SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Common Stock Purchase Rights
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10K. |X|
The aggregate market value of the common stock held by non-affiliates of the
registrant at March 18, 1998 was approximately $ 41.5 million. The aggregate
market value was calculated by using the closing price of the stock on that date
on the Nasdaq National Market.
Number of shares outstanding of the registrant's common stock, as of March 18,
1998: 7,369,178.
Documents incorporated by reference:
Certain sections of the registrant's Proxy Statement to be filed pursuant to
Regulation 14A under the Securities and Exchange Act of 1934 within 120 days of
the end of the registrant's fiscal year are incorporated by reference into Part
III of this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . 12
PART II
Item 5 Market for the Company's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 14
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 19
PART III
Item 10 Directors and Executive Officers of the Company . . . . . . . . . . 20
Item 11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 20
Item 12 Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 13 Certain Relationships and Related Transactions. . . . . . . . . . . 20
PART IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 21
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. For a discussion of
such factors see "Item 1. Business - Factors Which May Affect Future Results."
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PART I
ITEM 1. BUSINESS
GENERAL
Data Systems & Software Inc., through its subsidiaries and affiliates in the
United States and in Israel (collectively, the "Company"), (i) provides computer
consulting and development services to customers, (ii) has developed and is
currently marketing PHD-TM- - Professional Help Desk-TM-, an integrated software
suite for the "help desk" market, (iii) acts as an authorized direct seller,
value-added-reseller ("VAR") and integrator of computer hardware systems and
(iv) provides data communications and related products and services to utilities
and other customers.
Through the end of 1996, the Company conducted its business through two
business segments: the Computer Segment and the Semiconductor Segment (conducted
through Tower Semiconductor Ltd. ("Tower")). Although the Company retains
effective control of Tower, due to changes in the Company's voting control in
Tower, the balance sheets as at December 31, 1996 and December 31, 1997 do not
include Tower balances. Commencing with 1997, the Company accounts for its
interest in Tower's results using the equity method, including its pro-rata
share of Tower's net income as equity income.
The following table shows, for the years indicated, the dollar amount and
the percentage of the sales attributable to the different activities of the
Computer Segment:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Consulting and development services $20,871 69% $19,783 59% $20,573 52%
Computer hardware and VAR sales 8,440 28% 12,285 36% 15,170 38%
Professional Help Desk software 891 3% 1,802 5% 3,842 10%
------ ---- ------- ---- ------- ----
Total Computer Segment $30,202 100% $33,870 100% $39,585 100%
======= ==== ======= ==== ======= ====
CONSULTING AND DEVELOPMENT SERVICES
The Company provides computer software and systems consulting and
development services, primarily to high technology customers in Israel and the
United States. The Company's principal area of technological expertise is
state-of-the-art, embedded real-time software systems in a wide variety of
applications, including telecommunications, digital signal processing, image
processing and software testing and validation, radar, navigation, electronic
warfare, simulation and electro-optics.
The Company provides consulting and development services to customers
primarily by furnishing software and systems engineers, programmers and
technicians who perform design and development activities, generally on the
customer's premises. In these engagements, the Company's personnel generally
work under the customer's direction, having no specific obligation for product
delivery, and the customer pays the Company on a time and materials basis for
the services provided. During 1995, 1996 and 1997, sales attributable to
services provided on a time and materials basis were $14.9 million, $12.2
million and $16.8 million, respectively, accounting for approximately 49%, 36%
and 42% of Computer Segment sales for such years, respectively.
In addition to performing services on a time and materials basis, the
Company also undertakes work on a project basis with full responsibility for
delivering a specific software or hardware/software solution to a customer's
specifications or requirements. These projects generally are performed at fixed
prices and the profit margins on these projects are primarily determined by the
Company's success in controlling project costs. Profits derived from such
contracts may vary substantially as a result of various factors, including risk
of loss due to underestimating costs, difficulties with new technologies and
economic and other changes that may occur during the term of the contract.
During 1995, 1996 and 1997, sales from fixed price contracts were $2.3 million,
$2.7 million and $2.8 million, respectively, accounting for approximately 7%, of
Computer Segment revenues during these years.
The Company provides dedicated Internet access to business customers in greater
Cincinnati, Ohio. In addition, the Company provides web hosting for business
customers primarily in the United States and provides an international resume
database of experienced information systems professionals (known as placeum.com)
to professional recruiters on a subscription basis.
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HELP DESK SOFTWARE
The Company develops and markets customer service and support solutions
catering to the help desk segment of the CIS market. A help desk is, typically,
a service center set up by the information services (IS) department of an
organization to answer questions and solve problems relating to computer
hardware, software, telecommunications systems, or any company-specific issues.
PHD Professional Help Desk solutions address the needs of customers operating
within a client/server environment, with users enjoying out-of-box, customizable
solutions that include call, asset and problem management, in addition to
Web-based support and remote analyst and end-user access.
The Company's products are designed to allow help desk personnel to manage
incoming telephone calls, Web-based inquiries, or e-mail messages (call
management), resolve problems and capture knowledge (problem/knowledge
management), and manage personnel, equipment and other company resources (asset
management). PHD utilizes Experienced Based Reasoning-TM- (EBR-TM-), the
Company's proprietary problem resolution engine that automatically captures
customer data and creates a pool of shared knowledge about the nature of the
problems encountered and the solutions proposed. This effectively helps lessen
the problems associated with the help desk analyst turnover. EBR provides the
user with an organic growing body of knowledge from which to solve future
problems. This information can be made available to both help desk personnel and
end-users, facilitating self-diagnosis and problem resolution.
PHD offers client/server solutions grounded in a Microsoft framework.
Supported platforms include Windows NT, Windows 95, Windows 3.X and Windows CE
(for use with portable devices such as PDAs and PIMs). PHD solutions incorporate
Microsoft's Visual Basic for Applications (VBA), serving as the Company's
universal API. The addition of VBA effectively extends the reach of the help
desk, allowing for unprecedented customization and integration with existing
software investments.
PHD/X, built upon Microsoft's ActiveX technology, will allow application
programmers and developers to embed selected service and support PHD functions
directly into their products. The resulting applications will provide fully
integrated, robust and sophisticated help desk capabilities. The Company's first
ActiveX module, EBR/X, is presently shipping with the Professional Help Desk
suite. Additional modules are currently in development.
Capitalizing on the success and popularity of Java, PHD recently introduced
PHDWeb, the first Sun Microsystems certified "100% Pure Java" help desk
platform. PHDWeb offers the full functionality of the traditional Professional
Help Desk package over the Internet.
Through the end of 1997, the Company had invested approximately $7.9 million
on development, marketing and other costs associated with introduction of PHD.
See "Item 1. Business - Factors Which May Affect Future Results" -General
Factors - Entry Into New Markets" and "-Capitalization of Software Development
Costs; Possibility of Future Writedowns" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - General".
COMPUTER HARDWARE AND VAR SALES
The Company, through its Databit subsidiary, sells and services PC-based
computer hardware, software, data storage, client/server and networking
solutions. Databit is an authorized direct seller, value-added reseller and an
authorized service provider for equipment and software from such well-known
industry leaders as Compaq, IBM, Microsoft, Hewlett-Packard, Silicon Graphics,
Texas Instruments and Dell. Databit offers its customers a full range of systems
integration services, including design, implementation, hardware and software
selection and network cabling and installation, of local and wide area networks.
Databit provides maintenance and service to customers under extended service
agreements.
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DATA COMMUNICATION PRODUCTS AND SERVICES TO UTILITIES
Since 1992, through the PowerCom division of DSI Israel, the Company has
been designing, developing and marketing two-way interactive communications
solutions which provide real-time remote automated meter reading ("AMR") and
data management capabilities to utilities, energy service companies and
industrial and commercial customers. PowerCom's electronic power supply
management ("EPSM") system uses existing power lines to transmit the electricity
consumption data of each meter to the utility's main computer. A comprehensive
software package controls the system's operations and facilitates functions such
as real-time load switching, peak demand control and detection of leakage and
illegal use of electrical power. Pilot testing in Argentina has been completed
and beta site testing is currently being conducted in Mexico, Venezuela and a
number of towns in Israel. Although no full scale system sales of EPSM have been
made to date, the Company is currently negotiating with utilities in several
countries regarding installation of a pilot system or on a trial basis. Through
December 31, 1997 the Company had invested approximately $5.4 million (net of
government and customer participation) on development and marketing of the EPSM,
including $4.6 million carried on the balance sheet as capitalized software
costs.
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 U.S.
The CCU has been previously deployed at Public Service Electric and Gas using a
two-way cable TV system and at Duke Power using a cellular digital packet data
(CDPD) network. Five employees involved in developing the CCU have joined the
Comverge team.
The Company's communication systems are designed to allow customers to
compete more effectively by enabling them to reduce costs, defer capital
spending, increase sales revenues and improve service quality and scope. The
Company plans to broaden its target markets beyond utility companies to include
energy service providers, cooperatives, aggregators, municipals, and
telecommunications network service providers, as well as rekindle and expand
former strategic alliances and customer relationships. The Company intends to
expand its systems capabilities to include, in addition to its powerline
communications (PLC) technology, plain old telephone (POTS), personal
communication services (PCS) and Internet transport using its standards-based
open architecture.
The Company believes that its prior experience in the development,
manufacture, marketing and sales of energy management systems internationally,
together with the recently acquired assets and licensed technology, will permit
the Company to take advantage of market and product synergies, expand its U.S.
market and exploit the data communications and energy management needs of the
global utilities markets which are rapidly undergoing deregulation. See "Item 1.
Business - Factors Which May Affect Future Results - General Factors - Entry
Into New Markets" and "-Capitalization of Software Development and Costs;
Possibility of Future Writedowns" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - General".
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MULTIMEDIA ENTERTAINMENT
Since 1996, the Company has engaged in the development and marketing of
interactive, multimedia entertainment products under the Cybrcard-TM- name,
including 1996 NFL-R- Cybrcards, 1997 Major League Baseball-R- Cybrcards and
1997 NFL-R-Cybrcards. These products have generated only limited sales to date.
Due to the high costs associated with the marketing of consumer multimedia
products, the Company does not currently intend to develop and market additional
multimedia entertainment products in 1998. The Company, however, is actively
pursuing projects in the multimedia area in which the Company would have
responsibility for design and development of products which would be marketed
and sold by others. It is contemplated that in any such projects the cost of
development would be covered by the party with responsibility for the marketing
of the product. The Company would receive a combination of a fixed development
fee and/or royalties from the sale of products.
As of December 31, 1997 the Company had invested approximately $6
million in product development and marketing and administrative costs in
connection with its establishment of CybrCard and its product lines, all of
which was expensed.
CUSTOMERS AND MARKETS
The Company's Computer Segment commenced operations in Israel in 1986 and
Israel historically was the primary area of its operations. Due primarily to
significant growth in the Computer Segment's United States subsidiaries, the
percentage of revenues from activities of the United States subsidiaries
increased from 51% in 1995 to 61% in 1996 and 64% in 1997.
The Company commenced its operations in Israel by providing consulting
services to Israel Aircraft Industries Ltd. ("IAI"), which is wholly-owned by
the government of the State of Israel. IAI has been, and continues to be, the
Computer Segment's largest consulting customer. However, as the Company has
expanded its revenue base, and sales to IAI have decreased, the percentage of
its sales attributable to IAI has decreased. The percentage of the Company's
Computer Segment sales attributable to IAI in 1995, 1996 and 1997 was 16%, 8%
and 6%, respectively.
The Company's Computer Hardware and VAR sales commenced in 1992, accounting
for 28% of Computer Segment sales in 1995, increasing by almost 80% to 38% of
these sales in 1997. The Company's two largest hardware customers (a major New
York medical center and a large national law firm) accounted for approximately
10% and 5% and 11% and 12% of Computer Segment sales in 1996 and 1997,
respectively.
The Company's customers include major high technology companies, Fortune 500
companies and other leading industrial and service companies, in Israel and the
United States.
BACKLOG
The total backlog of work to be completed in the Company's Computer Segment
was approximately $1.7 million as of January 1, 1998, compared to $4.3 million
as of January 1, 1997. The Company estimates that virtually all of the backlog
will be performed in 1998.
Due to the generally short-term nature of orders received in the Computer
Segment, purchase orders or requisitions from customers requesting services on a
time and materials basis generally are cancelable on a minimum of 30 days
advance notice. Fixed price projects are often subject to termination for
convenience without substantial penalty and, accordingly, there can be no
assurances as to the actual sales to be generated from these contracts. In light
of the above, the Company does not consider backlog to be a meaningful measure
of operations in its Computer Segment.
COMPETITION
In its computer consulting and development services business, the Company
faces competition from numerous other competitors, both large and small,
operating in the Israeli and United States markets, some with substantially
greater financial and marketing resources. The Company believes that its wide
range of experience and long-term relationships with large corporations in the
United States and Israel enhance the Company's position with respect to
obtaining future business. For a discussion of factors relating to competition
in the other activities comprising the Company's Computer Segment, see "Item 1.
Business -Factors Which May Affect Future Results -General Factors -Competition.
PROPRIETARY RIGHTS
Certain products that the Company has developed and is developing
incorporate or are derived from intellectual property owned by third parties. A
license from, the consent of, or a joint development and marketing agreement
with, such third parties may be required in order to continue to develop and
market such products and there can be no assurance that any such arrangements
can be made on commercially reasonable terms.
In its product development activities, the Company relies on a combination
of nondisclosure agreements and technical measures to establish and protect its
proprietary rights, if any, in its products. The Company believes that, as a
result of the rapid pace of technological change in the software and real-time
system industries, legal protection for its products, if any, will be less
significant to the Company's prospects than the knowledge, ability and expertise
of the Company's management and technical personnel.
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In cases where the Company performs services on a time and materials basis,
the intellectual property rights resulting from these services are owned by the
Company's customer.
For further discussion of issues relating to proprietary rights to the
operation of the Company's Computer Segment, see "Item 1. Business - Factors
Which May Affect Future Results - General Factors - Dependence on Intellectual
Property of Third Parties".
SEMICONDUCTOR MANUFACTURING
INTRODUCTION
Tower is an independent "foundry" manufacturer of semiconductor integrated
circuits ("ICs") on silicon wafers, as well as a provider of design and turn-key
services. As a foundry, Tower manufactures wafers using its advanced production
capability and the proprietary IC designs of its customers. ICs manufactured by
Tower are incorporated into a wide range of products in diverse markets,
including computer and office equipment, communication products and consumer
electronics.
Semiconductors are the foundation of modern electronic equipment and
systems, constituting critical components for a wide range of products,
including computers, office equipment, communication equipment and defense,
aerospace, transportation and consumer electronics. A semiconductor may be
either a discrete device, such as an individual transistor, or an IC in which a
number of transistors and other elements are combined to form a more complex
circuit. A wide variety of semiconductor products currently are in use, ranging
from commodity products (such as DRAM, SRAM and other commodity memories) to
more differentiated products (such as microprocessors, ASICs and numerous
digital, analog and mixed-signal ICs).
SERVICES
Tower manufactures ICs on silicon wafers based upon proprietary designs
provided by its customers. Tower specializes in the manufacture of
differentiated IC products, which generally require greater process flexibility
and customization than commodity products. The end-product manufactured by Tower
is a silicon wafer containing multiple ICs.
In 1997, Tower continued to implement its strategy to develop and provide
customers with new specialized proprietary process technologies and value-added
services, particularly in certain niche markets, such as nonvolatile memories
("NVMs"). Together with Wafer Scale Integration, Inc., of Fremont, California,
("WSI"), a developer of peripheral system devices containing advanced NVM
modules, Tower developed an advanced embedded erasable and programmable
read-only memory ("EPROM") process based on WSI's proprietary technology. The
EPROM process has been qualified for production and initial production orders
have been received.
The Company has established a design team to offer specialized NVM design
services, including NVM modules, mixed-signal cells and design library support,
to potential customers and independent design centers seeking to utilize Tower's
NVM process technologies. Since May 1997, the design team has conducted
these activities from Tower's new Design Center in Nethanya, Israel.
In 1997 Tower also entered an agreement with Saifun Semiconductor Ltd. for
use of its breakthrough Flash technology and for the development of a
specialized Flash process. This process is especially suitable for embedding
large NVM arrays in "system-on-a-chip" products and has generated significant
customer interest. Throughout 1998, Tower anticipates continued investment in
the development of Flash features such as large memory arrays, endurance
verification and other support parameters. The Flash memory process is scheduled
to be released to manufacturing by the end of 1998, although there can be no
assurance of this.
CUSTOMERS AND MARKETS
At the time of its organization, Tower's only customer was National
Semiconductor Corporation. While Tower has since succeeded in adding new
customers, Tower remains dependent on a small number of customers for virtually
all of its business. In 1997, over 70% of Tower's sales were attributable to two
large customers, National and Motorola. In January, 1998, Tower entered into a
new purchase agreement with National, extending the foundry relationship with
National until at least February 2000.
Following a market downturn in 1996, growth for the foundry industry was
flat primarily as a result of massive price reductions, offset by continued
increases in wafer consumption in the end markets. Despite the flat market, the
Company, which had operated below capacity for much of 1996, was able to
increase its sales by more than 28% over 1996 and operate at a profit. However,
the situation in the marketplace remains uncertain and there is no assurance
that Tower's facility will operate at the level necessary for profitability. In
addition, Tower continues to see downward pressure on prices from both current
and potential new customers. See "Item 1. Business - Factors Which May Affect
Future Results - Factors Related to Tower - Reliance on Principal Customers;
Need to Expand Custome Base" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - General."
During 1997, Tower manufactured over 200 sophisticated semiconductor
products that are used by its customers (or end users) in a wide variety of
applications. These applications include personal computer products and
peripherals (such as microprocessors, local area networks and super I/O
devices), communications products (such as pagers), office automation products
(such as facsimile machines, answering machines and advanced printers), cellular
products (such as cellular telephones) and consumer products (such as
televisions and multimedia products). Tower estimates that five products
accounted for approximately 70% of sales. The number of products which Tower
manufactures in 1998 and in future periods will be determined by customer
orders.
PROCESS TECHNOLOGY
Tower's manufacturing process currently uses the following CMOS
(complementary metal oxide silicon) technologies: 1.0 micron double-level metal;
0.8 micron double-level metal; 0.8 micron triple-level metal; 0.6 micron
double-level metal; and 0.6 micron triple-level metal. In 1997, 0.5 micron
processes were qualified and began production in small quantities.
The semiconductor industry is characterized by rapid changes in both product
and manufacturing process technology. As a result, Tower's profitability will
depend on its ability to successfully develop and introduce to production
advanced process technologies which meet its customers' needs. Tower is
currently working on the development of a 0.5 micron double poly process for
mixed signal applications, as well as characterization of a 0.5 micron process
for CMOS image sensor applications. A 0.35 micron process is expected to be
qualified for full production later in 1998, although there can be no assurance
of this.
The development and introduction to production of advanced technologies is a
complex process, the success of which is dependent on many factors, some of
which may be beyond Tower's control. Tower has in the past experienced
unforeseen delays in the development and introduction of new processes. Tower
can, therefore, not predict when or if the development and introduction to
production of these new processes will be successfully completed. The failure by
Tower to develop and introduce new process technologies successfully and in a
timely manner would have a material adverse effect on Tower's business and
financial condition of the Company. See "Item 1. Description of Business -
Factors That May Influence Future Results - Factors Related to Tower - Need to
Advance Process Technology".
MANUFACTURING FACILITY
Due to the sensitivity and complexity of the semiconductor manufacturing
process, a semiconductor manufacturing facility requires a special clean room in
which most of the manufacturing functions are performed. Tower's manufacturing
facility includes an approximately 51,500 square foot clean room. Tower has
obtained ISO 9002 certification (a certification with respect to business
process quality standards) for its manufacturing operations.
At the time of its organization in 1993, Tower's facility had a capacity of
5,000 wafer starts per month, using 1.25 and 1.0 micron processes. Since that
time Tower has increased its capacity to approximately 17,000 wafer starts per
month at the current product mix utilizing 1.0, 0.8, 0.6 and 0.5 micron
processes. This increase in capacity has been achieved through the addition of
equipment, improvement in equipment utilization, the reconfiguration and
expansion of its existing clean room area, and the construction of an additional
clean room area.
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Tower does not currently intend to significantly increase the overall
capacity of its facility. Tower intends, however, to continue to make
significant expenditures during 1998 to fund its process technology advancement
program and to purchase equipment to increase Tower's capacity to manufacture
wafers using advanced processes, including those currently under development by
Tower. See "Item 1. Description of Business - Semiconductor Segment - Process
Technology".
COMPETITION
The semiconductor foundry industry is highly competitive. Tower competes
with other dedicated foundries and with integrated semiconductor companies and
end-product manufacturers that produce ICs for their own use and/or allocate a
portion of their manufacturing capacity to foundry operations. Particularly
during periods of market downturn, Tower may face increased competition from its
customers' internal manufacturing capacity and from other semiconductor
manufacturers who have underutilized capacity.
