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 September 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 (IRS 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 October 31,
1998: 7,433,278
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1997 and September 30, 1998 ........... 1
Consolidated Statements of Operations
for the three month and nine month periods ended
September 30, 1997 and 1998 .............................. 2
Consolidated Statement of Changes in Shareholders' Equity
for the nine month period ended
September 30, 1998 ....................................... 3
Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1997 and 1998 .............................. 4
Schedules to Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1997 and 1998 .............................. 5
Notes to Consolidated Financial Statements ................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 9-13
PART II. Other Information
Item 1. Legal Proceedings .......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ........ 14
Item 6. Exhibits and Reports on Form 8-K ........................... 14
Signatures ............................................................... 15
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)
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1997(*) 1998
------------ -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,424 $ 1,055
Short-term interest-bearing bank deposits 73 2,038
Marketable debt securities 1,600 999
Restricted cash 1,786 652
Trade accounts receivable, net 9,003 6,995
Inventory 377 867
Note receivable 2,248 --
Other current assets 1,173 990
-------- --------
Total current assets 17,684 13,596
-------- --------
Investments 70,695 65,720
-------- --------
Property and equipment, net 2,181 1,838
-------- --------
Other assets:
Intangible assets, primarily goodwill 338 647
Other 1,468 1,187
-------- --------
1,806 1,834
-------- --------
Total assets $ 92,366 $ 82,988
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 2,581 $ 230
Current maturities of long-term debt 1,128 581
Trade accounts payable 2,606 3,064
Accrued payroll, payroll taxes and social benefits 2,464 2,200
Other current liabilities 1,704 1,710
-------- --------
Total current liabilities 10,483 7,785
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 481 559
-------- --------
Minority interests 29,094 26,503
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued
and outstanding 7,708,540 and 7,718,540
shares at December 31, 1997 and
September 30, 1998, respectively 77 77
Additional paid-in capital 34,193 34,395
Retained earnings 19,886 16,012
-------- --------
54,156 50,484
Treasury stock, at cost - 339,362 and
478,962 shares at December 31, 1997 and
September 30, 1998, respectively (1,848) (2,343)
-------- --------
Total shareholders' equity 52,308 48,141
-------- --------
Total liabilities and shareholders' equity $ 92,366 $ 82,988
======== ========
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------------------- ------------------------
1997(*) 1998 1997(*) 1998
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Sales:
Products $ 14,903 $ 15,029 $ 5,006 $ 3,205
Services 14,641 14,573 4,357 4,946
-------- -------- ------- -------
29,544 29,602 9,363 8,151
-------- -------- ------- -------
Cost of sales:
Products 12,999 11,865 2,771 2,587
Services 11,898 11,192 4,081 3,864
-------- -------- ------- -------
24,897 23,057 6,852 6,451
-------- -------- ------- -------
Gross profit 4,647 6,545 2,511 1,700
Research and development
expenses, net 1,025 1,254 364 496
Selling, general and
administrative expenses 13,754 10,581 4,574 2,825
-------- -------- ------- -------
Operating loss (10,132) (5,290) (2,427) (1,621)
Interest income 631 144 86 19
Interest expenses (171) (215) (11) (49)
Gain on sale of division -- 5,998 -- --
Other income (loss), net 55 (2,126) 32 (1,744)
-------- -------- ------- -------
Loss before income taxes (9,617) (1,489) (2,320) (3,395)
Income tax expense (benefit) 526 32 (7) (41)
-------- -------- ------- -------
Loss after income taxes (10,143) (1,521) (2,313) (3,354)
Minority interests 390 579 37 184
Equity income (loss) in affiliates,
net of minority interests 3,289 (2,932) 873 (1,336)
-------- -------- ------- -------
Net loss ($ 6,464) ($ 3,874) ($1,403) ($4,506)
======== ======== ======= =======
Basic net loss per share ($ 0.88) ($ 0.53) ($ 0.19) ($ 0.62)
======== ======== ======= =======
Weighted average number of shares
outstanding (in thousands) 7,369 7,359 7,369 7,310
======== ======== ======= =======
Diluted net loss per share ($ 0.88) ($ 0.53) ($ 0.19) ($ 0.62)
======== ======== ======= =======
Weighted average number of shares
outstanding and common share
equivalents (in thousands) 7,369 7,359 7,369 7,310
======== ======== ======= =======
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
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 -- -- 147 -- -- 147
Purchase of treasury stock -- -- -- (495) -- (495)
Net loss -- -- -- -- (3,874) (3,874)
----- --- -------- ------- -------- --------
Balances, September 30, 1998
