU) to customers in the
US. The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price of $1.25 million has been allocated to the
assets acquired based on their estimated fair value at the date of acquisition.
Of the purchase price, $500,000 has been allocated to the license agreement and
is being amortized over the five-year period of this agreement.
In April 1998 the Company sold certain assets and the technology related to
its PHD product to Computer Associates International, Inc. for approximately $7
million. The Company recognized a capital gain of approximately $6 million
before taxes in the second quarter of 1998 in connection with this transaction.
Note 7: Other expenses
In 1996 the Company sold its shares in Mobile Information Systems Ltd.
("MIS"), a joint venture of the Company's subsidiary DSI Israel and Geotek
Communications, Inc. ("Geotek") to Geotek in exchange for a $2 million
unsecured note, bearing annual interest of 8.25%, payable July 1, 1998. In
February 1998, the Company signed an agreement with Geotek, modifying the
note to permit its conversion into shares of Geotek Common Stock. In April
1998 Geotek issued to the Company 3,000,000 shares of Geotek Common Stock.
Based on its agreement with Geotek, the delivery of these shares represented
payment of approximately $1.7 million of the approximately $2.3 million
principal of and accrued interest on the note. These shares were subsequently
sold by the Company for approximately $1.9 million. In June 1998 Geotek filed
for protection under Chapter 11 of the Bankruptcy Act. The Company has
therefor established a reserve for doubtful debts equal to the remaining
balance of approximately $610,000 which remains outstanding on the note. The
doubtful debt expense resulting from this allowance, partially offset by the
profit from the sale of the Geotek shares, is included in other expenses, net.
- 7 -
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Data Systems & Software Inc. through its subsidiaries in the United States
and in Israel (collectively, the "Company") is a provider of computer consulting
and development services and is an authorized direct seller and
value-added-reseller ("VAR") of computer hardware products. The Company also
develops and markets two-way communication solutions which support automated
meter reading, power supply management and other functions for utilities.
Through its investment in Tower Semiconductor Ltd.("Tower"), the Company also
engages in the manufacture of semiconductors.
Although it has effective control of Tower, due to the fact that the Company
does not have legal voting control of more than 50% of Tower's shares, the
Company accounts for its interest in Tower's results using the equity method,
including its pro-rata share of Tower's net income (loss) as equity income
(loss).
In August 1998, the Company's Decision Systems Israel Ltd. subsidiary
("DSI Israel"), restated its financial statements for all periods commencing
December 31, 1992 through March 31, 1998, in compliance with an order of the
Israel Securities Authority ("ISA"). The ISA's order was primarily related to
previously capitalized software development costs associated with DSI
Israel's Electric Power Supply Management ("EPSM") system, which the ISA
determined should have been expensed in the respective periods in which such
costs were incurred. The balance of these costs was approximately $4.7
million as at March 31, 1998.
The Company's future operating results are subject to the outcome of
various other factors and are subject to various other risks and
uncertainties. See "Item 1.Business - Factors Which May Affect Future
Results" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the six months and three months ended
June 30, 1997 and 1998, including the percentage of total revenues during each
period attributable to selected components of operations statement data, and for
the period to period percentage changes in such components.
<TABLE>
<CAPTION>
Six months ended June 30, Change Three months ended June 30, Change
--------------------------- from ---------------------------- from
1997 1998 1997 1997 1998 1997
------------- ------------ ----- ------------- ------------- -----
% of % of % of % of % of % of
($,000) sales ($,000) sales 1997 ($,000) sales ($,000) sales 1997
------- ----- ------- ----- ----- ------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $20,181 100% $21,451 100% 6% $10,141 100% $ 9,734 100% (4%)
Cost of sales 18,045 89 16,606 77 (8) 7,756 76 7,407 76 (4)
------- ----- ------- ----- ------- ----- ------- -----
Gross profit 2,136 11 4,845 23 127 2,385 24 2,327 24 (2)
R&D expenses (*) 661 3 758 4 15 323 3 416 4 29
SG&A expenses 9,180 46 7,756 36 (16) 4,789 47 2,867 30 (40)
------- ----- ------- ----- ------- ----- ------------
Operating loss (7,705) (38) (3,669) (17) 52 (2,727) (27) (956) (10) 65
Interest income (expense), net 385 2 (41) (-) (111) 277 3 (10) - (103)
Gain on sale of division - - 5,998 28 - - 5,998 62
Other income, net 23 - (382) (2) 21 - (427) (4)
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before
income taxes (7,297) (36) 1,906 9 127 (2,429) (24) 4,605 47 290
Income tax expense(*) 533 3 73 - (86) 49 - 42 - 14
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) after
income taxes (7,830) (39) 1,833 9 126 (2,478) (24) 4,563 47 284
Minority interests(*) 353 2 395 1 12 108 1 220 2 104
Equity income (loss), net of
minority interests 2,416 12 (1,596) (7) (166) 1,375 13 (1,247) (13) (191)
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss) ($5,061) (25%) $632 3% 113% ($995) (10%) $3,536 36% 457%
======= ===== ======= ===== ===== ======= ===== ======= ===== ====
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements
- 8 -
<PAGE>
SALES. The increase in sales in the six months ended June 30, 1998 as
compared to the same period in 1997, was primarily attributable to increased
sales of consulting and development services in the Company's Israeli
operations, as well as increased hardware VAR sales, partially offset by a
decrease in sales due to the sale of the Company's PHD division after the first
quarter of 1998, as well as a decrease in sales from the Company's United States
consulting services. The decrease in sales in the three months ended June 30,
1998 as compared to the same period in 1997 was primarily due to the sale of PHD
at the beginning of the second quarter of 1998 as well as a decrease in sales
from United States consulting services, partially offset by increased sales
in the Company's Israeli consulting and development activities as well as
increased hardware VAR sales.