Many of Tower's competitors have more advanced technological capabilities, a
more diverse and established customer base, and greater financial, marketing,
distribution and other resources than Tower. In addition, some competitors of
Tower may have lower labor costs. Tower competes primarily by seeking to offer
customers competitive pricing and a high level of service and process
customization.
PROPRIETARY RIGHTS
Tower uses internally developed process technologies and process
technologies licensed from customers. The 1.0 micron process used by Tower and
elements of the 0.8 process used by Tower are licensed from customers under
royalty-free licenses. The 0.6 micron process currently used by Tower and
specialized 0.6 micron embedded memory process currently being introduced to
production were internally developed. Elements of the 0.5 micron processes and
0.35 micron process currently under development will be used under
royalty-bearing licenses from third parties.
Investments
MOFET VENTURE CAPITAL FUND
The Company, together with other investors, established Mofet Israel
Technology Fund ("Mofet"), an Israeli public investment company formed for the
purpose of investing in the securities of high technology companies and projects
in Israel. Through two public offerings of its shares, options and convertible
debentures on the Tel Aviv Stock Exchange, and subsequent exercise of options,
Mofet has raised aggregate net proceeds of approximately $23.2 million. As of
December 31, 1997, the Company owned approximately 4% of the equity of Mofet.
The Company accounts for its investments in Mofet on the cost method.
Mofet is managed by Mofet Risk Capital Fund Management (1992) Ltd. ("Mofet
Management") pursuant to a management agreement expiring January 2000. The
current shareholders of Mofet Management are DSI (50%), F.I.B.I. Holdings
Company Ltd., a holding company controlled by the Safra family which controls
the First International Bank of Israel Ltd. (25%), and Menorah Insurance Company
Ltd., one of Israel's largest insurance companies (25%). Mofet has agreed to pay
Mofet Management a management fee equal to 4% per annum of the amounts invested
in the Fund (excluding profits). The Company accounts for its investment in
Mofet Management on the equity method.
MOBILE INFORMATION SYSTEMS LTD.
In March 1994, the Company acquired a 50% interest in Mobile Information
Systems Ltd. ("MIS"), a joint venture of DSI and Geotek Communications, Inc.
("Geotek"). The Company accounted for its investment in MIS on the equity
method. In 1996 the Company sold its shares in MIS to Geotek in exchange for a
$2 million unsecured note which bears annual interest of 8.25%, payable July 1,
1998. The Company thereby recorded a gain in 1996 of approximately $1.7 million
in connection with the sale. In February 1998, the Company signed an agreement
with Geotek, modifying the note to permit its conversion into shares of Geotek
Common Stock. Geotek has filed a registration statement registering the resale
by the Company of these shares. Upon effectiveness of the registration
statement, the Company will be free to sell the shares in the public market.
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EMPLOYEES
At December 31, 1997, the Company employed a total of 349 people, including
262 persons in engineering and technical support (approximately one-half with
advanced degrees in computer and electronic engineering), 30 in marketing and
sales, and 55 in management, administration and finance. At December 31, 1997,
Tower had a total of 656 employees.
The Company considers its relationship with its employees to be
satisfactory.
There are no collective bargaining agreements between the Company and any of
its employees. However, certain provisions of the collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordination Bureau of Economic Organizations (including the Industrialists
Association) are applicable to the Company's Israeli employees by order of the
Israeli Ministry of Labor. These provisions concern mainly the length of the
work day, minimum daily wages, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. The Company generally provides
its Israeli employees with benefits and working conditions beyond the required
minimums.
Israeli law generally requires severance pay upon the retirement or death of
an employee or termination of employment without due cause. Furthermore, Israeli
employees and employers are required to pay specified amounts to the National
Insurance Institute, which is similar to the United States Social Security
Administration. The payments to the National Insurance Institute include health
tax and are approximately 17% of wages (up to a specified amount), of which the
employee contributes approximately 60% and the employer approximately 40%.
RESEARCH AND DEVELOPMENT (R&D)
For information on R&D costs, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations General" and Notes 1 and 10 to the
Consolidated Financial Statements appearing elsewhere in this Report.
SEGMENT INFORMATION
For financial information regarding the Company's operating segments,
foreign and domestic operations and export sales, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations" and Note 20 to the Consolidated Financial Statements appearing
elsewhere in this Report.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company may from time to time issue certain statements, either in
writing or orally, that contain or may contain forward-looking information.
There can be no assurance, however, that actual results will not differ
materially from the Company's expectations, statements or projections. Factors
that could cause actual results to differ from the Company's expectations,
statements or projections include the risks and uncertainties relating to the
Company's business described below.
GENERAL FACTORS
ENTRY INTO NEW MARKETS. The Company has recently devoted substantial
resources to ventures to design and develop software products. The Company
believes that the markets for these products provide an opportunity to generate
substantially greater revenues and profit margins than its traditional services
markets. However, the Company has had relatively limited experience with
marketing and distribution of such products and there can be no assurance that
the Company will be able to develop the marketing expertise and relationships
necessary to identify and capitalize on opportunities in these product areas.
The limited operating histories of the Company's new product ventures make
prediction of their results and prospects difficult.
7
<PAGE>
CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS; POSSIBILITY OF FUTURE
WRITEDOWNS. The Company generally capitalizes the costs of new software product
development and amortizes these costs over the useful life of the product. If
the Company is not able to complete development or is unsuccessful in marketing
any of its software products, the Company may be required to writedown any
capitalized development costs related to such products. As of December 31, 1997,
the Company had unamortized capitalized software development costs of
approximately $4.6 million and additional investments in development costs may
be necessary to continue existing product development projects. In the past, the
Company has taken significant writedowns of software development costs and there
can be no assurances that additional writedowns will not be required in the
future. The writedown of any substantial amounts of such capitalized costs could
have a material adverse impact on the results of the Company.
MINORITY INTERESTS IN OPERATING SUBSIDIARIES. The Company has a number of
subsidiaries that are not wholly owned. Cash of subsidiaries that are not wholly
owned is generally not available for use by the Company or other subsidiaries
except to the extent paid to the Company as reimbursement for general overhead,
as management fees or as dividends. Dividends from the Company's Israeli
subsidiaries are subject to a withholding tax of 15% to 25%.
COMPETITION. In its computer consulting and development services business,
the Company faces competition from numerous other competitors, both large and
small, operating in the Israeli and United States markets, some with
substantially greater financial and marketing resources.
In the help desk market, the Company faces competition from a variety of
companies with greater experience in the marketplace and greater resources
available for product development, sales and marketing and product support.
These competitors include (i) companies that target enterprise-wide information
systems, (ii) companies with specific help-desk applications, (iii) professional
systems integration and services companies that design and implement custom
systems, (iv) large information systems providers and (v) the internal
information systems departments of potential customers. While the Company
believes that PHD has certain product and price advantages over its competition,
it may be difficult to educate its potential customers of the advantages of PHD
in light of the broad range of competing solutions.
The market for personal computer and related peripheral hardware sales in
which the Company's Databit subsidiary operates is characterized by severe
competition in price-performance, breadth of product line, financing
capabilities, technical expertise, service and overall reputation. Trends have
been for ongoing price reductions by manufacturers to end-users, thereby
reducing profit margins for distributors and value added resellers such as
Databit. Competitors include manufacturers, other VAR's, large equipment
aggregators (some of whom sell to the Company) and systems integrators. Many of
the Company's competitors have longer operating histories, greater financial
resources and buying power and larger installed bases of customers. The Company
feels that it competes primarily on the basis of its responsiveness and
technical expertise in evaluating customer needs and tailoring specific
solutions to those needs, as well as price.
The global market for automatic meter reading ("AMR") products is highly
competitive. The Company believes the principal competitive factors affecting
its sales of communication systems for AMR networks are its products'
technological capabilities, design features and functionality, price, quality of
service, reliability, ease of installation and scalability. New technological
developments, technical expertise, vendor reputation and technical support also
affect the competitiveness of the Company's products in the AMR market. While
the Company believes it competes favorably in these areas, many of its
competitors currently have (or may have) substantially greater financial,
marketing, technical or manufacturing resources and name recognition than the
Company. There can therefore be no assurance that the Company will be able to
successfully compete against current or future competitors in this market.
The emerging market for utility network automation systems and the
potential market for other applications accessible once a common infrastructure
is in place, have led electronics, communication and utility product companies
to initiate development of various data communication systems. Some of these
systems currently compete, and others may in the future compete, with the
8
<PAGE>
Company's communication systems. Many companies from diverse industries are
seeking solutions for the transmission of data over traditional communication
media such as radio, as well as more recently developed media such as cellular
networks. Utility companies are testing communication products from various
suppliers for numerous applications and no industry standard has been broadly
adopted. The Company's systems represent only some possible solutions for
automated meter reading.
DEPENDENCE ON INTELLECTUAL PROPERTY OF THIRD PARTIES. Certain of the
Company's product development efforts are dependent upon intellectual property
owned by third parties. For example, some of the Company's data communication
products utilize intellectual property licensed from Lucent Technologies. While
the Company believes it is in continuing compliance with these licensing
agreements and that the licensing agreements adequately protect the Company's
rights to integrate such intellectual property into its products, failure to
maintain such licenses could have a material adverse effect on the business and
prospects of the Company.
RAPID TECHNOLOGICAL CHANGE; NEED FOR CONTINUED PRODUCT DEVELOPMENT. The
market for the Company's PHD product is characterized by rapid technological
change, evolving computer hardware and software standards, frequent new product
introductions and continuing customer demands for expanded features and
functions. Accordingly, it will be necessary for the Company to continue to
invest in product development to ensure that such products continue to evolve
and remain competitive. There can be no assurance that the Company will have the
resources to invest in such product development or that such product development
efforts will be successful.
The rapid technological change in digital communication systems, especially
in the U.S., will necessitate the adaptation of the Company's data communication
systems for utilities to new communication technologies. Accordingly, it will be
necessary for the Company to develop full system compatibility with telephone,
cable television, CDPD and various wireless distribution networks. There can be
no assurance that the Company will have the resources to invest in the continued
product development required to keep pace with the changing technologies or that
such product development efforts will be successful.
OPERATIONS IN ISRAEL. A substantial portion of the Company's operations are
conducted in the State of Israel and, consequently, the Company is directly
affected by economic, political and military conditions in Israel. Accordingly,
any major hostilities involving Israel or the curtailment of trade between
Israel and its current trading partners could have a material adverse effect on
the Company's business and financial condition. In addition, certain
subsidiaries of the Company receive grants and tax benefits from, and
participate in, various programs sponsored by the government of Israel. There
can be no assurance that such grants and tax benefits will be continued in the
future at their current levels or at all. The termination or reduction of
certain grants, programs and tax benefits could have a material adverse effect
on the Company's business and financial condition.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS. Substantially all of the
Company's sales are made in dollars or in New Israeli Shekels ("NIS") linked to
the dollar. In 1997, approximately 50% of Tower's expenses were in dollars or
dollar-linked NIS and virtually all remaining expenses were in NIS. The dollar
cost of the Company's operations in Israel is influenced by the extent to which
any inflation in Israel is not offset (or is offset on a lagging basis) by the
devaluation of the NIS in relation to the dollar. There can be no assurance that
the Company will not be materially adversely affected in the future if inflation
in Israel exceeds the devaluation of the NIS against the dollar or if the timing
of such devaluation lags behind increases in inflation in Israel.
As of December 31, 1997, the net amount of the Company's monetary assets
that were not denominated in dollars or in NIS linked to the dollar was not
material. In the event that in the future the Company has material net monetary
assets that are not denominated in dollar-linked NIS, such net assets would be
subject to the risk of currency fluctuations.
9
<PAGE>
FACTORS RELATED TO TOWER
DEPENDENCE ON PRINCIPAL CUSTOMERS; NEED TO EXPAND CUSTOMER BASE. Tower
currently has a limited number of customers and is dependent on two principal
customers. If one of these principal customers were to reduce its orders, and
Tower were to be unsuccessful in selling to new or existing customers the
capacity that becomes available as a result thereof, such event would have a
material adverse effect on Tower's business and financial condition. Since the
end of 1997, Tower has been operating significantly below capacity. Tower is
making efforts to attract new customers to utilize all or a portion of its
unused capacity. Tower is currently engaged in discussions with several
potential new customers. The process of attracting new customers includes
extensive exchange of product and process information between Tower and
potential customers, including the running of test wafers and prototypes. There
is therefore no assurance that Tower will be able to attract additional business
from new customers in the near future, if at all.
RISK OF OPERATING BELOW FULL CAPACITY. Fixed costs represent a substantial
portion of the total operating costs of a semiconductor manufacturing operation.
As a result, any failure by Tower to operate at or near full capacity, whether
due to mechanical failure, lack of orders, fire or natural disaster, or
otherwise, could result in losses or diminished profitability.
NEED TO ADVANCE PROCESS TECHNOLOGY. The semiconductor industry is
characterized by rapid changes in both product and manufacturing process
technology. As a result, Tower's profitability will depend on its ability to
successfully develop and introduce to production advanced process technologies
which meet its customers' needs. Tower is currently working on the development
of a number of advanced processes.
The development and introduction to production of advanced technologies is a
complex process, the success of which is dependent on many factors, some of
which may be beyond Tower's control. Tower has in the past experienced
unforeseen delays in the development and introduction of new processes.
Therefore, Tower cannot predict when or if the development and introduction to
production of these new processes will be successfully completed. The failure by
Tower to develop and introduce new process technologies successfully and in a
timely manner would have a material adverse effect on the Company's earnings and
financial condition.
RISK OF SEMICONDUCTOR PROCESS YIELD PROBLEMS. The process technology for the
manufacture of semiconductor products is highly complex and sensitive to dust
and other contaminants. Minor impurities or difficulties in the production
process or defects in the masks used to manufacture a particular device can
cause a percentage of the wafers to be rejected or individual ICs or "die" on
specific wafers to be non-functional, which in each case negatively affects
manufacturing yields. Although Tower has implemented manufacturing control
procedures, tests its products at various stages in the manufacturing process
and conducts numerous quality-control inspections throughout the entire
production process, Tower in the past has experienced lower than expected
production yields, which have delayed product shipments and reduced profits.
There can be no assurance that Tower will not experience lower than anticipated
production yields in the future, which, if not cured in a timely manner, could
have a material adverse effect on the Company's business and financial
condition.
CYCLICAL NATURE OF THE SEMICONDUCTOR MARKET. The semiconductor industry
historically has been characterized by wide fluctuations in product supply and
demand. From time to time, the industry has experienced significant downturns
characterized by diminished product demand, production over-capacity and
accelerated erosion of the average selling prices of semiconductor products. In
some cases, these downturns have lasted for more than a year. No assurance can
be given that Tower's business will not be adversely affected in the future by
cyclical conditions in the semiconductor industry.
PROCUREMENT AND SOURCING. Tower's manufacturing processes use many raw
materials, including silicon wafers, chemicals, gases and various metals. These
raw materials generally are available from several suppliers and Tower is not
10
<PAGE>
dependent upon any single source of supply, although, in some instances, Tower
elects to purchase certain raw materials from a single source. In those
instances, Tower generally identifies and qualifies alternative sources of
supply. Although supplies for raw materials used by Tower currently are
adequate, shortages could occur in various critical materials due to
interruption of supply or increased industry demand. Any such shortages could
result in production delays which could have a material adverse effect on
Tower's business and financial condition.
In connection with implementing its technology advancement plans, Tower
expects to continue to make significant purchases of equipment required for
semiconductor manufacturing. Some of this equipment is available from only a
single vendor or a limited number of vendors and/or is manufactured in
relatively limited quantities. In addition, certain equipment has only recently
been developed. Delays in delivery and shortages in supply of such equipment, as
well as failures of such equipment to operate in accordance with Tower's
expectations, could result in higher costs and production delays and delay
implementation of Tower's technology and advancement plans. Any such delays,
shortages or failures could have a material adverse effect on Tower.
RISKS RELATING TO ISRAELI GOVERNMENT PROGRAMS. The Investment Law for the
Encouragement of Capital Investments, 1959 (the "Investment Law") provides that
capital investments in certain production facilities (or other eligible
facilities) may, upon application to The Investment Center of the Ministry of
Industry and Trade of the State of Israel ("The Investment Center"), be
designated as an "Approved Enterprise". Virtually all of Tower's existing
facilities and programs, including Tower's current $240 million investment
program and the $93.4 million investment program which was substantially
completed in 1995, have been granted Approved Enterprise status under the
Investment Law. To be eligible for grants and tax benefits, Tower must continue
to meet certain conditions, including making certain specified investments in
fixed assets. The certificate of approval related to Tower's current Approved
Enterprise program requires, among other things, that all investments under the
program be completed by the end of 1998. Should Tower fail to meet such
conditions in the future, it could be required to refund grants or tax benefits
already received (together with interest and certain inflation adjustments).
There can be no assurance that such grants and tax benefits will be continued in
the future at their current levels or at all.
DEPENDENCE ON SENIOR MANAGEMENT AND KEY PERSONNEL. Tower is highly
dependent upon the members of its senior management team, many of whom have been
working at the facility since National commenced the construction of the
facility in 1984. The loss of the services of any member of senior management
could have a material adverse effect on Tower's business and financial
condition. Tower does not maintain key-man life insurance with respect to
members of senior management.
Tower also is dependent to a substantial degree upon its skilled
professional and technical personnel and will be required to increase
significantly the number of these employees in the future in order to implement
successfully its plans for the future. There is considerable competition for the
services of qualified personnel in the semiconductor industry, particularly in
Israel, and, consequently, there can be no assurance that Tower will be able
either to retain its present personnel or to attract additional qualified
personnel as and when needed. In addition, Tower may be required to increase
employee compensation levels in order to retain its existing employees and
attract and retain the additional personnel that it expects to require.
COMPETITION. The semiconductor foundry industry is highly competitive. Tower
competes with other dedicated foundries and with integrated semiconductor and
end-product manufacturers that produce ICs for their own use and/or allocate a
portion of their manufacturing capacity to foundry operations. Many of Tower's
competitors have more advanced technological capabilities, a more diverse and
established customer base, and greater financial, marketing, distribution and
other resources than Tower. In addition, some of Tower's competitors may have
lower labor costs.
POSSIBLE SHORTAGES OF RAW MATERIALS AND EQUIPMENT. Although supplies for raw
materials and equipment used by Tower currently are adequate, shortages could
occur in the future in various critical materials and equipment due to
interruption of supply or increased industry demand. Any such shortages could
result in higher costs, production delays or delays in Tower's expansion, any of
which could have a material adverse effect on Tower's business and financial
condition.
ENVIRONMENTAL MATTERS. Tower is subject to a variety of governmental
regulations related to the use, discharge and disposal of toxic, volatile or
otherwise hazardous materials used in its manufacturing process. Any failure by
Tower to use, discharge or dispose of hazardous materials appropriately could
subject it to substantial liability or could require it to suspend or adversely
modify its manufacturing operations. In addition, Tower could be liable for
remedial measures if its properties are found to be contaminated even if Tower
is not responsible for such contamination, although Tower's risk in this regard
is reduced by an indemnity from National for violations of environmental
regulations that occurred prior to Tower's acquisition of the facility.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters (as well as the principal office for
its United States operations) are located in Mahwah, New Jersey in approximately
5,000 square feet of office space, under a lease which expires in September
2000. The rent for these premises currently is $74,000 per annum. The Company
also rents offices in New York City of approximately 3,500 square feet, under a
lease which expires in August 2000, at a current rent of $75,000 per annum, and
of approximately 9,700 square feet in Stamford, Connecticut, at an annual rent
of $96,000.
DSI's facilities in Israel are located in Givat Shmuel in the Tel Aviv area
in approximately 23,900 square feet of office space, under a lease which expires
in April 2000. The annual rent is currently approximately $326,000.
Tower's offices, engineering and manufacturing operations are located in a
building complex situated on 13 acres in an industrial park in Migdal Haemek,
Israel. The buildings comprise approximately 180,000 square feet of space and
include clean room facilities of approximately 51,700 square feet. These
premises currently are occupied under a long-term capital lease from the Israel
Lands Authority which expires in 2032. The lease rights under this lease were
assigned to Tower as part of its acquisition of the facility and the value
attributed to the capitalized lease is being amortized by Tower over the life of
the lease. Tower has no obligation for lease payments related to this lease
through the year 2032.
ITEM 3. LEGAL PROCEEDINGS
The Company is a plaintiff in an action in the United States District Court
for the District of New Jersey against a former officer who resigned in April
1995, alleging destruction and misappropriation of property and data owned by
the Company. The employee has filed a counterclaim against the Company, alleging
breach by the Company of its employment and resignation agreements with the
employee and seeking compensatory damages of $750,000 and punitive damages of
$25 million. The Company is pursuing its claims against the employee and is
vigorously defending against his counterclaims. The Company accrued the full
amount of severance payable under the resignation agreement at the time of his
resignation. The Company believes it is unlikely to incur additional material
liability in connection with the counterclaim.