(unaudited) 7,719 $77 $ 34,395 ($2,343) $ 16,012 $ 48,141
===== === ======== ======= ======== ========
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997(*) 1998
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 6,464) ($3,874)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities - see Schedule A 725 (79)
-------- -------
Net cash used in operating activities (5,739) (3,953)
-------- -------
Cash flows provided by investing activities:
Short-term and long-term bank deposits, net 35 (1,965)
Restricted cash, net (330) 1,134
Investment in marketable securities (25,223) (5,898)
Proceeds from realization of marketable securities 30,787 6,528
Net proceeds from sale of division -See schedule C -- 6,595
Acquisitions of property and equipment (748) (821)
Proceeds from sale of property and equipment 39 135
Acquisition of intangible assets -- (474)
Investments in capitalized software development costs, net (383) --
Increase in other assets (970) --
Net effect of change in reporting from
consolidation to equity method - see Schedule B 102 --
-------- -------
Net cash provided by investing activities 3,309 5,234
-------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net -- 55
Purchase of treasury stock -- (495)
Proceeds from sale of shares received in
partial conversion of note receivable -- 1,871
Short-term debt, net 113 (2,303)
Proceeds of long-term debt 1,018 102
Repayments of long-term debt (130) (880)
-------- -------
Net cash provided by (used in)
financing activities 1,001 (1,650)
-------- -------
Net decrease in cash and cash equivalents (1,429) (369)
Cash and cash equivalents at beginning of period 2,464 1,424
-------- -------
Cash and cash equivalents at end of period $ 1,035 $ 1,055
======== =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 129 $ 172
======== =======
Income taxes $ 162 $ 151
======== =======
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997(*) 1998
------------------------
<S> <C> <C>
A. Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization $ 829 $ 822
Minority interests 1,706 (2,591)
Write-down of capitalized software
development costs 1,967 --
Allowance for writeoff against note receivable -- 610
Allowance for bank guarantees for affiliate -- 1,135
Writeoff of investment in affiliate
and related receivables -- 256
Earnings on marketable debt securities (92) (30)
Deferred income taxes 923 --
Increase in liability for severance pay 140 195
Equity in affiliates (5,385) 4,954
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 -- (38)
Amortization of restricted stock award
compensation 98 147
Other (232) (4)
Decrease (increase) in accounts receivable
and other current assets (1,422) 1,355
Decrease (increase) in inventory 298 (490)
Decrease (increase) in long-term receivables (123) 97
Increase (decrease) in accounts payable and
other current liabilities 2,018 (372)
Increase in customer advances, net -- 65
------- -------
$ 725 ($ 79)
======= =======
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
=======
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
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, adjustments related to the
discontinuation of Cybrcard development and marketing activity, the sale of the
PHD division, the settlement of certain litigation, the accrual of a loss
contingency in connection with guarantees of the debt of an affiliate, and the
writeoff of the Company's investment in, and related receivables from, such
affiliate. 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 nine month periods ended September 30, 1997 have been reclassified to
conform with current presentation. The results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Restatement of Consolidated Financial Statements
In August 1998 a subsidiary filed restated financial statements which have
a material effect on the Company's consolidated financial statements. The
subsidiary's restatement was in response to an order of the Israel Securities
Authority 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 nine months and three months ended
September 30, 1997.
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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
--------------------- ---------------------
1997 1998 1997 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Sales $94,912 $ 52,926 $34,984 $ 15,167
Gross profit (loss) 28,015 (4,939) 10,273 (2,691)
Research and development expenses 5,535 6,104 2,296 1,894
SG&A 6,350 6,292 2,480 2,254
Operating income (loss) 16,130 (17,335) 5,497 (6,839)
</TABLE>
During the quarter ended September 30, 1998, Tower funded the purchase by
a trustee of 829,000 of Tower's ordinary shares to facilitate exercises of
employee stock options under Tower's share option plans. As a result of this,
Tower Semiconductor Holdings Ltd., which previously owned 41% of Tower, now owns
43.7%. The Company owns 60% of Tower Holdings. Tower's Board of Directors has
authorized the purchase of up to an aggregate 1,400,000 ordinary shares for such
purpose.
-6-
<PAGE>
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.