GROSS PROFIT. The increase in gross profit and gross profit margins in the
six months ended June 30, 1998, as compared to the same period in 1997, was
primarily due to a non-recurring write down of previously deferred production
expenses related to the Company's CybrCard product in the first quarter of 1997,
as well as increased gross profits in the Company's DSI Israel subsidiary. The
decrease in gross profit in the three months ended June 30, 1998, as compared to
the same period in 1997, was primarily due to the aforementioned sale of PHD,
partially offset by increased gross profits from computer VAR sales and from the
Company's DSI Israel subsidiary.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). The increase in R&D during the
six months and three months ended June 30, 1998 as compared to the same periods
in 1997, was due to increased EPSM product development expenses, as a result of
accelerated development costs as the product nears full scale release.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in SG&A
in the six months and three months ended June 30, 1998, as compared to the same
periods in 1997, was primarily due to the sale of PHD and reduction of its
activity in CybrCard, partially offset by increased marketing activity related
to the Company's solutions supporting automated meter reading and related
utilities solutions business.
OPERATING LOSS. The decrease in the operating loss in the six months and
three months ended June 30, 1998, as compared to the same periods in 1997, was
primarily attributable to the aforementioned increase in gross profits and
decrease in SG&A, partially offset by the increase in R&D.
SHARE OF AFFILIATED COMPANY'S NET INCOME (LOSS). The decrease in the equity
income, resulting in an equity loss, resulted from losses in Tower, primarily
attributable to continued decrease in Tower sales and capacity utilization, as
well as to increased R&D. See "Financial Condition".
NET INCOME (LOSS). The improvement in net income, resulting in net income
for the three months and six months ended June 30, 1998, as compared to the same
periods in 1997, was attributable to the aforementioned gain from the sale of
PHD and the increase in operating income in the 1998 periods, partially offset
by the equity losses from Tower, as described above.
Financial Condition
As of June 30, 1998, DSSI and its wholly owned subsidiaries had working
capital of $7.6 million (including cash and cash equivalents of $3.3 million).
Although there is no legal restriction preventing disposition of the Company's
investments in its less than wholly owned subsidiaries, or the distribution to
the Company of their earnings, cash of these subsidiaries (including DSSI's
principal subsidiaries, DSI Israel and Tower) is generally not available for use
by DSSI or other subsidiaries. In the past, DSSI has financed the operations of
its wholly owned subsidiaries from the proceeds of a public offering in 1993, an
institutional private placement in June 1994, the receipt of cash dividends from
Tower in 1996 and 1997 and, most recently, from the proceeds from the sale of
PHD.
- 9 -
<PAGE>
The increase in working capital as compared with the working capital at
December 31, 1997 was primarily due to the sale of PHD during the second quarter
of 1998.
In February 1998, the Company severely curtailed CybrCard product
development activity and suspended marketing activity due to the high costs
involved in continued marketing efforts. DSSI has at its disposal $2.2 million
of bank credit, secured by accounts receivable, none of which is being currently
used. DSSI believes that it has adequate liquidity to finance its ongoing
corporate activities.
DSI Israel has satisfied its financial and operating requirements
principally through cash from operations and the net proceeds of its initial
public offering in December 1992. As of June 30, 1998, DSI Israel had working
capital of $1.5 million, net of short term bank credit of $405,000. DSI Israel
has at its disposal additional bank credit should it require. Certain of its
bank deposits serve as collateral for bank loans and guarantees.
Although the Company continues to exercise effective control of Tower, since
the end of December 1996, the Company has not had voting control of more than
50% of Tower's shares and, therefore, ceased to consolidate Tower's balance
sheet and is including the results of Tower's operations on an equity basis.
Tower has satisfied its financial and operating requirements principally through
cash from operations, Investment Center grants, an advance from a customer and
the net proceeds of its public offerings in 1994 and 1995. As of June 30, 1998,
Tower had working capital of $85 million, including cash, short-term bank
deposits and marketable securities of $79.5 million.
Impact of Inflation and Currency Fluctuations
Approximately 70% 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
six months ended June 30, 1998 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 and extent of any
increase in the rate of inflation in Israel over the rate of inflation in the
United States that 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 were to exceed the devaluation of
the NIS against the dollar or the timing of such devaluation lags behind
inflation in Israel, as it occasionally has in the past.
The Company does not engage in any hedging activities.
As of June 30, 1998, 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.
- 10 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1997 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 27.1 - Financial Data Schedule
Reports on Form 8-K
Report of the Company on Form 8-K dated May 5,1998, as amended on June
11, 1998.
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<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 13, 1998
By: /s/ Yacov Kaufman
------------------------
Yacov Kaufman
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial informaton 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,049
<SECURITIES> 1,300
<RECEIVABLES> 9,924
<ALLOWANCES> 166
<INVENTORY> 685
<CURRENT-ASSETS> 16,864
<PP&E> 4,702
<DEPRECIATION> 2,736
<TOTAL-ASSETS> 88,856
<CURRENT-LIABILITIES> 7,674
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 53,016
<TOTAL-LIABILITY-AND-EQUITY> 88,856
<SALES> 11,824
<TOTAL-REVENUES> 21,451
<CGS> 9,278
<TOTAL-COSTS> 16,606
<OTHER-EXPENSES> 8,514
<LOSS-PROVISION> 574
<INTEREST-EXPENSE> 166
<INCOME-PRETAX> 1,906
<INCOME-TAX> 73
<INCOME-CONTINUING> 1,833
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 632
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