Between June and September 1996, several suits were filed in the United
States on behalf of a purported class of Tower's shareholders against Tower, its
Co-Chief Executive Officers, its Chairman of the Board of Directors, and DSSI.
The complaints seek to certify a class of all persons who purchased or otherwise
acquired Tower's ordinary shares between May 25, 1995 and June 10, 1996. The
actions have been consolidated in the United States District Court for the
District of New Jersey. The consolidated complaint filed in the actions alleges
on behalf of the class that the defendants made misstatements and omissions
regarding (i) the relationship between Tower and a major customer and (ii)
Tower's process development efforts in connection therewith, in violation of
certain U.S. Federal securities laws. Tower has indemnified the defendants, up
to the limits permitted by the Israeli Companies Ordinance, from any liability
arising out of the actions. Tower maintains insurance policies, that, under
certain conditions, cover actions of this type up to an aggregate amount of $20
million. The Company is unable to determine at this time with any certainty the
ultimate outcome of this matter or its effect if any, on the Company's financial
condition, operating results and business. However, the Company believes it has
meritorious defenses and is defending the actions vigorously.
The Company is not involved in any other legal proceedings that management
believes, individually or in the aggregate, will have a material adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
(NASDAQ/NNM) under the symbol "DSSI". The following table sets forth, for the
periods indicated, the high and low reported sales prices per share of the
Common Stock on The Nasdaq Stock Market.
High Low
---- ---
1996:
First Quarter . . . . . . . . . . . . . . . 8 5 3/8
Second Quarter . . . . . . . . . . . . . . . 9 1/8 5 3/4
Third Quarter . . . . . . . . . . . . . . . 7 1/4 4 3/4
Fourth Quarter . . . . . . . . . . . . . . . 7 1/4 4 3/8
1997:
First Quarter . . . . . . . . . . . . . . . 6 1/16 4 3/8
Second Quarter . . . . . . . . . . . . . . . 6 1/8 4 5/8
Third Quarter . . . . . . . . . . . . . . . 7 3/16 4 13/16
Fourth Quarter . . . . . . . . . . . . . . . 7 1/16 3 3/4
As of March 15, 1998 there were approximately 89 record holders of the
Common Stock. The Company estimates that there are approximately 2,800
beneficial owners of the Common Stock.
The Company paid no dividends in 1996 or 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the year ended
December 31, 1997 and balance sheet data as of December 31, 1997 have been
derived from the financial statements of the Company included elsewhere in this
Annual Report which have been audited by Deloitte & Touche LLP (a member of
Deloitte Touche Tohmatsu International), independent auditors. The following
selected statement of operations data for the years ended December 31, 1995 and
1996 and balance sheet data as of December 31, 1996 have been derived from the
financial statements of the Company appearing elsewhere in this Annual Report
which have been audited by Igal Brightman & Co. (a member of Deloitte Touche
Tohmatsu International), independent auditors. The selected statements of
operations data for the years ended December 31, 1993 and 1994 and balance sheet
data as of December 31, 1993, 1994 and 1995 are derived from audited financial
statements not included herein.
This data is qualified in its entirety by reference to, and should be read
in conjunction with, the Company's Consolidated Financial Statements (including
the notes thereto) and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The statement of operations data for the year ended December 31, 1993
includes Tower's operations for the ten months commencing March 1, 1993 and
therefore may not be comparable with statement of operations data for subsequent
periods. The balance sheet data as of December 31, 1996 and 1997 and the
statement of operations data for the year ended December 31, 1997 reflect the
Company's interest in Tower as an investment on the equity method, not otherwise
including Tower's balances or results of operations. Such data may therefore not
be directly comparable with that presented for prior periods.
13
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Statement of Operations Data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $57,945 $79,711 $129,823 $131,755 $ 39,996
Cost of sales 43,261 58,527 90,839 102,094 32,437
------- ------- -------- -------- --------
Gross profit 14,684 21,184 38,984 29,661 7,559
Research and development
expenses, net 1,036 2,911 2,648 5,059 1,003
Selling, general and
administrative expenses 7,600 10,602 15,926 18,635 18,859
------- ------- -------- -------- --------
Operating income (loss) 6,048 7,671 20,410 5,967 (12,303)
Interest income 280 1,313 5,188 5,321 478
Interest expense (1,159) (1,532) (2,434) (2,218) (225)
Gain on changes in ownership
interests in subsidiaries 935 14,755 26,339 - -
Other income (expenses), net (188) (147) 5 609 (111)
------- ------- -------- -------- --------
Income (loss) before taxes 5,916 22,060 49,508 9,679 (12,161)
Income taxes 1,605 1,632 4,837 2,141 3,032
------- ------- -------- -------- --------
Net income (loss) after taxes 4,311 20,428 44,671 7,538 (15,193)
Minority interests (2,153) (10,420) (25,352) (7,804) (2,773)
Equity in affiliates (40) (227) (169) (1,767) 8,027
------- ------- -------- -------- --------
Net income (loss) $ 2,118 $ 9,781 $ 19,150 $ (2,033) $ (9,939)
======= ======= ======== ======== ========
Earnings (loss) per share $ 0.44 $ 1.45 $ 2.62 $ (0.28) $(1.35)
======= ======= ======== ======== ========
Weighted average number
of shares 4,770 6,728 7,307 7,369 7,369
======= ======= ======== ======== ========
</TABLE>
Net income for each of the years 1993 through 1995 includes net income
attributable to gains on changes in ownership interests in subsidiaries or on
the sale of shares in subsidiaries. Excluding the effect of such gains, net
income after income taxes and minority interests for the years ended December
31, 1993, 1994, and 1995 would have been $1,813,000, $883,000 and $3,369,000,
respectively, and earnings per share for the same periods would have been $0.38,
$0.13 and $0.46, respectively.
Balance Sheet Data:
DECEMBER 31,
------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- -------
(in thousands)
Working capital $ 31,459 $ 63,895 $141,850 $ 13,676 $ 7,474
Total assets $ 71,741 $129,552 $275,377 $102,116 $97,471
Short-term debt, including
current maturities of
long-term debt $ 6,971 $ 3,821 $ 16,371 $ 2,124 $ 3,709
Long-term debt, net of
current maturities $ 13,902 $ 12,485 $ 22,499 $ 331 $ 481
Minority interests $ 7,379 $ 42,772 $129,730 $ 29,283 $30,272
Total shareholders' equity $ 30,988 $ 46,511 $ 67,754 $ 65,978 $56,235
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect the business and operations of the Company.
Certain of these factors are discussed at "Item 1. Description of
Business-Factors That May Influence Future Results."
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
14
<PAGE>
process technology and the proprietary IC designs of its customers. Since such
date 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, commencing in 1997,
the Company accounted for its interest in Tower's results using the equity
method including its pro rata share of Tower's net income as equity. The Company
therefore believes that the statement of operations for the year ended December
31, 1997 is not comparable with those of prior years.
COMPUTER SOFTWARE SERVICES AND SYSTEMS
The Company's Computer Segment commenced operations in Israel in 1986 with
revenues attributable to the Company's Israeli subsidiaries accounting for 51%,
39%, and 37% of the total revenues of this segment during 1995, 1996 and 1997,
respectively. The decreasing percentage is primarily due to the increasing
revenues from operations in the United States. The Computer Segment's operations
in the United States have had a cumulative operating loss since commencing
operations in 1991, reflecting primarily the significant expenditures intended
to generate revenues over the long term rather than in current periods. The
Company started to realize the benefits of these expenditures towards the end of
1994, achieving significant revenue growth and improved operating results in
these operations in 1995. In 1996 and 1997 the Company invested heavily in the
development and marketing of these products, resulting in increased operating
losses.
Costs relating to software product development are capitalized (in
accordance with applicable accounting principles for software development) to
the extent that they are incurred after the technological feasibility of the
product has been established and management considers that these costs are
recoverable from expected future revenues. When the foregoing criteria are not
satisfied, R&D costs relating to product development are expensed as incurred.
The Company's results of operations for 1995, 1996 and 1997 reflect $914,000,
$997,000 and $1.0 million respectively, of R&D expenses (net of government
grants) attributable to the Computer Segment. In addition, based on an
evaluation by management of the net realizable value of software costs
associated with certain of its products under development, the Company recorded
writedowns and amortized previously capitalized software costs totaling
$183,000, $881,000 and $2,016,000 in 1995, 1996 and 1997 respectively, included
in costs of sales.
As of December 31, 1995, 1996 and 1997, capitalized software development
costs reflected on the balance sheet were $4.4 million, $5.2 million and $4.6
million, respectively. As of December 31, 1997, all of the capitalized software
costs relate to the Company's EPSM product which is in beta testing. There have
been no full product sales of the EPSM to date and there can be no assurance
that the Company will in fact derive significant revenues from EPSM. Costs
related to new software modules are capitalized in accordance with applicable
accounting principles as described above.
Applicable accounting principles require that capitalized software costs be
periodically reviewed and are written down to net realizable value. Possible
additional writedowns of capitalized software costs associated with the
products above may significantly affect operating results in 1997 and future
periods. See "Item 1. Business Factors Which May Affect Future Results General
Factors - Capitalization of Software Development Costs; Possibility of Future
Writedowns".
Gross profit margins in the Israeli operations of the Computer Segment,
continue to experience downward pressure due to increased labor costs resulting
from the relative shortage of qualified programmers and engineers. There can be
no assurance that the competitive market place for qualified engineers will not
continue to affect margins in future periods.
SEMICONDUCTOR MANUFACTURING
Tower is an independent foundry manufacturer of semiconductor ICs on silicon
wafers and provider of related design and other services. As a foundry, Tower
manufactures wafers using its advanced production capability and the proprietary
IC designs of its customers. Tower manufactures primarily differentiated ICs
rather than commodity products. These ICs are incorporated into a wide range of
products in diverse markets, including computer and office equipment,
communication products and consumer electronics.
Tower commenced operations as an independent business in March 1993, when it
acquired its manufacturing facility from National Semiconductor Corporation (the
"Acquisition"). From the Acquisition through the end of 1995, Tower increased
its sales and profitability by (i) expanding its customer base, (ii) expanding
its manufacturing capacity through installation of new equipment, improvement of
equipment utilization, reduction of cycle time and streamlining of the
manufacturing process, (iii) reducing costs through improvement of equipment,
process yields and operational efficiencies and realization of economies of
scale, and (iv) advancing its process technology. This allowed Tower to improve
its gross profit and operating margins from commencement of operations through
the end of 1995.
As a result of (i) the end of Tower's purchase agreement with a major
customer, (ii) the reduction in orders from other customers and (iii) the
prevailing weakness in the demand for semiconductors products generally, Tower
operated its manufacturing facility substantially below capacity for part of
1996. Commencing in the fourth quarter of 1996 and into 1997, utilization
improved, primarily as a result of improvement in the personal computer and
peripheral end markets and certain price reductions implemented by Tower. As a
result of the improved utilization and the effect of Tower's successful cost
reduction and efficiency enhancement efforts, Tower was able to increase its
sales despite the reduction in prices and return to its previous levels of
profitability.
Beginning in the fourth quarter of 1997 and continuing into 1998, Tower
experienced reduced orders resulting in underutilization of capacity. Tower
believes that the reduced order levels reflect the conditions in the market for
semiconductor products. Tower also continues to see downward pressure on prices
from both current and potential customers. In March 1998, Tower announced that
it expected to operate at a loss for the first half of 1998, with an estimated
first quarter loss of $0.13 per share.
In 1996, Tower modified its capital plans, scaling back its capacity
expansion plan and increasing the resources allocated to Tower's technology
advancement plan and to improvements in infrastructure and operating procedures.
Tower does not currently intend to increase significantly the overall capacity
of its facility in 1998. Tower intends, however, to continue to make
expenditures during 1998 as part of its ongoing process technology advancement.
See "Item 1. Description of Business - Semiconductor Segment - Process
Technology," and "Item 1. Description of Business - Semiconductor Segment -
Manufacturing Facility".
Results of Operations
The following table sets forth selected statement of operations items as a
percentage of total sales of the Company.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.7% 73.4% 70.0% 77.5% 81.1%
------ ------ ------ ------ ------
Gross profit 25.3% 26.6% 30.0% 22.5% 18.9%
R&D expenses, net 1.8% 3.7% 2.0% 3.8% 2.5%
Selling, general and
administrative expenses 13.1% 13.3% 12.3% 14.1% 47.2%
------ ------ ------ ------ ------
Operating income (loss) 10.4% 9.6% 15.7% 4.5% (30.8%)
Financial income (expenses), net (1.5%) (0.3%) 2.1% 2.4% 0.6%
Gain on changes in ownership
interests in subsidiary 1.6% 18.5% 20.3% - -
Other income (expenses), net 0.3% (0.2%) - 0.4% (0.2%)
------ ------ ------ ------ ------
Income (loss) before income taxes 10.2% 27.6% 38.2% 7.3% (30.4%)
Income taxes 2.8% 2.0% 3.7% 1.6% 7.6%
------ ------ ------ ------ ------
Net income (loss) after income
taxes 7.4% 25.6% 34.5% 5.7% (38.0%)
Minority interests (3.7%) (13.1%) (19.5%) (5.9%) (6.9%)
Equity in affiliates ( - ) (0.2%) (0.1%) (1.3%) 20.1%
------ ------ ------ ------ ------
Net income (loss) 3.7% 12.3% 14.8% (1.5%) (24.8%)
====== ====== ====== ====== ======
</TABLE>
15
<PAGE>
The following table sets forth certain information with respect to the
results of operations of the Company and its two business segments for the years
1995, 1996 and 1997, the percentage of total revenues during each year
attributable to selected components of the statement of operations data and the
year to year percentage changes in such components.
The statements of operations for the year ended December 31, 1997 reflect
Tower's activity on the equity method, while that of previous years reflect
Tower's activity on a fully consolidated basis. Therefore, the information
presented for 1997 is not directly comparable to that presented for 1996 and
1995.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- Increase ---- Increase
Dollar % of Dollar % of (Decrease) Dollar % of (Decrease)
Amount Sales Amount Sales from 1995 Amount Sales from 1996
------ ----- ------- ----- ---------- ------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SEMICONDUCTOR SEGMENT
Sales $99,621 $97,885 (1.7%) - -
Gross profit $31,626 31.7% $22,447 22.9% (29.0%) - - -
R&D expenses, net $1,734 1.7% $4,062 4.1% 134.3% - - -
SG&A expenses $6,369 6.4% $7,119 7.2% 11.8% - - -
Operating income $23,523 23.6% $11,266 11.6% (52.1%) - - -
COMPUTER SEGMENT
Sales $30,202 $33,870 12.1% $39,585 16.9%
Gross profit $7,358 24.4% $7,214 21.3% (1.9%) $7,194 18.2% (0.3%)
R&D expenses, net $914 3.0% $997 2.9% 9.1% $1,003 2.5% 0.6%
SG&A expenses $7,836 25.9% $9,966 29.4% 27.2% $16,274 41.1% 63.3%
Operating income (loss) ($1,392) (4.6%) ($3,749) (11.1%) 169.4% ($10,083) (25.5%) 169.0%
CORPORATE
Sales - - - $411
Gross Profit - - - - - $365 88.8%
SG&A expenses $1,721 $1,550 (9.9%) $2,585 628.7% 66.7%
Operating loss ($1,721) ($1,550) (9.9%) ($2,220)(540.5%) 43.2%
COMBINED
Sales $129,823 $131,755 1.5% $39,996
Gross profit $38,984 30.0% $29,661 22.5% (23.9%) $7,559 18.9%
R&D expenses, net $2,648 2.0% $5,059 3.8% 91.0% $1,003 2.5%
SG&A expenses $15,926 12.3% $18,635 14.1% 17.0% $18,859 47.1%
Operating income (loss) $20,410 15.7% $5,967 4.5% (70.8%) ($12,303) 30.8%
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
SALES. Computer Segment sales increased in all areas of activity, although
the increase was primarily due to a 23% increase in Computer Hardware-VAR sales
and a 113% increase in PHD software sales.
GROSS PROFIT. The decrease in gross profits as a percentage of Computer
Segment sales was primarily attributable to (i) the writedown of $1.7 million
in previously capitalized development costs associated with the Company's PHD-TM
and CybrCard products, (ii) continued development and production costs of the
Company's CybrCard product causing a gross loss of over $1 million, (iii) the
increased percentage of sales attributable to Computer Hardware-VAR sales which
characteristically have lower gross profit margins, and (iv) a decrease in
profitability in the Company's Israeli consulting systems and software activity,
due to increased direct labor costs.
R&D. All R&D expenses in 1997 were attributable to the Company's EPSM
product for which development costs were no longer capitalized. For additional
discussion of R&D costs in the Computer Segment, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-General".
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ("SG&A"). The increase in
Computer Segment SG&A nominally and as a percentage of segment sales was
entirely due to increases of $4.1 million and $2.4 million in SG&A expenses
associated with the marketing and general introduction of the Company's PHD and
CybrCard products, respectively.
OPERATING INCOME (LOSS). The decrease in operating income was primarily due
to the aforementioned decrease in gross profits and increase in SG&A expenses.
16
<PAGE>
INCOME TAXES. The increase in income taxes in 1997 was primarily due to
establishment of a $5.5 million valuation allowance against tax benefits
associated with United States federal tax loss and foreign tax credit
carryforwards.
NET LOSS. The increase in the net loss is primarily attributable to the
aforementioned (i) increased direct costs due to writedown of development costs
associated with the Company's PHD and CybrCard products previously
capitalized and since discontinued development and production costs of the
Company's CybrCard product, (ii) marketing and general introduction of the
Company's PHD and CybrCard products and (iii) the tax expense resulting from
the valuation allowance recorded.
YEARS ENDED DECEMBER 31, 1996 AND 1995
SALES. The decrease in Semiconductor Segment sales was entirely due to a
decrease in average sales price, resulting from a general downturn in the market
for semiconductor products during the second half of 1996. Computer Segment
sales increased due to a 35% increase in sales from the Company's United States
operations, attributable to a 93% increase in Computer Hardware-VAR sales and a
102% increase in PHD software sales, partially offset by a decrease in revenues
from consulting services.
GROSS PROFIT. The decrease in gross profit as a percentage of Semiconductor
Segment sales was primarily attributable to the impact of increased costs
associated with the depreciation of the cost of the expansion of Tower's
manufacturing facility and the operation of the plant below capacity during the
second half of 1996 as well as the decrease in average sales price referred to
above. The decrease in gross profits as a percentage of Computer Segment sales
was primarily attributable to (i) the increased percentage of sales attributable
to Computer Hardware-VAR sales, which characteristically have lower gross profit
margins, and (ii) a decrease in profitability in the Company's Israeli
consulting systems and software activity, due to increased direct labor costs.
R&D. The increase in R&D expenses in the Semiconductor Segment reflected
higher process development expenses related to the implementation of Tower's
technology advancement plan. For a discussion of R&D costs in the Computer
Segment, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-General".
SG&A. The increase in SG&A and SG&A as a percentage of sales for the
Semiconductor Segment was primarily attributable to increased marketing expenses
and professional fees. The increase in Computer Segment SG&A as a percentage of
segment sales was primarily attributable to SG&A expenses associated with the
marketing and general introduction of the Company's PHD and CybrCard products,
as well as a decrease in the Segment's Israeli operations without a commensurate
decrease in the SG&A of such operations.
OPERATING INCOME. The decrease in operating income was primarily due to
the aforementioned decrease in gross profits.
GAIN ON CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARY. The gain in 1995 was
from Tower's public offering, net of certain expenses. Minority interests in
this gain was approximately $10.5 million.
INCOME TAXES. The increase in the effective tax rate for the year ended
December 31, 1996 was primarily attributable to (i) the recording in 1995 of a
non-taxable gain on changes in ownership interests in subsidiaries related to
the public offering of stock by the Company's Tower subsidiary, and (ii) the
recording of taxes payable on a dividend distributed to the Company by its Tower
subsidiary in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, DSSI and its wholly-owned subsidiaries had working
capital of $4.1 million (including unrestricted cash and cash equivalents of
$1.2 million) and DSI Israel had working capital of $3.4 million (net of short
term bank credit of $1.1 million). Although there is no legal restriction
preventing disposition of the Company's investments or the distribution to the
Company of their earnings, cash of subsidiaries that are not wholly-owned is
generally not available for use by DSSI or other subsidiaries.
DSSI has financed the operations of its wholly owned subsidiaries from the
proceeds of a public offering in 1993, an institutional private placement in
17
<PAGE>
June 1994 and the receipt of cash dividends from Tower in December 1996 and
1997. DSSI believes that it has adequate liquidity to finance its ongoing
corporate activities. However in order to continue financing its PHD activities
the Company will require additional financing. If the Company is unable to
obtain such financing on commercially reasonable terms, it may have to
discontinue PHD's operations. There can be no assurance that the Company will
obtain the resources to finance its PHD product development and marketing
efforts.