Note 6: Acquisition and Sale
In January 1998, the Company acquired certain assets and licensed
intellectual property from Lucent Technologies, Inc. This technology is being
used by the Company's recently formed Comverge Technologies subsidiary which
markets 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 $1,250 has been allocated to the assets
acquired based on their estimated fair value at the date of acquisition. Of the
purchase price, $500 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
$7,000. The Company recognized a capital gain of approximately $6,000 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., a
joint venture of the Company's subsidiary DSI Israel and Geotek Communications,
Inc. ("Geotek") to Geotek in exchange for a $2,000 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, and in April 1998 Geotek issued to the
Company 3,000,000 such shares. Based on its agreement with Geotek, the delivery
of these shares represented payment of approximately $1,700 of the approximately
$2,300 principal of and accrued interest on the note. These shares were
subsequently sold by the Company for approximately $1,900. In June 1998 Geotek
filed for protection under Chapter 11 of the Bankruptcy Act. The Company has
therefore established a reserve for doubtful debts equal to the remaining
balance of approximately $610 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.
During the quarter ended September 30, 1998, the Company determined that
an affiliate (a former subsidiary of the Company), on whose behalf the Company
had guaranteed bank debt of approximately $1,100, was experiencing financial
difficulty, and that it was likely that the Company would be required to perform
under its guarantees. Accordingly, in the third quarter of 1998 the Company
accrued loss contingencies of approximately $1,400 in connection with these
guarantees and with the write off of the Company's investment in, and related
receivables from, the affiliate.
-7-
<PAGE>
NOTE 8: Contingencies
Between June and September 1996, several suits were filed in the United
States on behalf of a purported class of Tower's shareholders who purchased or
otherwise acquired Tower's ordinary shares between May 25, 1995 and June 10,
1996, against Tower, its Co-Chief Executive Officers, its Chairman of the Board
of Directors and the Company, as an indirect principal shareholder in Tower. The
actions have been consolidated in the United States District Court for the
District of New Jersey. The consolidated complaint filed in the actions alleges
that the defendants made misstatements and omissions regarding, among other
things, (i) the relationship between Tower and a former major customer of Tower
and (ii) Tower's process development efforts in connection therewith, in
violation of certain U.S. Federal securities laws.
The Company has indemnified the officers and its director who are
defendants in this action, up to the limits permitted by the Israel Companies
Ordinance, from any liability arising out of the actions. The Company maintains
insurance policies that, under certain conditions and subject to certain
exclusions, cover actions of this type up to an aggregate amount of $20,000. The
Company is unable to determine at this time with any certainty the availability
and amount of coverage available to the Company under the aforementioned
policies in connection with this claim.
Tower believes it has meritorious defenses and is defending the action
vigorously. However, there is no assurance that Tower will not determine that
the advantages of settlement of the matter outweigh the risks and expense
associated with further litigation. Tower and the Company are unable to
determine at this time with any certainty the ultimate outcome of the
aforementioned matter and its effect, if any, on Tower's or the Company's
financial condition, operating results and business.
Tower has recently been separately approached by two parties alleging that
Tower is infringing on certain semiconductor production patents owned by such
parties and requesting that Tower enter into negotiations for a royalty-bearing
license for the use of the technology covered by such patents. Tower is
presently assessing these allegation and intends to engage in discussions with
the parties to determine whether there is any merit to their claim. In addition,
Tower is assessing if and to what extent Tower may be able to seek
indemnification from third parties for all or part of any royalties or other
amounts which may be paid or payable by the Company in connection with this
matter. Tower and the Company are unable to determine at this time with any
certainty the ultimate outcome of the aforementioned matter or its effect, if
any, on Tower's and the Company's financial condition, operating results and
business.
Note 9: Recent Developments
During the quarter ended September 30, 1998, the Company purchased 139,600
of its own shares. The Company's Board of Directors has authorized the purchase
of up to an aggregate 500,000 of the Company's ordinary shares.
-8-
<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 that 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 $4.7 million as of March
31, 1998. The Company's consolidated financial statements for the periods
presented herein reflect the restatement of financial statements for the year
ended December 31, 1997 and the nine months and three months ended September 30,
1997.
The Company's future operating results are subject to the outcome of
various other factors and are subject to various other risks and uncertainties.
See "Item 1.Business - Factors Which May Affect Future Results" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the nine months and three months ended
September 30, 1997 and 1998, including the percentage of total revenues during
each period attributable to selected components of operations statement data,
and for the period to period percentage changes in such components.