Due to the high costs associated with Cybrcard's marketing of consumer
multimedia products, the Company does not currently intend to develop and market
additional multimedia entertainment products in 1998. The Company, however, is
actively pursuing projects in the multimedia area in which the Company would
have responsibility for design and development of products which would be
marketed and sold by others. It is contemplated that in any such projects the
cost of development would be covered by the party with responsibility for the
marketing of the product.
In February 1998, the Company and Databit entered into a term loan agreement
with a bank under which the Company borrowed $1.2 million. In connection
therewith, the Company granted security interests in all of its assets as
security for the loan. The loan is repayable in 22 monthly installments
beginning May 1, 1998, with interest at the bank's reference rate plus 1%
(currently 9.50%).
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. 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 has retained effective control of Tower, since the end of
December 1996, the Company no longer maintained voting control of more than 50%
of Tower's shares and, therefore, ceased to consolidate Tower's balance sheet
and in 1997 consolidated its 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
December 31, 1997, Tower had working capital of $87.5 million, including cash,
short-term bank deposits and marketable securities of $83.9 million.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
During 1997 approximately 90% of the Company's sales were denominated in
dollars. The remaining portion is primarily denominated in NIS that are linked
to the dollar. Such sales transactions are negotiated in dollars, however, for
the convenience of the customer they are settled in NIS. These transaction
amounts are linked to the dollar between the date the transactions are entered
into until the date they are effected and billed for. Subsequent thereto,
through the date of settlement, amounts are primarily unlinked. The majority of
the Company's expenses in 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. During 1997, the NIS was devalued against the dollar by
approximately 8.8%, while the consumer price index in Israel increased by 7%.
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 it did in previous years, to
exceed the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind inflation in Israel.
Tower has commitments outstanding in Japanese Yen incurred for certain
capital equipment expenditures. Tower purchases forward exchange contracts to
reduce its financial exposure to fluctuation in the Japanese Yen/US dollar
exchange rate resulting from such commitments. The Company does not engage in
any other hedging activities.
As of December 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.
YEAR 2000 COMPLIANCE
The Company's software and hardware systems were developed relatively
recently and the Company therefore believes that the systems do not require
significant modifications to make them Year 2000 compliant. However, the Company
may face Year 2000 compliance issues in relation to projects it performed for
customers in the past, or as it seeks to coordinate with suppliers, customers
and others. Although the Company is not currently aware of any material Year
2000 compliance problems, an assessment has not been made of the anticipated
costs, problems and uncertainties associated with possible Year 2000 compliance
issues and the possible consequences to the Company.
18
<PAGE>
SUMMARY QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly financial
information for the Company for the years ended December 31, 1996 and 1997. This
information should be read in conjunction with the financial statements of the
Company and the notes thereto. The quarterly financial information for the year
ended December 31, 1997, reflects Tower's activity on the equity method, while
such information for the year ended December 31, 1996 reflects Tower's
activities on a fully consolidated basis. Therefore information for such periods
is not directly comparable.
<TABLE>
<CAPTION>
1996 1997
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $35,732 $36,711 $28,702 $30,610 $10,040 $10,141 $9,363 $10,452
Cost of sales 25,799 28,815 24,152 23,328 10,289 7,756 6,852 7,540
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 9,933 7,896 4,550 7,282 (249) 2,385 2,511 2,912
R&D, net 835 893 1,535 1,796 161 323 231 288
SG&A 4,454 4,626 4,192 5,363 4,391 4,789 4,574 5,105
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 4,644 2,377 (1,177) 123 (4,801) (2,727) (2,294) (2,481)
Financial income (expenses), net 1,165 820 687 431 108 277 75 (207)
Other income (expenses), net 17 12 1,840 (1,260) 2 21 32 (166)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 5,826 3,209 1,350 (706) (4,691) (2,429) (2,187) (2,854)
Income tax expense (benefit) 1,161 489 1,434 (943) (164) 36 (7) 3,167
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) after
income taxes 4,665 2,720 (84) 237 (4,527) (2,465) (2,180) (6,021)
Minority interests (3,819) (2,325) (724) (936) (635) (686) (571) (881)
Equity in affiliates (73) (53) (416) (1,225) 1,764 2,167 1,454 2,642
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $773 $342 ($1,224) ($1,924) ($3,398) ($984) ($1,297) ($4,260)
======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share $0.10 $0.04 ($0.17) ($0.25) ($0.46) ($0.13) ($0.18) ($0.58)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number
of shares outstanding 7,310 7,534 7,373 7,400 7,371 7,371 7,369 7,369
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Furnished at end of this Report commencing on page F-1. Financial Statements
of Tower Semiconductor Ltd. are included commencing at page F-22 in accordance
with Rule 3-09(a) of Regulation S-X.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information relating to each director and nominee for director of the
Company and the information relating to the Company's executive officers,
appearing under the captions "Election of Directors -- Certain Information
Regarding Directors and Executive Officers" in the Company's definitive proxy
statement for the 1998 Annual Meeting of Stockholders to be filed on or before
April 30, 1998 (the "1998 Proxy Statement") is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to compensation of directors and executive officers
appearing under the caption "Election of Directors -- Directors' Remuneration",
"Election of Directors -- Employment Arrangements -- Executive Compensation" in
the 1998 Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership appearing under the caption
"Stock Ownership" in the 1998 Proxy Statement is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and transactions appearing
under the caption "Certain Transactions" in the 1998 Proxy Statement is hereby
incorporated by reference.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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)
(the "1993 Registration Statement")).
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.
33-44027) (the "1992 Registration Statement")).
3.3 Amendments to the By-laws of the Registrant adopted December 27, 1994
(incorporated by reference to Exhibit 3.3 of the Registrant's Current
Report on Form 8-K dated January 10, 1995).
4.1 Specimen certificate for the Common Stock (incorporated herein by
reference to Exhibit 4.2 to the 1992 Registration Statement).
4.2 Form of Underwriter's Warrant Agreement, including form of
Underwriter's Warrant (incorporated herein by reference to Exhibit 4.4
to the 1993 Registration Statement).
4.3 Form of Warrant to Purchase Common Stock (incorporated herein by
reference to Exhibit 4.3 to the Company's Annual Report on Form 10K
for the year ended December 31, 1995 (the "1995 10-K")).
*10.1 Employment Agreement between the Registrant and George Morgenstern,
dated as of January 1, 1997.
*10.2 Employment Agreement between the Registrant and Shmuel Fogel, dated
September 1, 1986 (incorporated herein by reference to Exhibit 10.3 to
the 1992 Registration Statement).
*10.3 1991 Stock Option Plan (incorporated herein by reference to Exhibit
10.4 to the 1992 Registration Statement).
*10.4 1994 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.4 to the 1995 10-K).
*10.5 1994 Stock Option Plan for Outside Directors, as amended (incorporated
herein by reference to Exhibit 10.5 to the 1995 10-K).
10.6 1995 Stock Option Plan for Nonmanagement Employees (incorporated
herein by reference to Exhibit 10.6 to the 1995 10-K).
10.7 Lease Agreement between Tower Semiconductor Ltd. ("Tower") and the
Israel Lands Administration (incorporated herein by reference to
Exhibit 10.1 to Tower's Registration Statement on Form S-1 (File No.
33-83126) (the "First Tower Registration Statement")).
10.8 Shareholders Agreement between National Semiconductor (IC) Ltd. and
Tower Semiconductor Holdings 1993 Limited, dated as of February 28,
1993, as amended (incorporated herein by reference to Exhibit 10.3 to
the First Tower Registration Statement).
10.9 Amendment dated November 2, 1995 to the Shareholders Agreement listed
above as Exhibit 10.8 (incorporated by reference to Exhibit 1.2 to
Tower's Annual Report on Form 20-F for the year ended December 31,
1994 (the "Tower 1994 20-F")).
10.10 Amendment dated June 12, 1995 to the Shareholders Agreement listed
above as Exhibit 10.8 (incorporated by reference to Exhibit 10.3.2 to
Tower's Registration Statement on Form F-1 (File No. 33-93434) (the
"Second Tower Registration Statement")).
10.11 Amendment dated as of September 22, 1995 to the Shareholders Agreement
listed above as Exhibit 10.8. (incorporated herein by reference to the
1995 10-K).
21
<PAGE>
10.12 Amendment dated as of August 1, 1996 to the Shareholders Agreement
listed above as Exhibit 10.8 (incorporated by reference to Exhibit 1.3
to Tower's Annual Report on Form 20-F for the year ended December 31,
1996 (the "Tower 1996 20-F")).
10.13 Registration Rights Agreement among Tower, National Semiconductor (IC)
Ltd., and Tower Semiconductor Holdings 1993 Limited, dated as of
February 28, 1993 (incorporated herein by reference to Exhibit 10.4 to
the First Tower Registration Statement).
10.14 Technology Transfer Agreement between National Semiconductor
Corporation and Tower, dated as of February 28, 1993 (incorporated
herein by reference to Exhibit 10.6 to the First Tower Registration
Statement).
10.15 Shareholders Agreement among the Registrant, The Israel Corporation
Ltd. and Tower Semiconductor Holdings 1993 Limited, dated as of
February 28, 1993, as amended (incorporated herein by reference to
Exhibit 10.8 to the First Tower Registration Statement).
10.16 Mutual Services Agreement between Tower and National Semiconductor
Corporation, dated July 1, 1994 (incorporated herein by reference to
Exhibit 10.9 to the First Tower Registration Statement).
10.17 Purchase Agreement, as amended, between Tower and Hewlett-Packard
Company, dated January 16, 1994 (incorporated herein by reference to
Exhibit 10.10 to the First Tower Registration Statement).
10.18 Technology Transfer and License Agreement between Tower and
Hewlett-Packard Company, dated February 22, 1994 (incorporated herein
by reference to Exhibit 10.11 to the First Tower Registration
Statement).
10.19 Special Collective Agreement and Letter of Indemnity dated October 4,
1994 between Tower, the Histadrut and Mivtachim Social Institute of
Employees Ltd. (incorporated herein by reference to Exhibit 10.12 to
the First Tower Registration Statement).
10.20 Contract Supply Agreement between Tower and Motorola, Inc., dated May
24, 1994, as amended (incorporated herein by reference to Exhibit
10.13 to the First Tower Registration Statement).
10.21 Certificate of Approval of the Investment Center of the Israel
Ministry of Industry and Trade (incorporated herein by reference to
Exhibit 10.14 to the First Tower Registration Statement).**
10.22 Certificate of approval for the Investment Center of the Israel
Ministry of Industry and Trade dated January 24, 1996.**
10.23 Bank Loan and Credit Line Agreements among the Registrant, Bank Leumi
Le-Israel B.M. and Bank Hapoalim B.V., as amended (incorporated herein
by reference to Exhibit 10.15 to the First Tower Registration
Statement).
*10.24 Form of Tower Employee Share Purchase Plan Agreement (incorporated
herein by reference to Exhibit 10.16 to the First Tower Registration
Statement).
*10.25 Employment Agreement between the Registrant and Sanford L. Kane, dated
as of July 1, 1994 (incorporated herein by reference to Exhibit 10.18
to the First Tower Registration Statement).
*10.26 Agreement dated April 10, 1995, between the Company and Sanford L.
Kane (incorporated herein by reference to Exhibit 21.1 to the 1995
10-K).
*10.27 Employment Agreement between Tower and Rafael Levin, dated February
25, 1993, as amended (incorporated herein by reference to Exhibit
10.19 to the First Tower Registration Statement).
*10.28 Employment Agreement between Tower and Yoav Nissan-Cohen, dated
February 25, 1993, as amended (incorporated herein by reference to
Exhibit 10.20 to the First Tower Registration Statement).
22
<PAGE>
10.29 Agreement between the Registrant and Tower dated January 18, 1994
(incorporated herein by reference to Exhibit 10.21 to the First Tower
Registration Statement).
10.30 Agreement between the Registrant and Tower, dated June 12, 1995
(incorporated herein by reference to Exhibit 10.22 to the Second Tower
Registration Statement).
10.31 Promissory Note dated July 1, 1996 of Geotek Communications, Inc. in
the principal amount of $2,000,000 payable to Decision System Israel
Ltd. (incorporated herein by reference to Exhibit 10.37 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 10-K"))
10.32 Letter Agreement between Geotek Communications, Inc. and the
Registrant dated February 26, 1998.
10.33 Installment Promissory Note among the Registrant, Databit Inc., and
Bank Leumi Trust Company dated February 9, 1998.
10.34 Security Agreement between the Registrant and Bank Leumi Trust
Company.
10.35 Security Agreement between Databit Inc. and Bank Leumi Trust Company.
10.36 Promissory Note between George Morgenstern and the Registrant, dated
as of December 31, 1997.
10.37 License Agreement between the Registrant and Lucent Technologies Inc.
dated as of January 9, 1998 (incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated February 17, 1998).
10.38 Bill of Sale dated as of January 9, 1998, by and from Lucent
Technologies Inc. to the Registrant (incorporated herein by reference
to the Registrant's Current Report on Form 8-K dated February 17,
1998).
10.39 Settlement Agreement by and among the Registrant, Jeffrey A. Cummer,
Dwayne A. Moyers and affiliates dated February 6, 1998 (incorporated
herein by reference to the Registrant's Current Report on Form 8-K
dated February 6, 1998).
22.1 List of subsidiaries
24.1 Consent of Deloitte & Touche LLP
24.2 Consent of Igal Brightman & Co.
27.1 Financial Data Schedule
- ----------
* This exhibit includes a management contract, compensatory plan or
arrangement in which one or more directors or executive officers of the
Company participate.
** Hebrew original, accompanied by English language translation or summary.
(b) FINANCIAL STATEMENT SCHEDULES.
None.
(c) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the last three months of
1997.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Township of Mahwah,
State of New Jersey, on March 31, 1998.
DATA SYSTEMS & SOFTWARE INC.
By /s/ George Morgenstern
--------------------------------
George Morgenstern
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant, in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George Morgenstern
- ---------------------------- Chairman of the Board; March 31, 1998
George Morgenstern President; Chief Executive
Officer; and Director
/s/ Robert L. Kuhn
- ---------------------------- Vice Chairman and Director March 31, 1998
Robert L. Kuhn
/s/ Samuel Fogel
- ---------------------------- Executive Vice President March 31, 1998
Samuel Fogel and Director
/s/ Yacov Kaufman
- ---------------------------- Vice President, Chief March 31, 1998
Yacov Kaufman Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
/s/ Harvey Eisenberger
- ---------------------------- Director March 31, 1998
Harvey Eisenberger
/s/ Allen I. Schiff
- ---------------------------- Director March 31, 1998
Allen I. Schiff
- ---------------------------- Director March 31, 1998
Maxwell M. Rabb
/s/ Susan Malley
- ---------------------------- Director March 31, 1998
Susan Malley
/s/ Sheldon Krause
- ---------------------------- Secretary and Director March 31, 1998
Sheldon Krause
24
<PAGE>
DATA SYSTEMS & SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF DATA SYSTEMS & SOFTWARE INC.:
Report of Deloitte & Touche LLP............................................. F-1
Report of Igal Brightman & Co. ............................................. F-2
Consolidated Balance Sheets as of December 31,
1996 and December 31, 1997 ............................................... F-3
Consolidated Statements of Operations for the
years ended December 31, 1995, December 31,
1996 and December 31, 1997 ............................................... F-4
Consolidated Statement of Changes in Shareholders'
Equity for the years ended December 31, 1995
December 31, 1996 and December 31, 1997................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, December 31, 1996 and December 31, 1997................ F-6
Notes to Consolidated Financial Statements ................................. F-7
FINANCIAL STATEMENTS OF TOWER SEMICONDUCTOR LTD.:
Auditors' Report ......................................................... F-22
Balance Sheets as of December 31, 1997 and December 31, 1996 ............. F-23
Statements of Income for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995 ................................. F-24
Statement of Changes in Shareholders' Equity for the years
ended December 31, 1997, December 31, 1996
and December 31, 1995 ................................................... F-25
Statements of Cash Flows for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995 ................................. F-26
Notes to Financial Statements ............................................. F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
DATA SYSTEMS & SOFTWARE INC.
We have audited the accompanying consolidated balance sheet of Data Systems &
Software Inc. ("the Company") and its subsidiaries as of December 31, 1997 and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1997, and the results of their operations,
changes in shareholders' equity and cash flows for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
March 30, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
DATA SYSTEMS & SOFTWARE INC.
We have audited the accompanying consolidated balance sheet of Data Systems &
Software Inc. ("the Company") and its subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel, including those prescribed by the Israeli Auditors' Regulations
(Auditor's Mode of Performance) - 1973, which auditing standards are
substantially identical to generally accepted auditing standards in the United
States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1996, and the results of their operations,
changes in shareholders' equity and cash flows for the years ended December 31,
1995 and 1996, in conformity with accounting principles generally accepted in
Israel and the United States. As applicable to these financial statementss, such
accounting principles are substantially identical in all material respects.
IGAL BRIGHTMAN & CO.
Certified Public Accountants (Isr.)
Tel Aviv, Israel
March 31, 1997
F-2
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
AS OF DECEMBER 31,
--------------------
ASSETS 1996* 1997*
--------------------
Current assets:
Cash and cash equivalents $ 2,464 $ 1,424
Short-term interest bearing bank deposits 398 73
Marketable debt securities (Note 3) 5,226 1,600
Restricted cash (Note 10) 1,403 1,786
Trade accounts receivable, net (Note 4) 7,875 9,003
Inventory (Note 5) 953 377
Note receivable (Note 6) -- 2,248
Other current assets (Note 7) 1,740 1,446
-------- -------
Total current assets 20,059 17,957
-------- -------
Investments (Notes 5 and 8) 68,372 70,695
-------- -------
Property and equipment, net (Note 9) 2,279 2,181
-------- -------
Other assets:
Capitalized software development costs, net (Note 10) 5,229 4,630
Intangible assets, primarily goodwill 468 338
Note receivable (Note 6) 2,083 --
Other 3,626 1,670
-------- -------
11,406 6,638
-------- -------
Total assets $102,116 $97,471
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others (Note 11) $1,962 $ 2,581
Current maturities of long-term debt - banks
and others (Note 12) 162 1,128
Trade accounts payable 1,643 2,606
Accrued payroll, payroll taxes and social benefits 2,140 2,464
Other current liabilities 476 1,704
-------- -------
Total current liabilities 6,383 10,483
-------- -------
Long-term liabilities:
Long-term debt - banks and others, net of
current maturities (Note 12) 331 248
Other (Note 13) 141 233
-------- -------
Total long-term liabilities 472 481
-------- -------
Commitments and contingencies (Note 14)
Minority interests 29,283 30,272
-------- -------
Shareholders' equity (Note 15):
Common stock - $.01 par value per share:
Authorized 20,000,000 shares;
Issued - 7,708,540 shares at
December 31, 1996 and 1997 77 77
Additional paid-in capital 33,997 34,193
Retained earnings 33,752 23,813
-------- -------
67,826 58,083
Treasury stock, at cost - 339,362 shares
at December 31, 1996 and 1997 (1,848) (1,848)
-------- -------
Total shareholders' equity 65,978 56,235
-------- -------
Total liabilities and shareholders' equity $102,116 $97,471
======== =======
* Reflects the balances of Tower Semiconductor Ltd. ("Tower") on the equity
method.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997*
-------------------------------
Sales:
Products $110,116 $113,235 $ 19,950
Services 19,707 18,520 20,046
-------- -------- --------
129,823 131,755 39,996
-------- -------- --------
Cost of sales:
Products 76,181 87,706 16,744
Services 14,658 14,388 15,693
-------- -------- --------
90,839 102,094 32,437
======== ======== ========
Gross profit 38,984 29,661 7,559
Research and development expenses, net 2,648 5,059 1,003
Selling, general and administrative expenses 15,926 18,635 18,859
-------- -------- --------
Operating income (loss) 20,410 5,967 (12,303)
Interest income 5,188 5,321 478
Interest expenses (2,434) (2,218) (225)
Gain on changes in ownership interests
in subsidiaries (Note 17) 26,339 - -
Other income (expenses), net 5 609 (111)
-------- -------- --------
Income (loss) before income taxes 49,508 9,679 (12,161)
Income taxes (Note 18) 4,837 2,141 3,032
-------- -------- --------
Income (loss) after income taxes 44,671 7,538 (15,193)
Minority interests (25,352) (7,804) (2,773)
Equity (loss) in affiliates (169) (1,767) 8,027
-------- -------- --------
Net income (loss) $19,150 ($2,033) ($9,939)
======== ======== ========
Basic net income (loss) per share $2.73 ($0.28) ($1.35)
======== ======== ========
Weighted average number of shares
outstanding (in thousands) 7,026 7,369 7,369
======== ======== ========
Diluted net income (loss) per share $2.62 ($0.28) ($1.35)
======== ======== ========
Weighted average number of shares
outstanding and common share
equivalents (in thousands) 7,307 7,369 7,369
======== ======== ========
* The statement of operations for the year ended December 31, 1997 reflects the
results of Tower on the equity method, while the statements of operations for
the year ended December 31, 1995 and December 31, 1996 reflect the results of
Tower on a fully consolidated basis.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars 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, 1995 7,130 $71 $30,372 ($567) $16,635 $46,511
Purchase of treasury stock -- -- -- (1,281) -- (1,281)
Issuance of common stock
relating to business
acquisitions 129 1 1,133 -- -- 1,134
Common stock issued upon
exercise of options
and warrants, net 331 3 2,237 -- -- 2,240
Net income -- -- -- -- 19,150 19,150
----- ----- ------- ------- ------- -------
Balances, December 31, 1995 7,591 75 33,742 (1,848) 35,785 67,754
Common stock issued in
restricted stock award 100 1 587 -- -- 588
Unamortized restricted stock
award compensation -- -- (437) -- -- (437)
Common stock issued upon
exercise of options 18 1 105 -- -- 106
Net loss -- -- -- -- (2,033) (2,033)
----- ----- ------- ------- ------- -------
Balances, December 31, 1996 7,709 77 33,997 (1,848) 33,752 65,978
Amortization of restricted
stock award compensation -- -- 196 -- -- 196
Net loss -- -- -- -- (9,939) (9,939)
----- ----- ------- ------- ------- -------
Balances, December 31, 1997 7,709 $77 $34,193 ($1,848) $23,813 $56,235
===== ===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $19,150 ($2,033) ($9,939)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities-- see Schedule A 15,097 17,087 477
------- ------- -------
Net cash provided by (used in)
operating activities 34,247 15,054 (9,462)
------- ------- -------
Cash flows (used in) provided by investing activities:
Short-term and long-term bank deposits, net (22,712) (403) 363
Restricted cash, net -- -- (330)
Investment in marketable securities (232,184) (194,798) (33,122)
Proceeds from realization of marketable securities 200,089 243,257 37,102
Acquisitions of property and equipment (51,381) (51,728) (862)
Proceeds from sale of property and equipment 39 229 53
Proceeds from sale of shares in a
non-affiliated company -- 80 --
Investments in capitalized software
development costs, net (2,408) (1,965) (380)
Investments in other assets (1,028) (36) 4,291
Loans to affiliates (266) (2,785) -
Net effect of change in reporting from
consolidation to equity method-- see Schedule B -- (11,459) 102
Net cash acquired (transferred) on
purchase (sale) of subsidiaries 272 (130) --
------- ------- -------
Net cash (used in) provided by
investing activities (109,579) (19,738) 7,217
------- ------- -------
Cash flows provided by (used in) financing activities:
Net proceeds from public offering of
securities and exercise of option
warrants of subsidiary 88,068 -- (211)
Proceeds from issuance of common stock, net 2,240 106 --
Minority interest portion of subsidiary
dividend distribution -- (14,931) --
Purchase of treasury stock (1,338) -- --
Short-term debt, net 2,567 (1,625) 566
Proceeds from long-term debt 6,514 230 1,359
Repayments of long-term debt (7,887) (341) (509)
Liability in respect of customer advances 4,500 -- --
Repayment of liability in respect of
customer advances -- (2,250) --
------- ------- -------
Net cash provided by (used in)
financing activities 94,664 (18,811) 1,205
------- ------- -------
Net increase (decrease) in cash and cash equivalents 19,332 (23,495) (1,040)
Cash and cash equivalents at beginning of year 6,627 25,959 2,464
------- ------- -------
Cash and cash equivalents at end of year $25,959 $2,464 $1,424
======= ======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $911 $829 $183
======= ======= =======
Income taxes $3,422 $2,360 $773
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
A. Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization $8,880 $16,829 $ 1,479
Gain on changes in ownership interests
in subsidiaries (26,339) -- --
Gain on sale of affiliate -- (1,710) --
Minority interests 25,352 7,804 989
Write-down of capitalized software
development costs 183 583 1,711
Earnings on marketable debt securities (3,775) (3,330) (107)
Deferred income taxes 2,421 1,715 2,507
Increase in liability for severance pay 492 176 120
(Equity) loss in affiliates 169 1,767 (8,027)
(Gain) loss on sale of property, plant
and equipment, net 91 55 (15)
Other 71 (276) (152)
(Increase) decrease in accounts
receivable and other current assets (22,789) 7,757 (1,327)
(Increase) decrease in inventory (3,553) (2,461) 424
Decrease (increase) in long-term receivables 324 (163) (165)
Increase (decrease) in accounts payable
and other current liabilities 16,767 (10,219) 3,040
Increase (decrease) in liability in
respect of customer advances, net 16,803 (1,440) --
------- ------- -------
$15,097 $17,087 $477
======= ======= =======
B. Net effect of change in reporting from
consolidation to equity method - see Note 2:
Working capital, net of cash -- $68,217 ($18)
Investment recorded -- (65,884) 1,157
Property and equipment -- 104,582 --
Other assets -- 120 (1,037)
Other liabilities -- (25,256) --
Minority interests -- (93,238) --
------- ------- -------
-- ($11,459) $102
======= ======= =======
C. Non - cash activities:
Issuance of common stock related
to business acquisitions $ 1,134 $ -- --
======= ======= ======
Notes received upon sale of subsidiary $ -- $ 589 --
======= ======= ======
Note received upon sale of affiliate $ -- $ 2,000 --
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Data Systems & Software Inc., a Delaware corporation ("DSSI"), through its
subsidiaries and affiliates (collectively, "the Company"), (i) provides
consulting and development services for computer software and systems and
pre-packaged software solutions, and is an authorized dealer and a
value-added-reseller of computer hardware, and (ii) engages in the manufacture
of semiconductors. The Company's shares are traded on the Nasdaq National
Market.
The industries in which the Company operates are characterized by rapid
technological development. Accordingly, the ability to anticipate changes in
technology and to develop and introduce new and enhanced products incorporating
new technologies on a timely basis are significant factors in the ability to
grow and remain competitive. Furthermore, substantial expenditures are required
for research and development ("R&D") and for new product introduction.
(b) USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
(c) SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
The currency of the primary economic environment in which the operations of the
Company are conducted is the United States dollar ("dollar"). Accordingly, the
Company uses the dollar as its functional currency. Transactions and balances
that are denominated in dollars are presented at their dollar amounts.
Transactions and balances in other currencies are remeasured into dollars in
accordance with the principles of Statement of Financial Accounting Standards
("SFAS") No. 52.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all majority-owned
or controlled subsidiaries. Material intercompany balances and transactions have
been eliminated. The Company's principal subsidiaries are as follows:
Effective percentage ownership
Name of subsidiary as of December 31,
------------------ 1996 1997
-------- --------
Tower Semiconductor Holdings 1993 Ltd. ("Holdings") 60.0% 60.0%
Tower 24.6% 24.6%
Decision Systems Israel Ltd. ("DSI") 79.6% 76.3%
International Data Operations, Inc. 100.0% 100.0%
Databit Inc. 100.0% 100.0%
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and demand deposits in banks and
short-term investments (primarily time deposits and certificates of deposit)
with original maturities of three months or less.
INVESTMENTS IN SECURITIES
Marketable debt securities which the Company has the positive intent and ability
to hold to maturity are reflected at amortized cost, which approximates market
value. Non-current equity investments in which the Company does not have
significant influence are carried at cost.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined for
raw materials, spare parts and supplies on the average cost method. For work in
process and finished goods, cost is determined on the basis of standard costs,
adjusted for variances as appropriate. For merchandise inventories, cost is
determined on the first-in, first-out method.
F-8
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
INVESTMENTS
Gains or losses resulting from the effective reduction of the Company's holdings
in subsidiaries due to the sale of their shares are included in operating
results.
Investments in 50% or less of the voting control of companies or other entities
over whose operating and financial policies the Company has the ability to
exercise significant influence ("affiliates") are accounted for by the equity
method. Pursuant to this method, the Company includes its share of the
affiliate's earnings or losses in its results of operations.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost, net of investment grants received
or receivable. Depreciation is calculated based on the straight-line method over
periods ranging from three to 25 years.
COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs, presented net of participations from
others, are capitalized upon the establishment of technological feasibility for
costs that the Company believes will be recovered from anticipated revenues.
These determinations are made regularly by the Company on a product by product
basis. Amortization of these costs commences on the earlier of general release
to customers or the receipt of revenues from the product, based on the ratio of
current revenues to current and anticipated future gross revenues, but not less
than straight-line amortization over the expected economic life of each product
(primarily three years). Capitalized software development costs which exceed
their net realizable value at each balance sheet date, as determined by
management, are written off.
GOODWILL
Goodwill, included with other assets, represents the excess of cost over the net
carrying value of assets of subsidiaries acquired in purchase transactions.
Goodwill is amortized based on the straight-line method over periods ranging
from five to fifteen years. Management reviews goodwill (as well as property and
equipment and other long-lived assets) on a periodic basis to determine whether
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Amortization expense related to goodwill amounted
to $409, $221 and $288 during the years ended December 31, 1995, 1996 and 1997,
respectively.
REVENUE RECOGNITION
Revenues are recognized as products are shipped or services are provided, except
for revenues from fixed-price contracts, which are recorded on the basis of the
percentage-of-completion method. Revenues from such contracts are recorded as
costs (primarily direct labor) are incurred, in the proportion that actual costs
incurred bear to total estimated costs. Percentage-of-completion estimates are
continually reviewed and any adjustments required are reflected in the period
when such estimates are revised. Losses on contracts, if any, are recognized in
the period in which the loss is determined.
RESEARCH AND DEVELOPMENT EXPENSES
("R&D") costs not qualifying for capitalization as software development costs,
net of related participations, are charged to operations as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25. In accordance therewith, the Company
records compensation for share options granted to employees at the date of grant
based on the difference between the exercise price of the options and the market
value of the underlying shares at that date, as well as for the fair value of
restricted shares issued to employees. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options. See Note
15 for pro forma disclosures required in accordance with SFAS No. 123.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on specific identification of
accounts considered to be doubtful of collection. The allowance for doubtful
accounts amounted to $540 and $438, at December 31, 1996 and 1997, respectively.
Bad debt expense was $288, $95 and $8 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-9
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
FOREIGN EXCHANGE AGREEMENTS
The Company (primarily through Tower), from time to time, has entered into
foreign exchange agreements (forward agreements) primarily as a hedge against
non-dollar equipment purchase commitments. Gains and losses on foreign exchange
agreements through the date that the equipment is received are deferred and
recorded to property and equipment, while gains and losses subsequent thereto,
through the date of actual payment of the liability, are included in financial
income or expenses.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss, capital loss and tax credit carryforwards. Deferred tax assets and
liabilities are classified as current or noncurrent based on the classification
of the related assets or liabilities for financial reporting, or according to
the expected reversal dates of the specific temporary differences, if not
related to an asset or liability for financial reporting. No provision has been
recorded for taxes which might be owed on disposition of the Company's
investments or on distribution to the Company of their earnings, since the
Company intends to reinvest earnings indefinitely.
LONG-LIVED ASSETS
The Financial Accounting Standards Board (the "FASB") Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" requires that they be segregated and stated at the lower of the
expected net realizable value or cost. The carrying value of long-lived assets
is periodically reviewed to determine whether impairment exists. The review is
based on comparing the carrying amount of the assets to the undiscounted
estimated cash flows over the remaining useful lives. No impairment is indicated
as of December 31, 1997. The Company has adopted this statement and the impact
has not been significant.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 128 "Earnings per Share" (the "Statement"). The Statement
establishes standards for computing and presenting net income (loss) per share
and applies to entities with publicly held common stock or potential stock such
as employee stock options. The Statement replaces the presentation of primary
net income (loss) per share with a presentation of basic net income (loss) per
share and also requires, among other things, dual presentation of basic and
diluted net income (loss) per share for all entities with complex capital
structures. Basic net income (loss) per share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of shares
outstanding for each period presented. Diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted number of shares
outstanding plus the dilutive potential of common shares which will result from
the exercise of stock options. Prior periods have been restated to reflect the
requirements of the new statement.
The following is a reconciliation of the weighted average shares used in the
computation of basic and dilutive net income (loss) per share: (000's)
1995 1996 1997
-------- -------- --------
Weighted average common shares
outstanding used for basic
net income (loss) per share 7,026 7,340 7,369
Dilutive stock options 281 -- --
-------- -------- --------
Weighted average common shares
outstanding used for dilutive
net income (loss) per share 7,307 7,340 7,369
======== ======== ========
No stock options were included in the computations for 1996 and 1997, as doing
so would have been a anti-dilutive of the per-share amounts for those years. The
number of stock options and warrants that could potentially dilute basic net
income (loss) per share in the future that were not included in the table above
in years ended December 31, 1995, 1996 and 1997 were 1,940, 2,022 and 1,911,
respectively.
F-10
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement is effective for financial statements issued for periods
beginning after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and believes that such
effect would be insignificant.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" SFAS 131 requires the reporting of profit
and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company uses data at the subsidiary level to manage the operations and
the Company will expand its current footnote disclosure to meet this criteria.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pension and Other Post-retirement Benefits". SFAS 132 revises and standardizes
employers' disclosures regarding pension and other post-retirement benefit
plans. SFAS 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 already in compliance with this
disclosure.
NOTE 2 - INVESTMENT IN TOWER
Since acquiring Tower, a manufacturer of semiconductor products, DSSI maintained
voting control of more than 50% of its shares, through Holdings. Tower's shares
are traded on the Nasdaq National Market. Although the Company has retained
effective control of Tower, as of the end of 1996 the Company no longer
maintained voting control of Tower and, therefore, ceased to consolidate Tower's
balance sheet as of December 31, 1996. As the Company's individual assets and
liabilities at December 31, 1996 and the consolidated statements of income for
the year ended December 31, 1997 do not include amounts related to Tower, the
Company's 1996 and 1997 income statements are not directly comparable. The
consolidated statements of operations reflect Tower's revenues and expenses on a
full-year basis for the years ended December 31, 1995 and 1996. See Note 8 for
summary financial information of Tower.
NOTE 3 - MARKETABLE DEBT SECURITIES
Marketable debt securities consist primarily of United States Treasury Bills at
yields to maturity ranging from 4.9% to 5.1% (1996 - 4.6% to 4.9%) and maturing
in January, 1998, such amount approximates market value.
NOTE 4 - PRINCIPAL CUSTOMERS
Sales to and receivables from principal customers for the respective periods
were as follows:
Accounts
Consolidated sales receivable as of
Year ended December 31, December 31,
--------------------------------------------- ----------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------- -------
Customer A $57,427 44.2% $65,599 49.8% --(*) -- --(*) --
Customer B 19,725 15.2 9,716 7.4 --(*) -- --(*) --
Customer C 535 0.4 1,541 1.2 $4,617 11.5% $ 402 $ 946
Customer D 462 0.4 3,410 2.6 4,273 10.7 1,193 744
------- ---- ------- ---- ------ ---- ------- -------
$78,149 60.2% $80,266 61.0% $8,890 22.2% $1,595 $1,690
======= ==== ======= ==== ====== ==== ======= =======
(*) See Note 2.
F-11
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
NOTE 5 - INVENTORY
As of December 31,
Inventory consists of the following: 1996 1997
------ ------
Work in process $14 $33
Finished goods and merchandise 939 344
------ ------
$953 $377
====== ======
NOTE 6 - NOTE RECEIVABLE
Effective July 1996, the Company sold its 50% interest in an affiliate in
consideration for a $2,000 unsecured note. The note bears interest at an annual
rate of 8.25% and is payable on or before July 1, 1998. The Company recorded a
gain of approximately $1,700 on the transaction in 1996. In February 1998, the
note was modified to make it convertible into freely tradeable common stock of
the maker of the note.
NOTE 7 - OTHER CURRENT ASSETS
As of December 31,
Other current assets consist of the following: 1996 1997
------- -------
Israeli government - other $40 $20
Foreign income tax receivable (Israel) 515 347
Other 1,185 1,079
-------- -------
$1,740 1,446
======== =======
NOTE 8 - INVESTMENTS
(a) Composition As of December 31,
Investments consist of the following: 1996 1997
-------- --------
Investment in Tower (see (b) below) $65,884 $68,630
Other investments (see (c) below) 2,488 2,065
-------- --------
$68,372 $70,695
======== ========
Minority interests in investments $29,283 $30,272
======== ========
(b) Investment in Tower As of December 31,
Set forth below is condensed financial 1996 1997
information of Tower -------- --------
Current assets $110,403 $115,738
Property and equipment 106,047 99,216
Other assets 120 -
Current liabilities 30,727 24,813
Long-term debt 12,064 12,117
Other long-term liabilities 13,194 13,753
Shareholders' equity 160,585 166,881
Year ended December 31,
1995 1996 1997
--------- --------- ---------
Sales $99,621 $97,885 $125,917
Operating income 23,468 9,652 20,140
Net income 20,439 10,014 19,171
In November 1996, Tower paid a dividend of $19,808 ($1.50 per share) and in
October 1997 a dividend of $13,235 ($1.00 per share). The market value of the
Company's investment in Tower as of December 31, 1997 was approximately $32,500.
F-12
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(c) Other Investments
In 1995, the Company established CybrCard LP, a limited partnership engaged in
the development and production of sports-related CD-ROMs, in which the Company
owned a 50% interest. Through December 31, 1996, the Company invested in
CybrCard approximately $2,800 in the form of loans and advances, reduced by
approximately $1,600 representing the Company's share of CybrCard's losses.
Subsequent to December 31, 1996, the Company purchased the remaining 50%
interest in CybrCard, and, accordingly, CybrCard is consolidated by the Company
in 1997.
The Company, together with other investors, established a venture capital fund,
Mofet Israel Technology Fund. The Company owns approximately 4% of the equity of
the Fund and 50% of the Fund's management company. The Company's investment in
the Fund, which is accounted for on the cost method, amounted to $767 and
$1,300 at December 31, 1996 and 1997, respectively. Its investment in the
management company, which is accounted for on the equity method, amounted to
$0 and $295 at December 31, 1996 and 1997, respectively.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated
useful life As of December 31,
(in years) 1996 1997
Cost: --------- ------- -------
Computer equipment 3-5 $2,616 $1,963
Office furniture and equipment 4-10 464 1,841
Motor vehicles 7 1,195 1,107
Leasehold improvements Term of Lease 184 197
------- -------
4,459 5,108
------- -------
Accumulated depreciation and amortization:
Computer equipment 1,456 1,375
Office furniture and equipment 227 478
Motor vehicles 381 952
Leasehold improvements 116 122
------- -------
2,180 2,927
------- -------
Property and equipment, net $2,279 $2,181
======= =======
Depreciation and amortization in respect of property and equipment amounted to
$8,471, $16,019 and $886 for 1995, 1996 and 1997, respectively.
NOTE 10 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
Capitalized software development costs consist of the following:
As of December 31,
1996 1997
------ -------
Capitalized software developments costs $7,480 $9,252
Less: Israeli government grants (541) (541)
Customer participation in pilot-site costs (366) (386)
Accumulated amortization (606) (1,246)
Write-down to net realizable value (738) (2,449)
------ -------
$5,229 $4,630
====== =======
Based on management's determination that certain capitalized software costs
exceeded their net realizable value, capitalized software costs relating to
certain sub-systems in development projects were written-down and included in
cost of sales for capitalized software that is being amortized and research and
development expenses for capitalized software that is not yet available for
general release to customers and has not yet recorded revenues. Writedowns to
the net realizable value of the capitalized software costs amounted to $155,
$583 and $1,711 for the years ended December 31, 1995, 1996 and 1997,
respectively. Amortization of capitalzed software amounted to $25, $581 and $305
during the years ended December 31, 1995, 1996 and 1997, respectively.
F-13
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
NOTE 11 - SHORT-TERM DEBT-BANKS AND OTHERS
Included with short-term debt is $1,456 received from foreign investors
(December 31, 1996 - $1,403) intended for financing future projects of the
Company. In January 1998 this amount was repaid. The debt was secured by a bank
deposit which bears interest at approximately 4% per annum. The deposit has been
classified as restricted cash. In 1997, the Company undertook a direct
guarantee, by means of a deposit, of $330 of certain bank commitments arising
out of the operating activities of an Israeli affiliate. The deposit has been
classified as restricted cash. All lines of credit with Israeli banks were being
fully utilized as of December 31, 1997.
NOTE 12 - LONG-TERM DEBT- BANK AND OTHER
Composition As of December 31,
1996 1997
------- ------
Debt to Israeli banks, bearing
interest at 5%-8% per annum $493 $1,376
Less - current maturities 162 1,128
------- ------
$ 331 $ 248
======= ======
Certain assets in Israel have been pledged as collateral for long-term and
short-term bank debt amounting to approximately $1,000 and for guarantees.
Interest expense on short-term and long-term bank debt for 1995, 1996 and
1997 amounted to $1,011, $734 and $183, respectively.
NOTE 13 - OTHER LONG-TERM LIABILITIES
Other long-term liabilities include unfunded severance pay obligations of $116
and $233 as of December 31, 1996 and 1997, respectively, after deducting fund
balances maintained in the Company's name for the sole purpose of making
severance payments. Israeli law and labor agreements determine the obligations
of the subsidiaries in Israel to make severance and pension payments to
dismissed employees and to employees leaving employment in certain other
circumstances. The obligation for severance pay benefits, as determined by the
Israeli Severance Pay Law, is based upon length of service and last salary.