-9-
<PAGE>
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, Change September 30, Change
-------------------------------------- from -------------------------------------- from
1997(*) 1998 1997 1997(*) 1998 1997
----------------- ----------------- ---- ----------------- ---------------- ----
% of % of % of % of % of % of
($,000) sales ($,000) sales 1997 ($,000) sales ($,000) sales 1997
-------- ----- -------- ----- ---- ------- ------ ------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 29,544 100% $ 29,602 100% --% $ 9,363 100% $ 8,151 100% (13%)
Cost of sales 24,897 84 23,057 78 (7) 6,852 73 6,451 79 (6)
-------- --- -------- --- ------- ------ ------- ---
Gross profit 4,647 16 6,545 22 41 2,511 27 1,700 21 (32)
R&D expenses 1,025 3 1,254 4 22 364 4 496 6 36
SG&A expenses 13,754 47 10,581 36 (23) 4,574 49 2,825 35 (38)
-------- --- -------- --- ------- ------ ------- ---
Operating loss (10,132) (34) (5,290) (18) 48 (2,427) (26) (1,621) (20) 33
Interest income (expense), net 460 2 (71) -- (115) 75 1 (30) -- (140)
Gain on sale of division -- -- 5,998 20 -- -- -- -- --
Other income (expense), net 55 -- (2,126) (7) 32 -- (1,744) (21)
-------- --- -------- --- ------- ------ ------- ---
Loss before income taxes (9,617) (32) (1,489) (5) 85 (2,320) (25) (3,395) (41) (46)
Income tax expense (benefit) 526 2 32 -- (94) (7) -- (41) -- (486)
-------- --- -------- --- ------- ------ ------- ---
Loss after income taxes (10,143) (34) (1,521) (5) 85 (2,313) (25) (3,354) (41) (45)
Minority interests 390 1 579 2 48 37 -- 184 2 397
Equity income (loss), net of
minority interests 3,289 11 (2,932) (10) (189) 873 10 (1,336) (16) (253)
-------- --- -------- --- ------- ------ ------- ---
Net loss ($ 6,464) (22%) ($ 3,874) (13%) 40% ($1,403) (15%) ($4,506) (55%) (221%)
======== === ======== === ==== ======= ====== ======= === ====
</TABLE>
(*) Restated - See Note 2 to consolidated financial statements.
SALES. The increase in sales in the nine months ended September 30,
1998,as compared to the same period in 1997, was primarily due to increased
computer hardware VAR sales and increased sales of consulting services in
Israel, offset by a decrease in sales due to the sale of the Company's PHD
division in the beginning of the second quarter this year, as well as decreased
sales of consulting services in the United States. The decrease in sales in the
three months ended September 30, 1998 as compared to the same period in 1997,
was primarily attributable to a decrease in sales due to the aforementioned sale
of the Company's PHD division, as well as a decrease in sales from the Company's
United States consulting services, partially offset by increased computer
hardware VAR sales. The decline in sales in the third quarter of 1998 as
compared to the second quarter of 1998 was attributable to decreased computer
hardware VAR sales, which the Company believes resulted from the acceleration by
principal customers of their contemplated 1998 purchases into the first half of
the year.
GROSS PROFIT. The increase in gross profit and gross profit margin in the
nine months ended September 30, 1998, as compared to the same period in 1997,
was primarily due to (i) a non-recurring write down of previously deferred
production expenses related to the Company's CybrCard product in the first
quarter of 1997 (ii) improved computer hardware VAR sales and margins and (iii)
increased gross profits and margins on sales by DSI Israel, partially offset by
a decrease due to the sale of PHD. The decreases in gross profit and gross
profit margin in the three months ended September 30, 1998, as compared to the
same period in 1997, were primarily due to the sale of PHD as mentioned above,
partially offset by the reduced losses resulting from the suspension of Cybrcard
activities and improved gross profit and gross profit margin in the Company's
United States consulting activities. The decrease in gross profit and gross
profit margin in the third quarter of 1998 as compared to the second quarter of
1998 was primarily due to the aforementioned decrease in computer hardware VAR
sales.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). The increase in R&D during the
nine months and three months ended September 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.
-10-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in
SG&A in the nine months and three months ended September 30, 1998, as compared
to the same periods in 1997, was primarily due to the sale of PHD and reduced
Cybrcard activity, partially offset by increased marketing activity related to
the Company's automated meter reading and utilities solutions business.
OPERATING LOSS. The decrease in the operating loss in the nine months and
three months ended September 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.
OTHER EXPENSE. The increase in other expense in the nine months and three
months ended September 30, 1998, as compared to the comparable periods in 1997,
was primarily due to the accrual of loss contingencies in connection with
guarantees by the Company of the debt of an affiliate and the writeoff of the
Company's investment in such affiliate, as well as due to the settlement of
certain litigation.
INCOME TAXES. The income tax provisions for the three-month and nine-month
periods ended September 30, 1998 and September 30, 1997 are based on actual tax
computations for each of the periods. The Company generally establishes
valuation allowances against its net operating loss carryforwards and therefore
does not recognize deferred tax assets in connection therewith.
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 a continued decrease in Tower sales and capacity
utilization. See "Financial Condition".