These obligations are substantially covered by regular deposits with recognized
severance pay and pension funds and by the purchase of insurance policies. The
amounts so funded are not reflected on the balance sheet, since they are not
under the control and management of these subsidiaries, but are controlled by
the funds and insurance companies. The pension plans are multi-employer and
independent of the Company. Therefore, no information is available regarding
their present value and the net assets available for benefits. Pension and
severance pay costs for 1995, 1996 and 1997 were approximately $2,173, $2,236
and $591, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
(a) Leases Of Property And Equipment
Rental and leasing expenses for 1995, 1996 and 1997 amounted to $554, $625 and
$777, respectively. Future minimum lease payments on non-cancelable operating
leases as of December 31, 1997 are as follows:
Year ending December 31,
1998 967
1999 977
2000 885
2001 361
------
$3,190
======
(b) Guarantees
The Company has provided bank guarantees of approximately $1,284 as security for
payment of obligations of affiliates and other companies.
F-14
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(c) Royalties
Certain research and development programs are eligible for financial assistance
from the Office of the Chief Scientist of the Israeli Ministry of Industry and
Commerce or from the Israel-United States BIRD Foundation. In return, the
subsidiaries are obligated to pay royalties at a rate of 2% to 5% of sales of
products resulting from the research and development efforts, up to a maximum of
150% of the financing received.
(d) Legal Actions
The Company is a plaintiff in an action against a former officer who resigned in
April 1995, alleging destruction and misappropriation of property and data owned
by the Company. The employee has filed a counterclaim against the Company,
alleging breach by the Company of its employment and resignation agreements with
the employee and seeking compensatory damages of $750 and punitive damages of
$25,000. The Company is pursuing its claims against the employee and is
vigorously defending against his counterclaims. The Company accrued the full
amount of severance payable under the resignation agreement at the time of such
employee's resignation. Based on the opinion of legal counsel handling the
matter, the Company believes it is unlikely to incur additional material
liability in connection with the counterclaim.
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. 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
major customer and (ii) Tower's process development efforts in connection
therewith, in violation of certain U.S. Federal securities laws. Tower has
indemnified the defendants, up to the limits permitted by the Israel Companies
Ordinance, from any liability arising out of the actions. Tower maintains
insurance policies that, under certain conditions, 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 ultimate outcome of the aforementioned matter or its
effect if any, on the Company's financial condition, operating results and
business. However, the Company believes it has meritorious defenses and is
defending the actions vigorously.
(e) Employee Retirement Savings Plan (401K)
The Company sponsors a tax deferred retirement savings plan (401K) which permits
eligible employees to contribute varying percentages of their compensation up to
the limit allowed by the Internal Revenue Service. The 401(K) Plan also provides
for discretionary Company contributions. No discretionary contributions were
made for the years ended December 31, 1995, 1996 and 1997.
NOTE 15 - SHAREHOLDERS' EQUITY
(a) Stock Option Plans
The Company's stock option plans provide for the granting to officers, directors
and other key employees of options to purchase shares of common stock at not
less than 85% of market value on the date of grant. The purchase price must be
paid in cash. To date, the Company has issued options under the plans at market
value. All options expire within five to ten years from the date of the grant.
The options generally vest over a one to three year period from the date of
grant of the option. The authorized number of options is 2,000,000 and the
number remaining available for issuance is 247,358.
F-15
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
A summary of the status of the Company's option plans as of December 31, 1995,
1996 and 1997, as well as changes during each of the years then ended, is
presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------- -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
(in shares) (in shares) (in shares)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 970,500 $6.65 1,361,567 $6.70 1,423,492 $6.60
Granted 559,400 $6.73 226,500 $5.90 53,500 $5.82
Exercised (65,833) $4.59 (17,875) $5.89 - -
Forfeited (102,500) $6.77 (146,700) $6.38 (20,925) $6.38
--------- --------- ---------
Outstanding at
end of year 1,361,567 $6.70 1,423,492 $6.60 1,456,067 $6.57
========= ========= =========
Exercisable at
end of year 407,241 $6.57 826,601 $6.61 1,162,816 $6.66
========= ========= =========
</TABLE>
Exercisable as of
Outstanding as of December 31, 1997 December 31, 1997
- ---------------------------------------------- ----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- ---------- ----------- ---------- --------- ----------- ---------
(in shares) (in years) (in shares)
----------- ---------- -----------
$4.75-$5.88 277,500 6.4 $5.69 121,583 $5.60
6.06- 7.88 1,148,567 4.9 $6.66 1,021,233 $6.70
11.13 30,000 7.8 $11.13 20,000 $11.13
----------- -----------
1,456,067 $6.57 1,162,816 $6.65
=========== ===========
The weighted average grant-date fair value of the 226,500 and 53,500 options
granted during 1996 and 1997 amounted to $3.56 and $5.24 per option,
respectively. The Company utilized the Black-Scholes option pricing model to
estimate fair value, utilizing the following assumptions for the respective
years (all in weighted averages):
1995 1996 1997
---- ---- ----
Risk-free interest rate 6.70% 6.30% 6.00%
Expected life of options 3.4 years 5.9 years 5.9 years
Expected annual volatility 59% 59% 47%
Expected dividend yield none none none
F-16
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
Had compensation cost for the Company's option plans been determined based on
fair value at the grant dates for awards made in 1996 and 1997 under such plans
in accordance with SFAS No. 123, the Company's pro forma net income (loss) and
earnings (loss) per share would have been as follows:
Year ended December 31,
1995 1996 1997
---- ---- ----
Net income (loss) - as reported $19,150 ($2,033) ($9,939)
======= ======= ========
Pro forma net income (loss) $18,498 ($2,980) ($10,061)
======= ======= ========
Basic net income (loss) per share-
as reported $2.73 ($0.28) ($1.35)
======= ======= ========
Pro forma net income (loss) per share $2.53 ($0.41) ($1.37)
======= ======= ========
Diluted net income (loss) per share-
as reported $2.62 ($0.28) ($1.35)
======= ======= ========
Pro forma diluted net income (loss)
per share $2.63 ($0.28) ($1.35)
======= ======= ========
The pro forma information in the above table also gives effect to the
application of SFAS No. 123 on the share option plans of the Company's
subsidiaries.
(b) Warrants
The Company has from time to time issued warrants primarily as compensation to
underwriters in connection with public stock offerings and to investors as part
of a private placement by the Company of common stock and warrants. All warrants
issued to date have been at exercise prices equal to or greater than market
value on the date of issuance. The effect of warrant issuance on the Company's
results of operations for all years presented is immaterial. A summary of
warrant activity follows:
1995 1996 1997
------------------ ------------------- -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
(in shares) (in shares) (in shares)
Outstanding at
beginning of year 591,284 $8.97 433,825 $9.06 433,825 $9.06
Granted 100,000 $6.34 -- -- --
Exercised (257,459) $7.80 -- -- --
Forfeited -- -- -- -- (236,325) $8.13
--------- --------- ---------
Outstanding at
end of year 433,825 $9.06 433,825 $9.06 197,500 $10.18
========= ========= =========
(c) Stock Award
In March 1996, the Company granted 100,000 shares of common stock to its Chief
Executive Officer. The shares vest over a three-year period. Deferred
compensation in the aggregate amount of $587 was recorded against additional
paid-in capital at the date of grant, of which $150 and $196 was amortized to
compensation expense during 1996 and 1997, respectively.
F-17
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(d) Other
In March 1996, the Company's Board of Directors adopted a stockholder rights
plan providing for the distribution of common stock purchase rights at the rate
of one right for each share of the Company's common stock held by shareholders
of record as of the close of business on April 1, 1996. The rights plan is
designed to deter coercive takeover tactics, including the accumulation of
shares in the open market or through private transactions, and to prevent an
acquirer from gaining control of the Company without offering a fair price to
all of the Company's shareholders. Each right initially entitles shareholders to
buy one-half of a share of common stock of the Company for $15. Generally, the
right will be exercisable only if a person or group acquires beneficial
ownership of 15% of more of the Company's common stock or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's common stock. If any person
("Acquiring Person") becomes the beneficial owner of 15% or more of the
Company's common stock, other than pursuant to a tender or exchange offer for
all outstanding shares of the Company approved by a majority of the Company's
independent directors, then, subject to certain exceptions set forth in the
rights plan, each right not owned by the Acquiring Person or related parties
will entitle its holder to purchase, at the right's then current exercise price,
shares of the Company's common stock (or in certain circumstances - as
determined by the Board of Directors - cash, other property or other securities)
having a value of twice the right's then current exercise price. The Company
will generally be entitled to redeem the rights at one half of one cent per
right at any time until 10 days (subject to extension) following a public
announcement that a 15% position has been acquired. The rights plan will expire
in March 2006.
NOTE 17 - RELATED PARTY BALANCES AND TRANSACTIONS
Other assets include a non-interest bearing loan of $277 and $357, at December
31, 1996 and 1997, respectively, made to an executive officer of the Company. In
addition, the Company approved a loan of up to $650, bearing interest at an
annual rate of 7%, to its Chief Executive Officer. The balance of this loan as
of December 31, 1997 was approximately $650. Such loan is repayable in
installments over a period of five years. The Company paid consulting and other
fees to directors of $82, $85 and $45 for the years ended December 31, 1995,
1996 and 1997, respectively. Sales for the years ended December 31, 1995, 1996
include $1,160, and $102, respectively, to an affiliate. No sales to affiliates
were made in 1997. Approximately $152 and $66, received from affiliates for
expense reimbursement during the years ended December 31, 1995 and 1997,
respectively, was reflected as a reduction of selling, general and
administrative expenses. No amount was received in 1996. The Company paid legal
fees for services rendered and out-of-pocket disbursements to a firm in which a
related party is a principal, of approximately $535, $450 and $401 for the years
ended December 31, 1995, 1996 and 1997, respectively. Approximately $10 and
$117, included in other current liabilities, was owed to this firm as of
December 31, 1996 and 1997, respectively.
NOTE 18 - GAIN ON CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES
Tower conducted a public offering in July 1995, which resulted in a decrease in
the Company's effective interest in Tower to 24.6%. As a result of the
offerings, the Company recognized a gain on changes in ownership interests in
subsidiaries of $26,339 in 1995.
Detailed information of the stock offering is as follows:
July
1995
-------
Number of shares issued (in thousands) 3,205
Price per share $ 29.00
Total net proceeds of offering $88,068
Company's effective ownership interest before transaction 32.5%
Company's effective ownership interest after transaction 24.6%
No deferred taxes were recorded in respect of the gains, as the Company's
investment in Tower is essentially permanent in duration (see Note 18).
F-18
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
NOTE 19 - INCOME TAXES
(a) Composition
Income taxes consist of the following: Year ended December 31,
1995 1996 1997
Current: ------ ------ ------
Federal $ -- $ 8 $ (4)
State and local 14 -- 161
Foreign 2,402 418 716
------ ------ ------
2,416 426 873
Deferred: ------ ------ ------
Federal (491) (677) 1,853
State and local 18 (187) 218
Foreign 2,894 2,579 88
------ ------ ------
2,421 1,715 2,159
------ ------ ------
$4,837 $2,141 $3,032
====== ====== ======
(b) Effective Income Tax Rates
Set forth below is a reconciliation between the Federal tax rate and the
Company's effective income tax rates:
Year ended December 31,
1995 1996 1997
------ ------ ------
Statutory Federal rates 34% 34% 34%
Increase (decrease) in income tax rate
resulting from:
Tax exempt gain from public offering of
subsidiary (18) -- --
Israeli operations - net impact of
Israeli statutory rate and special
deduction (9) (12) (3)
Non-deductible expenses 2 2 (1)
State and local income taxes - net 1 (4) 9
Net operating loss carryforward (2) (1) --
Other 1 2 (5)
Increase in valuation allowance 1 1 (67)
---- ----- ----
Effective income tax rates 10% 22% (33%)
==== ===== ====
(c) Analysis Of Deferred Tax Assets (Liabilities)
Deferred tax assets (liabilities) consist of the following:
As of December 31,
1996 1997
-------- -------
Accelerated depreciation for tax purposes $ (72) $ (50)
Intangible asset basis differences (187) (93)
Nondeductible accrued expenses (653) (661)
Net operating and capital loss carryforwards 3,906 7,951
Foreign tax credit carryforwards 242 242
------- ------
3,236 7,389
Valuation allowance (598) (6,910)
------- ------
Net deferred tax asset (liability) $2,638 $479
======= ======
The valuation allowance relates principally to net operating loss and capital
loss carryforwards and Federal foreign tax credit carryforwards. Due to the
history of losses in the Company's United States operations, a valuation
allowance has been established against all deferred tax assets relating to such
items.
As of December 31, 1997, deferred tax assets of $279 are classified as other
current assets (1996 - $205) and $200 as other assets (1996 - $2,433).
F-19
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(d) Summary Of Tax Loss And Credit Carryforwards
As of December 31, 1997, the Company had various tax loss and credit
carryforwards which expire as follows:
Federal
Net Operating Loss foreign
Expiration Federal State Foreign tax credit
------------ ------- ------- ------- ----------
1999 $317
2000 1,078
2001 1,178 $241
2002 - 2003 1,070
2008 - 2009 $2,758
2010 - 2011 2,841 1,058
2012 - 2013 7,527 10,330
Unlimited $4,994
------- ------ ------- ----------
Total $13,126 $15,031 $4,994 $241
======= ====== ======= ==========
(e) Composition Of Income Before Income Taxes
Composition of income before income taxes is as follows:
Year ended December 31,
------------------------------
Income (loss) before income taxes: 1995 1996 1997
-------- -------- --------
Domestic $(1,950) $(4,128) $(11,206)
Foreign 51,458 13,807 (955)
------- ------- --------
$49,508 $9,679 $(12,161)
======= ======= ========
(f) Other
As of December 31, 1996 and 1997, the aggregate unrecognized deferred tax
liability related to investments in foreign subsidiaries that are essentially
permanent in duration amounted to approximately $8,000 and $933, respectively.
F-20
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
NOTE 20 - SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The data for each business segment is presented according to geographical
location of the operating facilities. General corporate expenses are included
with selling, general and administrative expenses in the statements of
operations.
<TABLE>
<CAPTION>
Semiconductor
Computer Segment Segment Corporate Total
------------------------------------------ --------- --------- -----
Adjustments Total
United and Computer United
Israel States eliminations Segment Israel States
------ ------ ------------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Total sales $15,634 $15,600 $(1,032) $30,202 $99,621 -- $129,823
Intercompany sales (684) (348) 1,032 -- -- -- --
------- -------- ------- ------- ------- ------ --------
Net sales 14,950 15,252 -- 30,202 99,621 -- 129,823
Operating income (loss) (419) (973) -- (1,392) 23,523 (1,721) 20,410
Identifiable assets 16,497 3,935 -- 20,432 238,413 16,532 275,377
Depreciation and amortization 861 174 -- 1,035 7,818 27 8,880
Capital expenditures 2,658 730 -- 3,388 46,229 26 49,643
Year ended December 31, 1996(*):
Total sales $13,424 $21,045 $(599) $33,870 $ 97,885 -- $131,755
Intercompany sales (77) (522) 599 -- -- -- --
------- -------- ------- ------- ------- ------ --------
Net sales 13,347 20,523 -- 33,870 97,885 -- 131,755
Operating income (loss)(**) (693) (3,058) -- (3,751) 11,268 (1,550) 5,967
Identifiable assets 14,824 6,894 -- 21,718 65,889 14,509 102,116
Depreciation and amortization 629 907 -- 1,536 15,243 50 16,829
Capital expenditures 1,692 1,326 -- 3,018 50,565 110 53,693
Year ended December 31, 1997(*):
Total sales 14,346 25,593 (354) 39,585 -- 411 39,996
Intercompany -- (354) 354 -- -- -- --
------- -------- ------- ------- ------- ------ --------
Net sales 14,346 25,239 -- 39,585 -- 411 39,996
Operating (loss) (1,150) (8,933) -- (10,083) -- (2,220) (12,303)
Identifiable assets 15,456 6,263 -- 21,719 68,649 7,103 97,471
Depreciation and amortization 466 1,030 -- 1,496 -- 55 1,479
Capital expenditures 704 535 -- 1,239 -- 3 1,242
</TABLE>
Sales classified by geographical markets: Year ended December 31,
1995 1996 1997(*)
-------- -------- --------
Israel $ 14,672 $ 12,061 $ 12,769
United States 65,941 62,438 27,164
Far East 48,814 56,773 --
Europe 396 483 63
-------- -------- --------
$129,823 $131,755 $ 39,996
======== ======== ========
(*) See Note 2.
(**) The Company also operated in 1996 in the Computer segment via an affiliate
in the United States which is engaged in the development and production of
software. The Company's share in the affiliate's losses (reflected in equity in
affiliates in the statement of income) amounted to $1,600 in 1996. The affiliate
was consolidated in 1997.
Sales classified by geographical markets: Year ended December 31,
1995 1996 1997
-------- -------- ---------
Israel $14,672 $ 12,061 $ 12,769
United States 65,941 62,438 27,164
Far East 48,814 56,773 --
Europe 396 483 63
-------- -------- ---------
$129,823 $131,755 $ 39,996
======== ======== =========
NOTE 21 - FINANCIAL INSTRUMENTS
(a) General
A financial instrument is defined as cash, evidence of an ownership interest in
an entity, or a contract that imposes on one entity a contractual obligation
either to deliver or receive cash or another financial instrument to or from a
second entity. Examples of financial instruments include cash and cash
equivalents, trade accounts receivable, loans, investments, trade accounts
payable, accrued expenses, options and forward contracts.
F-21
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
In accordance with SFAS Nos. 105, 107, and 119, the Company makes certain
disclosures with regard to financial instruments, including derivatives. These
disclosures include, among other matters, the nature and terms of derivative
transactions, information about significant concentrations of credit risk, and
the fair value of financial assets and liabilities.
(b) Forward Exchange Agreements
The Company, through Tower, has entered into forward exchange agreements to
manage exposure to equipment purchase commitments denominated in Japanese yen.
These transactions qualified for hedge accounting in accordance with generally
accepted accounting principles and, accordingly, the results of such
transactions have been recorded concurrently with the realization of the related
items (i.e., receipt of the equipment and payment of the related liability). The
Company does not hold or issue derivative financial instruments for trading
purposes.
(c) Presentation Of Foreign Exchange Transactions In The Financial Statements
Losses recognized on forward exchange transactions amounted to $1,661 and $3,598
for 1995 and 1996, respectively. Of these amounts, $1,130 and $3,002 were
capitalized to property and equipment, respectively; and the remaining amounts
of $531 and $596 were reflected in financing expenses, respectively. No such
transactions are reflected for 1997. See Note 2.
(d) Fair Value Of Financial Instruments
Fair values are estimated for financial instruments included in current assets
and current liabilities at book value, due to the short maturity of such
instruments. Fair value for long-term debt is estimated based on the current
rates offered to the Company for debt with the same remaining maturities. Fair
value of long-term equity marketable investments is estimated based on market
value. The estimation of fair value for non-marketable long-term equity
investments (book value of $70,696 as of December 31, 1997) was not practicable.
The estimated fair value of the Company's financial instruments was not
materially different than their book value. See Note 7(b) for information
regarding the book and fair market value of the Company's investment in Tower.
(e) Concentrations Of Credit Risk
The Company is subject to credit risk through its trade receivables. As of
December 31, 1997, approximately 10% of the trade accounts receivable were due
from a major Israel government-owned company which, despite experiencing
financial difficulties, continues to pay its trade receivables over extended
credit periods. The remaining balance consists primarily of receivables from
various customers.
F-22
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. ("the Company") and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors' Regulations
(Auditor's Mode of Performance) - 1973, which standards are substantially
identical to generally accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997, in accordance with generally
accepted accounting principles in Israel. As applicable to these financial
statements, such accounting principles are substantially identical in all
material respects to generally accepted accounting principles in the United
States, except as indicated in Note 18.
Igal Brightman & Co.
Certified Public Accountants
Tel Aviv, Israel
January 27, 1998
F-23
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
As of December 31,
----------------------------
Note 1997 1996
----- ---------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,792 $ 11,459
Short-term interest-bearing deposits 11 53,046 27,051
Marketable debt securities 3 26,207 33,610
Trade accounts receivable (no allowance
for doubtful accounts) 9,14 11,008 11,094
Other receivables 4 6,974 11,316
Inventories 5 12,432 14,289
Other current assets 1,279 1,157
---------- ---------
Total current assets 115,738 109,976
---------- ---------
LONG-TERM INVESTMENTS 6 2,610 427
---------- ---------
PROPERTY AND EQUIPMENT, NET 7,11 99,216 106,047
---------- ---------
OTHER ASSETS -- 120
========== =========
TOTAL ASSETS $ 217,564 $ 216,570
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt 8 $ 308 $ 208
Trade accounts payable 13,124 16,284
Current portion of long-term liability
in respect of customer advances 16 5,450 9,900
Due to related parties 9 207 414
Other current liabilities 10 5,724 3,921
---------- ---------
Total current liabilities 24,813 30,727
LONG-TERM DEBT 11 12,117 12,064
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMER ADVANCES 16 3,340 7,714
OTHER LIABILITIES 12 10,413 5,480
COMMITMENTS AND CONTINGENCIES 16
---------- ---------
Total liabilities 50,683 55,985
---------- ---------
SHAREHOLDERS' EQUITY
Ordinary shares, NIS 1 par value - authorized 30,000,000 shares;
issued and outstanding 13,235,360 and 13,205,450 shares, respectively 13 4,323 4,314
Additional paid-in capital 138,013 137,787
Shareholder receivables and unearned compensation (736) (861)
Retained earnings 25,281 19,345
---------- ---------
Total shareholders' equity 166,881 160,585
========== =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 217,564 $ 216,570
========== =========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
Note 1997 1996 1995
----- -------- -------- --------
<S> <C> <C> <C> <C>
SALES 14,16 $125,917 $ 97,885 $ 99,621
COST OF SALES 89,556 75,727 68,270
-------- -------- --------
GROSS PROFIT 36,361 22,158 31,351
-------- -------- --------
OPERATING COSTS AND EXPENSES
Research and development, net 16 7,271 4,062 1,734
Marketing, general and administrative 9 8,550 7,001 6,149
Other expenses 7 400 1,443 --
-------- -------- --------
16,221 12,506 7,883
======== ======== ========
OPERATING INCOME 20,140 9,652 23,468
FINANCING INCOME, NET
(net of interest expense of
$1,519, $1,928 and $1,382, respectively) 2,452 2,661 2,138
GAIN FROM SALE OF EQUIPMENT 615 -- --
-------- -------- --------
INCOME BEFORE INCOME TAXES 23,207 12,313 25,606
INCOME TAXES 15 4,036 2,299 5,167
-------- -------- --------
NET INCOME $ 19,171 $ 10,014 $ 20,439
======== ======== ========
BASIC EARNINGS PER ORDINARY SHARE
Earnings per share $ 1.45 $ 0.76 $ 1.76
======== ======== ========
Net income used to compute basic earnings per share $ 19,171 $ 10,014 $ 20,439
======== ======== ========
Weighted average number of ordinary
shares outstanding - in thousands 13,235 13,205 11,593
======== ======== ========
DILUTED EARNINGS PER ORDINARY SHARE
Earnings per share $ 1.38
========
Net income used to compute diluted earnings per share $ 19,225
========
Weighted average number of ordinary
shares outstanding - in thousands 13,945
========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Shareholder
receivables
Ordinary shares Additional and
------------------------- paid-in unearned Retained
Shares Amount capital compensation earnings Total
---------- ------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 10,000,000 $ 3,229 $ 50,431 $ (672) $ 8,700 $ 61,688
Issuance of employee share options 802 (802) --
Amortization of unearned compensation 309 309
Expenses connected with issuance
of employee share options (153) (153)
Public offering of ordinary shares, net 3,205,450 1,085 86,983 88,068
Net income 20,439 20,439
---------- ------- -------- ------ ------- --------
BALANCE - DECEMBER 31, 1995 13,205,450 4,314 138,063 (1,165) 29,139 170,351
Cancellation of unearned compensation
in respect of non-vested options, net (121) 121 --
Amortization of unearned compensation 183 183
Expenses connected with issuance
of employee share options (155) (155)
Cash dividend paid (19,808) (19,808)
Net income 10,014 10,014
---------- ------- -------- ------ ------- --------
BALANCE - DECEMBER 31, 1996 13,205,450 4,314 137,787 (861) 19,345 160,585
Exercise of share options 29,910 9 290 299
Cancellation of unearned compensation
in respect of non-vested options, net (39) 39 --
Amortization of unearned compensation 86 86
Expenses connected with issuance
of employee share options (25) (25)
Cash dividend paid (13,235) (13,235)
Net income 19,171 19,171
---------- ------- -------- ------ ------- --------
BALANCE - DECEMBER 31, 1997 13,235,360 $ 4,323 $ 138,013 $ (736) $ 25,281 $ 166,881
========== ======= ======== ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Income $ 19,171 $ 10,014 $ 20,439
Adjustments to reconcile net income
to net cash provided by operating activities:
Income and expense items not involving cash flows:
Depreciation and amortization 23,648 17,515 8,386
Deferred income taxes 4,036 2,299 2,554
Earnings on marketable debt securities (1,637) (2,959) (3,158)
Gain from sale of equipment (615) -- --
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable 86 2,408 (6,493)
Decrease (increase) in other receivables and other current assets (1,156) 2,207 (2,791)
Decrease (increase) in inventories 1,857 (1,082) (3,721)
Increase (decrease) in trade accounts payable 1,923 (2,895) 1,643
Increase (decrease) in due to related parties (207) (239) 233
Increase (decrease) in other current liabilities 1,803 (1,074) 2,122
Increase (decrease) in liability in respect of customer advances, net (8,824) (1,439) 16,803
Increase in other long-term liabilities 577 117 528
--------- --------- ---------
Net cash provided by operating activities 40,662 24,872 36,545
CASH FLOWS - INVESTING ACTIVITIES
Investments in property and equipment (29,390) (84,475) (62,076)
Proceeds from sale of property and equipment 766 -- --
Investment grants received 13,041 30,800 14,634
Increase in deposits (25,978) (1,684) (25,414)
Investments in marketable debt securities (48,836) (109,951) (88,139)
Proceeds from realization of marketable debt securities 57,876 151,736 51,902
Long-term investments (2,000) -- --
--------- --------- ---------
Net cash used in investing activities (34,521) (13,574) (109,093)
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares, net -- -- 86,845
Proceeds from exercise of share options 299 -- --
Share option plan and share issuance expenses (25) (155) (153)
Increase in (repayment of) liability in respect of customer advances -- (2,250) 4,500
Increase (decrease) in short-term debt 86 (1,641) 1,171
Proceeds from (repayment of) long-term debt 67 -- (1,440)
Cash dividend paid (13,235) (19,808) --
--------- --------- ---------
Net cash provided by (used in) financing activities (12,808) (23,854) 90,923
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,667) (12,556) 18,375
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 11,459 24,015 5,640
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 4,792 $ 11,459 $ 24,015
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 748 $ 702 $ 816
========= ========= =========
Cash paid during the year for income taxes $ 1,578 $ 1,515 $ 3,167
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. Description of Business
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel,
commenced operations in March 1993. The Company is an independent
"foundry" manufacturer of semiconductor integrated circuits on
silicon wafers. As a foundry, the Company manufactures wafers using
its advanced production capabilities and the proprietary integrated
circuit designs of its customers. The industry in which the Company
operates is characterized by wide fluctuations in supply and demand.
Such industry is also characterized by the complexity and
sensitivity of the manufacturing process, by high levels of fixed
costs, and by the need for constant improvements in production
technology.
In March 1993, the Company acquired its plant in Israel from a
subsidiary of National Semiconductor Corporation, a U.S. corporation
("National"), in an acquisition ("Acquisition") accounted for by the
purchase method of accounting. Pursuant to a shareholders'
agreement, as of December 31, 1997, National maintained the right to
nominate one member of the Company's Board of Directors.
During 1996 and 1997, respectively, the Company established a wholly
owned marketing subsidiary in the U.S. and a 51%-owned (on a fully
diluted basis) ASIC design center subsidiary in Israel. The
operations of these subsidiaries were not material to the Company's
financial position or results of operations as of December 31, 1997
and 1996 and for the years then ended.
The Company's ordinary shares are traded on the Nasdaq National
Market.
B. Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The Company's financial statements include the financial statements
of the Company and its majority-owned subsidiaries, after
elimination of material intercompany transactions and balances.
B. Cash and Cash Equivalents
F-28
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Cash and cash equivalents consist of deposits in banks and
short-term investments (primarily time deposits and certificates of
deposit) with original maturities of three months or less.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. Marketable Debt Securities
Marketable debt securities which the Company has the positive intent
and ability to hold to maturity are reflected at amortized cost.
D. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies on the basis
of average cost per unit. Cost is determined for work in process and
finished goods on the basis of actual production cost.
E. Investments in Other Entities
Long-term investments in other entities, over whose operating and
financial policies the Company does not have the ability to exercise
significant influence, are presented at cost.
F. Property and Equipment
Property and equipment are presented at cost, net of investment
grants received or receivable, and less accumulated depreciation and
amortization. Depreciation is calculated based on the straight-line
method over the estimated economic lives of the assets or terms of
the related leases, as follows:
Land and buildings under capital lease 14-25 years
Machinery and equipment 5 years
Transportation vehicles 7 years
Management reviews property and equipment and other long-lived
assets on a periodic basis to determine whether events or changes in
circumstances indicate that the carrying amount of such assets may
not be recoverable.
G. Income Taxes
The Company records deferred income taxes to reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and for tax
purposes. Deferred taxes are computed based on the tax rates
anticipated to be in effect (under applicable law at the time the
financial statements are prepared) when the deferred taxes are
expected to be paid or realized.
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or
liability for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related
to an asset or liability for financial reporting.
F-29
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
H. Revenue Recognition
Revenues are recognized upon delivery. An accrual for estimated
returns, computed primarily on the basis of historical experience,
is recorded at the time of sale.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
I. Research and Development
Research and development costs are charged to operations as
incurred. Amounts received or receivable from the Government of
Israel and others, as participation in research and development
programs, are offset against research and development costs.
J. Earnings per Ordinary Share
Basic earnings per ordinary share are calculated based on the
weighted average number of ordinary shares outstanding for each
period presented (including retroactive effect of shares issued upon
exercise of share options during each period) and give effect to
shares issuable from share options whose exercise is probable based
on specific calculations. Diluted earnings per share include the
effects of all outstanding options which have a dilutive effect on
earnings per share. Diluted earnings per share data for 1996 and
1995 has not been presented, since such data did not differ by more
than 5% from basic earnings per share. See Note 18 for disclosure of
1997 earnings per share data in accordance with U.S. GAAP. Basic and
diluted earnings per share data in accordance with U.S. GAAP, as
well as the data relating to earnings and number of shares used for
such calculations, were not materially different from the data
presented in accordance with Israeli GAAP for 1996 and 1995.
K. Foreign Exchange Agreements
The Company, from time to time, enters into foreign exchange
agreements as a hedge against non-dollar equipment purchase
commitments. Gains and losses on such agreements through the date
that the equipment is received are deferred and recorded to property
and equipment, while gains and losses subsequent thereto, through
the date of actual payment of the liability, are included in
financing income, net.
L. Functional Currency and Transaction Gains and Losses
The currency of the primary economic environment in which the
Company conducts its operations is the U.S. dollar ("dollar").
Accordingly, the Company uses the dollar as its functional and
reporting currency. Financing income, net, reflects net foreign
currency transaction losses, which amounted to $384, $677 and $473
in 1997, 1996 and 1995, respectively.
M. Stock-Based Compensation
F-30
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Pursuant to this
accounting standard, the Company records deferred compensation for
share options granted to employees at the date of grant based on the
difference between the exercise price of the options and the market
value of the underlying shares at that date. Deferred compensation
is amortized to compensation expense over the vesting period of the
underlying options. See Note 13B for pro forma disclosures required
in accordance with Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), of the Financial Accounting Standards
Board.
F-31
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
N. Reclassifications
Certain amounts in the 1996 financial statements have been
reclassified in order to conform to the 1997 presentation.
NOTE 3 - MARKETABLE DEBT SECURITIES
Marketable debt securities consist of the following:
Yield to maturity As of December 31,
----------------- ------------------
1997 1996
---- ----
United States Treasury Bills 5.2%-6.0% $15,749 $32,595
United States Treasury Notes 5.6% 9,433 --
Israeli government bonds 6.6% 1,025 1,015
------ -------
$26,207 $33,610
====== =======
Marketable debt securities mature between February 1998 and July
1998. The market value of the securities as of December 31, 1997 and
1996 was approximately equal to their book value.
NOTE 4 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
------------------
1997 1996
---- ----
Investment grants receivable $3,414 $ 9,043
Government agencies 3,560 2,273
------ -------
$6,974 $11,316
====== =======
NOTE 5 - INVENTORIES
Inventories consist of the following (1):
As of December 31,
------------------
1997 1996
---- ----
Raw materials $ 3,214 $ 4,304
Spare parts and supplies 3,570 3,363
Work in process 4,059 5,543
Finished goods 1,589 1,079
------- -------
$12,432 $14,289
======= =======
(1) Net of write-downs to net realizable value of $350 and $850 as
of December 31, 1997 and 1996, respectively.
F-32
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 6 - LONG-TERM INVESTMENTS
Long-term investments consist primarily of an investment in Sayfun
Semiconductor Ltd. ("Sayfun"), according to an agreement between the
Company and Sayfun signed in October 1997 for the development,
licensing and future utilization of certain technology possessed by
Sayfun.
As of December 31, 1997, the Company has invested $2,000 in Sayfun
in exchange for 10.0% of Sayfun's equity and, according to the
agreement, is obligated to invest another $3,000 in exchange for
additional equity in Sayfun that will increase the Company's
aggregate investment to 15% of Sayfun's equity (including certain
anti-dilution protective rights). These additional investments are
dependent on the achievement of specific development milestones with
regard to the technology.
Pursuant to certain provisions of the agreement, the Company and
Sayfun are obligated, under certain circumstances, to pay each other
royalties and Sayfun is obligated to produce, through the Company,
at least 75% of its products based on such technology.
NOTE 7 - PROPERTY AND EQUIPMENT
A. Composition
As of December 31,
------------------
Cost (1): 1997 1996
---- ----
Land and buildings under capital lease $ 27,627 $ 26,556
Machinery and equipment 120,735 105,798
Transportation vehicles 2,075 1,541
-------- --------
150,437 133,895
-------- --------
Accumulated depreciation and amortization:
Land and buildings under capital lease 4,314 2,702
Machinery and equipment 46,343 25,217
Transportation vehicles 564 329
-------- --------
51,221 28,248
======== ========
99,216 105,647
Design costs in respect of plant to be
constructed, net (2) -- 400
-------- --------
$ 99,216 $106,047
======== ========
(1) As of December 31, 1997, the cost of buildings, machinery and
equipment is reflected net of investment grants of $72,158 (as
of December 31, 1996 - $64,562).
(2) Due to uncertainty with respect to the form and location of
the plant to be constructed, costs in the aggregate amount of
$400 and $1,443, the recovery of which was not considered
probable by management, were written-off in 1997 and 1996,
respectively.
F-33
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 7 - PROPERTY AND EQUIPMENT (cont.)
B. Investment Grants
In connection with the formation of the Company, the Investment
Center of the Ministry of Industry and Trade of the State of Israel
("Investment Center"), under its "approved enterprise" program,
approved an investment program for expenditures on buildings and
equipment in the aggregate amount (as amended) of approximately
$96,850. The approval certificate was granted in respect of a
benefit track providing the Company with investment grants at a rate
of 38% of the investments included in such certificate. The Company
completed its investments in respect of this program during 1996,
and received final approval from the Investment Center in November
1997 for the investments effected in respect of this program.
In January 1996, an investment program ("existing program") for
expansion of the Company's plant in the aggregate amount of $239,579
was approved by the Investment Center. The approval certificate was
granted in respect of a benefit track providing the Company with
investment grants at a rate of 34% of the investments included in
such certificate. Pursuant to the approval, the investments in
respect of this program are required to be completed by December 31,
1998.
Receipt of the above grants is subject to various conditions. In the
event the Company fails to comply with such conditions, the Company
may be required to repay all or a portion of the grants received
plus interest and certain inflation adjustments. In order to assure
fulfillment of the conditions related to the receipt of investment
grants, floating liens were registered in favor of the State of
Israel on substantially all assets of the Company. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 1997.
In respect of the existing program, the Company has invested
approximately $105,500 through December 31, 1997 and estimates that
the total investment within the framework of such program will
aggregate approximately $145,000 by December 31, 1998. In January
1998, the Company applied to the Investment Center for a two-year
extension of time to complete its investments under the existing
program. Based on preliminary discussions with the Investment
Center, the Company's management is of the opinion that such
extension will be approved.
F-34
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 8 - SHORT-TERM DEBT
Short-term debt consists primarily of unlinked, non-interest bearing
short-term loans received from a bank for the payment of Value Added
Tax (VAT).
In December 1997 and January 1998, the Company received letters of
intent from certain Israeli banks. Pursuant to such letters of
intent, the banks (see Note 11) and a third bank will make available
to the Company, at its request, short-term credits in the aggregate
amount of $75,000, of which $60,000 will be available through
December 1999 and the rest through December 1998, at terms to be
agreed upon by the parties prior to the actual receipt of any
credits by the Company.
NOTE 9 - RELATED PARTIES
A. Composition
Amounts due to related parties consist of the following:
As of December 31,
------------------
1997 1996
---- ----
National $122 $348
Directors 85 66
---- ----
$207 $414
==== ====
B. Other Related Party Balances and Transactions
Trade accounts receivable as of December 31, 1997 includes $5,080
due from National, primarily for wafer purchases ($9,500 as of
December 31, 1996).
The Company purchased materials and received services from National
during 1997 in the aggregate amount of $55 ($260 and $2,101 for 1996
and 1995, respectively). See Note 16E.
Pursuant to a management agreement with Data Systems & Software Inc.
("DSSI"), the Company's indirect principal shareholder, DSSI is
entitled to management fees from the Company of $40 per month in
1997, 1996 and 1995. The management agreement can be terminated by
either party as of the end of any year, subject to certain advance
notice requirements.
In addition, the Company purchases computerized testing equipment
from a related party supplier in the normal course of business. The
Company's purchases from this supplier aggregated $962, $18, and
$282 for 1997, 1996 and 1995, respectively.
F-35
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 10 - OTHER CURRENT LIABILITIES
As of December 31,
------------------
Other current liabilities consist of
the following: 1997 1996
---- ----
Accrued salaries $3,836 $2,463
Vacation accrual 1,758 1,428
Other 130 30
------ ------
$5,724 $3,921
====== ======
NOTE 11 - LONG-TERM DEBT
In connection with the Acquisition, the Company assumed certain
long-term bank loans of National in the aggregate amount of $12,064
("Original Term Loans"). The Original Term Loans are indexed to the
dollar and bear interest (payable quarterly) at an annual rate of
6%. The Company is obligated to repay the principal of the Original
Term Loans in quarterly installments commencing in March 1993 and
ending in May 1998
The bank that provided the Original Term Loans, together with
another bank (collectively, "Banks"), agreed to make new loans ("New
Term Loans") to the Company to repay and effectively extend the
maturity of all principal installments due on the Original Term
Loans. The aggregate balance of the New Term Loans is repayable in
12 equal quarterly payments commencing in May 2000.
The Banks also agreed that, as long as the Company maintains
deposits at the Banks with original maturities of at least one year
from the date of deposit, the annual interest rate on the New Term
Loans (up to the amount of such deposits) will be 0.3% over the
interest rate that the Company receives on the deposits. The portion
of the New Term Loans not covered by such deposits will bear annual
interest at the three-month Libor rate plus 1.25%.
The agreements with the Banks restrict the Company's ability to
place liens on its assets (other than to the State of Israel in
respect of investment grants) without the prior consent of the
Banks. Furthermore the agreements contain certain restrictive
financial covenants. As of December 31, 1997, the Company was in
full compliance with such covenants.
NOTE 12 - OTHER LIABILITIES
A. Composition As of December 31,
------------------
1997 1996
---- ----
Net liability for employee termination
benefits (see B below):
Gross obligation $ 6,794 $ 5,805
Amounts funded through deposits to
severance pay funds and purchase
of insurance policies (5,489) (5,039)
------- -------
1,305 766
Deferred income taxes (see Note 15C) 8,490 4,384
Other 618 330
------- -------
$10,413 $ 5,480
======= =======
F-36
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 12 - OTHER LIABILITIES (cont.)
B. Employee Termination Benefits
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law,
is based upon length of service and the employee's most recent
salary. This liability is primarily covered by regular deposits made
by the Company into recognized severance and pension funds and by
insurance policies purchased by the Company. The amounts so funded
are not reflected on the balance sheet, since they are controlled by
the fund trustees and insurance companies and are not under the
control and management of the Company.
Expenses relating to employee termination benefits were
approximately $1,674 , $1,311 and $1,303 for 1997, 1996 and 1995,
respectively.
NOTE 13 - SHAREHOLDERS' EQUITY
A. Share Purchase Plan
In December 1993, the Company sold 234,497 ordinary shares to key
senior management employees pursuant to a share purchase plan for an
aggregate purchase price of $678. Loans extended by the Company
financed approximately $672 of the aggregate purchase price required
to be paid by the employees. Such loans are denominated in new
Israeli shekels ("NIS") and are linked to the Israeli Consumer Price
Index ("CPI"). Through December 31, 1997, all shares under the plan
were fully vested. The shares are subject to certain restrictions on
sale or transfer. The employee's obligation to repay loans received
to finance the purchase of the ordinary shares is secured by such
shares and is repayable upon the sale of the ordinary shares in
accordance with a formula set forth in the share purchase plan.