NET LOSS. The decrease in net losses for the nine months ended September
30, 1998, as compared to the same period in 1997, was primarily attributable to
the aforementioned gain from the sale of PHD and the decrease in operating loss
in the 1998 periods, partially offset by the equity losses from Tower and by the
aforementioned other expenses. The increase in net losses for the three months
ended September 30, 1998, as compared to the same period in 1997, was
attributable to the aforementioned equity losses and other expenses, partially
offset by the decrease in operating losses described above.
Financial Condition
As of September 30, 1998, DSSI and its wholly owned subsidiaries had
working capital of $5.8 million (including cash, cash equivalents, deposits and
marketable securities of $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.
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.
-11-
<PAGE>
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 September 30, 1998, DSI Israel had
working capital of $1.1 million. DSI Israel has at its disposal bank credit
should it require. Certain of its investments 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 has 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 September 30, 1998,
Tower had working capital of $91 million, including cash, short-term bank
deposits and marketable securities of $84 million.
Stock Repurchase Program
During the quarter ended September 30, 1998, the Company purchased 139,600
of its own shares. The Company's Board of Directors has authorized the purchase
of up to an aggregate 500,000 of the Company's ordinary shares.
Year 2000 Technology Risks
The Company is in the process of reviewing its computer systems and
operations, both those for internal use and those developed for customers, to
identify and determine the extent to which any systems will be vulnerable to
potential errors and failures as a result of the "Year 2000 problem." Any of
these programs that have time-sensitive software could experience system
failures or miscalculations and result in disruption of operations.
The Company is conducting a comprehensive review of these computer systems
to ensure that all such systems are Year 2000 compliant prior to the
commencement of the year 2000. The Company's plan for its Year 2000
compatibility effort include the following: (i) conducting a comprehensive
inventory of the Company's internal systems, including non-information
technology systems (e.g. switching, billing and other platforms and electrical
systems) and any systems intended to be acquired by the Company, (ii) conducting
a comprehensive review of the systems developed by the Company for customers
either under development or within their warranty period and (iii) assessing and
prioritizing any required remediation, and (iv) remediating any problems by
modifying, or replacing where appropriate, non-compliant systems.
In addition to assessing its own internal or externally supplied systems,
the Company is making efforts to identify and remedy potential implications to
the Company as a result of its suppliers' vulnerability to Year 2000 problems.
There can be no assurance, however, that such problems will not have a material
adverse effect on the Company.
-12-
<PAGE>
The Company expects to complete its Year 2000 compliance effort by June
30, 1999 and to have remedied all material Year 2000 problems of its own by the
end of the year 1999. To date, the Company has identified that only a small part
of its internal systems are non-Year 2000 compliant, and these, as stated, are
in the process of being made compliant. With respect to systems developed by the
Company for customers, the Company has reviewed all such systems which were
delivered within the last three years and which remain under warranty, and no
material Year 2000 problems have been identified to date.
The Company has not incurred through September 30, 1998, and does not
expect to incur, significant costs in its Year 2000 compatibility effort, except
for the reallocation of manpower dedicated to this effort. Company
quality-control personnel and certain executive staff are involved in this
effort.
Following the completion of the Company's Year 2000 assessment, the
Company intends to determine the nature and extent of any contingency plans that
appear to be required. Even if the Company's assessment is completed without
identifying any additional materially non-compliant systems, there is no
assurance that the Company will not experience a Year 2000 related systems
failure. Any such failure could have a material adverse impact on the Company's
operations and financial condition.
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
nine months ended September 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 if 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 September 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.
-13-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other information
Item 1: Legal Proceedings
In October 1998 the Company settled the litigation with a former employee
described at Part I, Item 3 of the Company's 1997 10-K. The settlement provided
for the payment by the Company to the employee of $500,000 and the issuance to
the employee of 50,000 shares of the Company's Common Stock. The Company had
previously accrued approximately $290,000 in connection with the employee's
resignation. The Company accrued an additional approximately $350,000 of other
expenses in the third quarter of 1998 in connnection with the settlement of this
action.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant with amendments thereto
(incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-70482)).
3.2 By-laws of the Registrant (incorporated herein by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 (File No.
33-70482)).
3.3 Amendments to the By-laws of the Registrant adopted December 27, 1994
(incorporated by reference to Exhibit 3.3 of the Current Report on Form
8-K dated January 10, 1995).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
-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: November 16, 1998
By: /s/ Yacov Kaufman
------------------------------------
Yacov Kaufman
Chief Financial Officer
-15-
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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<PERIOD-END> SEP-30-1998
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0
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<COMMON> 77
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