B. Share Option Plans
The Company maintains two share option plans, which were adopted in
1994 and 1995, respectively. The plans provide for the grant of
options to employees (including senior management) to purchase
ordinary shares at exercise prices which may not be less than 85% of
the market value of the ordinary shares at the date of grant. In
addition, pursuant to the plans, the terms of the options granted
may not exceed ten years from the first grant date under each plan.
Options granted to date become vested over a four-year period
according to various vesting schedules. In July 1996, the exercise
price of vested options granted under the 1994 plan was reduced from
primarily $17 per share to $13 per share, while the exercise price
of non-vested options granted was reduced from primarily $17 per
share to $9.125 per share (the market value of the shares at such
time). The exercise price of all options granted under the 1994 plan
after July 1996 has been the market value of the shares on the date
of grant.
F-37
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. Share Option Plans (cont.)
A summary of the status of the Company's share option plans as of
December 31, 1997, 1996 and 1995, as well as changes during each of
the years then ended, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ------------------
Weighted Weighted Weighted
Number of average Number average Number average
share exercise of share exercise of share exercise
options price options price options price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of
beginning of year (1) 729,656 $ 9.10 265,000 $17.16 --
Granted 104,340 11.84 528,960 8.80 265,000 $17.16
Exercised (29,910) 10.00 --
Terminated -- --
Forfeited (34,519) 8.60 (64,304) 15.65 --
------- ------- ------
Outstanding as of end
of year 769,567 9.45 729,656 9.10 265,000 17.16
======= ======= =======
Options exercisable as of
end of year 199,107 9.72 52,804 12.95 --
======= ======= =======
</TABLE>
(1) During 1996, the exercise price of share options granted under
the 1994 plan was reduced.
The following table summarizes information about share options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Exercisable as of
Outstanding as of December 31, 1997 December 31, 1997
---------------------------------------------------------- ---------------------------
Weighted
average
Range of remaining Weighted Weighted
exercise Number contractual life average Number average
prices outstanding (in years) exercise price exercisable exercise price
------ ----------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.38-7.00 10,000 8.73 $ 6.69 2,500 $ 6.69
8.75 457,326 8.91 8.75 106,776 8.75
9.13 155,185 7.37 9.13 47,115 9.13
10.25-11.25 53,000 9.65 10.58 -- --
12.00-13.82 84,056 8.35 12.57 42,716 13.00
17.38 10,000 9.55 17.38 -- --
------- -------
769,567 199,107
======= =======
</TABLE>
F-38
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. Share Option Plans (cont.)
The weighted average grant-date fair value of the 104,340, 528,960
and 265,000 options granted during 1997, 1996 and 1995 amounted to
$7.56, $4.50 and $11.20 per option, respectively. The Company
utilized the Black-Scholes option pricing model to estimate fair
value, utilizing the following assumptions for the years 1997, 1996
and 1995 (all in weighted averages):
1997 1996 1995
---- ---- ----
Risk-free interest rate 5.50% 5.50% 5.50%
Expected life of options 4.5 years 4.4 years 4.4 years
Expected annual volatility 79% 58% 58%
Expected dividend yield none none none
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made in
1997, 1996 and 1995 under such plans in accordance with SFAS 123,
the Company's pro forma net income and earnings per share would have
been as follows:
1997 1996 1995
---- ---- ----
Pro forma net income $17,860 $9,221 $19,752
======= ====== =======
Pro forma basic
earnings per share $ 1.35 $ 0.70 $ 1.70
======= ====== =======
Pro forma diluted
earnings per share $ 1.28
=======
C. Description of Ordinary Shares
As of December 31, 1997 and 1996, the Company had authorized
30,000,000 par value NIS 1 ordinary shares, of which 13,235,360 and
13,205,450, respectively, were issued and outstanding. Holders of
ordinary shares are entitled to participate equally in the payment
of dividends and bonus share distributions and, in the event of the
liquidation of the Company, in the distribution of assets after
satisfaction of liabilities to creditors. Each ordinary share is
entitled to one vote on all matters to be voted on by shareholders.
D. Cash Dividends
In September 1997, the Company's Board of Directors declared the
payment of a special dividend in the amount of $13,235 ($1.00 per
ordinary share). The dividend was paid in October 1997.
F-39
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
In October 1996, the Company's Board of Directors declared the
payment of a special dividend in the amount of $19,808 ($1.50 per
ordinary share). The dividend was paid in November 1996.
NOTE 14 - CONCENTRATIONS RELATING TO SALES AND PRINCIPAL GEOGRAPHICAL MARKETS
A. Sales to Major Customers (as a percentage of total sales for the
respective periods)
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Customer A - National 70% 67% 58%
Customer B -- 8% 9%
Customer C 15% 10% 20%
Customer D 7% 8% 9%
As of both December 31, 1997 and 1996, the above major customers
constituted most of the trade accounts receivable reflected on the
balance sheet (see Note 17E).
B. Sales by Geographical Market (as a percentage of total sales for
the respective periods)
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
United States 38% 41% 47%
Far East (1) 61% 58% 49%
Other 1% 1% 4%
(1) Primarily represents sales to assembly plants owned by
National in the Far East.
NOTE 15 - INCOME TAXES
A. Approved Enterprise Status
Virtually all of the Company's facilities have been granted approved
enterprise status, as provided by the Israeli Law for the
Encouragement of Capital Investments - 1959 ("1959 Law") (see Note
7B). In connection with the Acquisition, the Government of Israel
also agreed to transfer to the Company the approved enterprise
status held by National with respect to its investment programs.
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to approved enterprise investments.
The Company's income attributable to its
F-40
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
various approved enterprise investments is taxed at a rate of 20%
through periods ending between 2002 and 2007, depending on the
specific approval certificate. The portion of the Company's taxable
income which is not attributable to approved enterprise investments
is subject to regular "Company Tax" (37% in 1995, declining to 36%
in 1996 and thereafter).
F-41
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 15 - INCOME TAXES (cont.)
A. Approved Enterprise Status (cont.)
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the 1959 Law and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company
to comply with these conditions, the tax benefits could be canceled,
in whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in full
compliance with the aforementioned conditions through December 31,
1997.
Year ended December 31,
-----------------------
B. Composition 1997 1996 1995
---- ---- ----
Current $ -- $ -- $2,613
Deferred 4,036 2,299 2,554
------ ------ ------
$4,036 $2,299 $5,167
====== ====== ======
C. Components of Deferred Tax Asset/Liability
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheet as of December
31:
1997 1996
---- ----
Deferred tax benefit - current
Accrued vacation pay $ 352 $ 286
Other 33 29
-------- -------
Total current deferred tax benefit $ 385 $ 315
======== =======
Net deferred tax liability - long-term
Deferred tax asset - long-term
Public offering issuance expenses $ -- $ 407
Liability for employee rights upon severance 261 153
Research and development 1,240 657
Net operating loss carryforward 71 444
Unearned compensation 71 98
-------- -------
1,643 1,759
Deferred tax liability - long-term
Depreciation (10,133) (6,143)
-------- -------
F-42
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Total net long-term deferred tax liability $ (8,490) $(4,384)
======== =======
F-43
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 15 - INCOME TAXES (cont.)
D. Effective Income Tax Rates
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31
-------------------
1997 1996 1995
---- ---- ----
Israeli statutory rate 36% 36% 37%
Reduced tax rate for
approved enterprise (16) (16) (16)
Permanent differences and other, net (1) (3) (1) (1)
---- ---- ----
17% 19% 20%
==== ==== ====
(1) Primarily includes special depreciation deduction in
connection with the location of the Company's plant.
E. Net Operating Loss Carryforward
The Company has net operating loss carryforwards of approximately
$355 as of December 31, 1997, which may be carried forward for an
unlimited period of time.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
Between June and September 1996, several suits were filed in the
United States on behalf of a purported class of the Company's
shareholders who purchased or otherwise acquired the Company's
ordinary shares between May 25, 1995 and June 10, 1996, against the
Company, its Co-Chief Executive Officers, its Chairman of the Board
of Directors and DSSI. 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 the Company and a major customer
and (ii) the Company's process development efforts in connection
therewith, in violation of certain U.S. Federal securities laws.
The Company has indemnified the defendants, 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, 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 ultimate outcome of the
aforementioned matter or its effect if any, on the Company's
financial condition, operating results and business. However, the
Company believes it has meritorious defenses and intends to defend
the actions vigorously.
F-44
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (cont.)
B. Leases
The Company's offices and engineering and manufacturing operations
are located in a building complex situated in an industrial park in
Migdal Haemek, Israel. These premises are currently occupied under a
long-term lease from the Israel Lands Authority, which expires in
2032. The Company has no obligation for lease payments related to
this lease through the year 2032.
The Company occupies certain other premises under various operating
leases. The obligations under such leases were not material as of
December 31, 1997.
C. Purchase Agreements
The Company from time to time enters into long-term purchase
agreements with customers. Pursuant to such agreements, the Company
is committed to sell, and the customer is committed to purchase
(subject to reductions in certain circumstances), a specific monthly
output derived from the start of processing of silicon wafers
("wafer starts") at prices stipulated in the agreements. The
Company's existing purchase agreement with National expires on
February 28, 1998 (see also below). From commencement of the
Company's operations through December 31, 1997, a substantial
portion of the Company's production has been sold in the framework
of these agreements.
In May 1995, the Company and National signed an amendment to their
original purchase agreement (as previously amended). The amendment
called for an increase in the number of wafer starts per month that
the Company was committed to sell to National ("additional output").
In consideration for such increase, National provided the Company
with the amount of $28,875 as an advance in respect of the
additional output. The advance bears interest at the three-month
Libor rate. Any amounts of the advance not offset against sales of
additional output to National through October 1, 1999 were to be
retained by the Company without any obligation to National.
In January 1998, the Company and National signed a new purchase
agreement ("new agreement"), effective March 1, 1998 through
February 28, 2000, with an option to extend the agreement for an
additional one year. The new agreement replaces all prior purchase
agreements with National, as well as portions of other agreements
pertaining to wafer purchases. Pursuant to the new agreement, the
Company is committed to sell, and National is committed to purchase
(subject to reductions in certain circumstances), quantities as set
forth in the agreement. Such quantities are lower than the
commitments of the Company and National pursuant to the prior
agreements mentioned above. The new agreement also
F-45
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
establishes mechanisms for determining the prices to be charged by
the Company during the period of the agreement.
NOTE 16 - COMMITMENTS AND CONTINGENCIES (cont.)
C. Purchase Agreements (cont.)
In addition, the mechanism for offsetting the aforementioned advance
payment received from National was revised and extended National's
right to offset the advance payment against wafer purchases through
February 2000. Under certain circumstances, the Company may be
required to repay National a portion of the advance payment still
outstanding at that time. The portion of the advance outstanding as
of December 31, 1997 that is expected to be offset in 1998 in
accordance with the new agreement is presented as a current
liability.
In the framework of certain purchase agreements with customers, the
Company is entitled to receive warrants to purchase share capital of
the customer under conditions stipulated in the agreements.
In June 1996, the Company reached an understanding for the
termination of a purchase agreement with a former major customer.
Sales to such customer accounted for approximately 8% and 9% of the
Company's sales in 1996 and 1995, respectively.
D. Profit Sharing Plan
The Company maintains an employee profit sharing plan. Under the
terms of this plan (i) 7.5% of the Company's profit before taxes, as
defined ("PBT"), each year is to be divided among all employees of
the Company, including senior management (the allocation of which is
based on salary and a yearly performance score for each employee)
and (ii) 2.5% of PBT each year is to be divided among key senior
management employees. The profit sharing award with respect to each
year is paid in two installments in the following year. The
Company's expenses pursuant to the profit sharing plan were $2,312,
$1,231 and $2,561 for 1997, 1996 and 1995, respectively.
E. Mutual Services Agreements
In connection with the Acquisition, the Company and National entered
into a mutual services agreement. The agreement, as extended from
time to time, is effective through February 28, 1998. In accordance
with the aforementioned agreement, the Company paid National $55 for
various services and National paid the Company $361 for certain
activities in 1997 ($260 and $800, respectively, for 1996; and
$2,101 and $714, respectively, for 1995).
F. Other Principal Agreements
The Company from time to time, in the normal course of business,
enters into long-term agreements with various entities for the joint
development of products and processes utilizing technologies owned
by both the other entities and the Company ("joint ventures").
Certain of such agreements contain commitments by the Company and/or
the other entities to purchase
F-46
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
specific quantities of the products developed. As of December 31,
1997, the Company's aggregate commitment to invest in such joint
ventures was $5,167.
F-47
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (cont.)
G. Other Commitments
(1) In consideration for research and development funding
received by the Company and another party, aggregating
$780 as of December 31, 1997, from the BIRD - Binational
Industrial Research and Development Foundation ("BIRD"),
the Company and the other party has undertaken to pay
royalties amounting to primarily 2.5% of the gross sales
from products developed from the research and
development financed, not to exceed 150% of the grants
received.
(2) Receipt of certain research and development grants from
the Government of Israel is subject to various
conditions. In the event the Company fails to comply
with such conditions, the Company may be required to
repay all or a portion of the grants received. In
management's opinion, the Company has been in full
compliance with the conditions through December 31,
1997.
NOTE 17 - FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a
contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of
financial instruments include cash and cash equivalents, trade
accounts receivable, loans, investments, trade accounts payable,
accrued expenses, options and forward contracts.
In accordance with Statements No. 105, 107 and 119 of the FASB, the
Company makes certain disclosures with regard to financial
instruments, including derivatives. These disclosures include, among
other matters, the nature and terms of derivative transactions,
information about significant concentrations of credit risk, and the
fair value of financial assets and liabilities.
A. Foreign Exchange Agreements
The Company, from time to time, enters into foreign exchange
agreements to manage exposure to equipment purchase commitments
denominated in Japanese yen. These transactions qualify for hedge
accounting in accordance with GAAP and, accordingly, the results of
such transactions are recorded concurrently with the realization of
the related items (i.e., receipt of the equipment and payment of the
related liability). The Company does not hold or issue derivative
financial instruments for trading purposes.
B. Credit Risk of Financial Instruments, Including Derivatives
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the
exposure of the Company through its use of derivatives.
F-48
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 17 - FINANCIAL INSTRUMENTS (cont.)
B. Credit Risk of Financial Instruments, Including Derivatives
(cont.)
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations. See E below with
regard to credit risks in respect of trade accounts receivable.
Substantially all remaining financial instruments held by the
Company are due from governmental entities and, accordingly, the
Company's credit risk in respect thereof is negligible.
C. Presentation of Foreign Exchange Transactions in the Financial
Statements
There were no outstanding foreign exchange agreements as of December
31, 1997 and the results of such agreements were not material for
1997.
The aggregate contract amount of foreign exchange agreements
outstanding as of December 31, 1996 was $1,016. The credit risk on
these transactions was not material as of December 31, 1996 and no
deferred losses existed at that date.
Losses recognized on foreign exchange agreements amounted to $3,598
in 1996. Of this amount, $3,002 was capitalized to property and
equipment during 1996 and the remaining amount of $596 was reflected
in financing expenses (1995 - $1,661, $1,130 and $531,
respectively).
D. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments did
not materially differ from their respective carrying amounts as of
December 31, 1997 and 1996.
E. Concentrations of Credit Risk
Most of the Company's trade accounts receivable (73% as of December
31, 1997) were due from the Company's two major customers, both of
whom are large multinational companies (see Note 14A).
F-49
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 18 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the primary
material difference between GAAP in Israel and in the U.S. relates
to the presentation of earnings per share data in 1997. Set forth
below is the Company's earnings per share data in accordance with
U.S. GAAP (SFAS 128).
Year ended
December 31,
------------
1997
----
Basic Earnings Per Share 1.45
====
Diluted Earnings Per Share 1.43
====
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per share computations for
1997 in accordance with U.S. GAAP..
Year ended December 31, 1997
----------------------------
Income Shares Per-share
(Numerator) (Denominator) amount
----------- ------------- ------
Basic Earnings Per Share
Income available to ordinary
shareholders 19,171 13,217 1.45
Effect of Dilutive Securities
Options -- 235
------ ------
Diluted Earnings Per Share
Income available to ordinary
shareholders after assumed
conversions 19,171 13,452 1.43
====== ====== ====
Options to purchase 45,000 ordinary shares at an average exercise
price of $11.90 per share were outstanding during 1997 but were not
included in the computation of diluted earnings per share because
the exercise prices of the options were greater than the average
market price of the ordinary shares. The options, which expire in
November 2007, were still outstanding as of December 31, 1997.
F-50
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1997 between DATA
SYSTEMS & SOFTWARE INC., a Delaware corporation (the "Company"), and GEORGE
MORGENSTERN (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has been the President and Chief Executive
Officer of the Company since its organization in 1986, and has successfully
developed and expanded the business of the Company;
WHEREAS, the Executive is employed as the President and Chief
Executive Officer of the Company under an agreement between them dated as of
January 1, 1994 (the "1994 Employment Agreement"), which expires on December 31,
1998; and
WHEREAS, the Company desires to assure itself of the Executive's
continued services, and the Executive is willing to continue to provide such
services to the Company on a full time basis for a period of time, and to be
retained thereafter on a part-time basis in an advisory and consultative
capacity, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Employment.
(a) The Company shall employ the Executive, and the Executive shall
serve, as Chairman of the Board, President and Chief Executive Officer of the
Company during the period commencing on the date hereof and ending on December
31, 2001, or such earlier date as may be
<PAGE>
designated by the Executive upon written notice to the Board of Directors that
he elects to terminate such employment and serve as a Consultant to the Company
in accordance with the provisions of Paragraphs 1(b) or 1(c) hereof (the period
during which the Executive continues to serve as Chairman of the Board,
President and Chief Executive Officer of the Company is hereinafter referred to
as the "Employment Period", and the period during which he serves as a
Consultant to the Company is hereinafter referred to as the "Consulting
Period"). It is also contemplated that throughout the term of this Agreement,
the Executive will continue to be a member of the Board of Directors of the
Company, and serve as Chairman of the Board during the Employment Period and as
Chairman Emeritus during the Consulting Period. During the Employment Period the
Executive shall devote his best efforts and services to his employment on
substantially a full-time basis. The place of employment shall be at the
headquarters of the Company, which shall at all times be in the New York City
metropolitan area.
(b) Upon not less than 120 days' prior written notice to the Company
at any time prior to December 31, 2001, the Executive shall have the right to
terminate his employment as Chairman of the Board, President and Chief Executive
Officer of the Company hereunder and elect to serve as a Consultant to the
Company for a period ending on December 31 of the seventh year after which the
Executive commenced to serve as a Consultant to the Company. The Executive shall
specify in said notice the date (the "Employment Termination Date") upon which
his services as Chairman of the Board, President and Chief Executive Officer of
the Company hereunder shall terminate (which date shall be the last day of a
calendar month not less than 120 days after the date such notice is given). The
Consulting Period shall commence on the first day of the calendar month
immediately succeeding the Employment Termination Date.
2
<PAGE>
(c) Anything to the contrary herein notwithstanding, if at any time
during the Employment Period the Company breaches any of its obligations
hereunder or there shall occur a "Change in Control of the Company" (as
hereinafter defined), the Executive shall have the option, upon written notice
to the Company (in accordance with the provisions of Paragraph 6(c) hereof) that
such breach or a Change in Control of the Company has occurred and that the
Executive intends to exercise such option, to terminate his employment as
Chairman of the Board, President and Chief Executive Officer hereunder and to
serve as a Consultant to the Company beginning on a date ten (10) days after the
giving of such notice and ending on the later of (i) December 31 of the seventh
year thereafter and (ii) December 31, 2005. For purposes of this Agreement, a
"Change in Control of the Company" shall be deemed to have occurred if (i) there
shall be consummated (A) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's Common Stock would be converted in whole or in part into
cash, securities or other property, other than a merger of the Company in which
the holders of the Company's Common Stock immediately prior to the merger have
substantially the same propor tionate ownership of common stock of the surviving
corporation immediately after the merger, or (B) any sale, lease, exchange or
transfer (in one transaction or a series of related transactions) of all or
substantially all the assets of the Company, or (ii) the stockholders of the
Company shall approve any plan or proposal for the liquidation or dissolution of
the Company, or (iii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than the Company or a subsidiary thereof or any employee benefit
plan sponsored by the Company or a subsidiary thereof, shall become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company
3
<PAGE>
representing 20% or more of the combined voting power of the Company's then
outstanding securities ordinarily (and apart from rights accruing in special
circumstances) having the right to vote in the election of directors, as a
result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, or (iv) at any time during a period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company shall cease for any reason to constitute
at least a majority thereof, unless the election or the nomination for election
by the Company's stockholders of each new director during such two-year period
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such two-year period or (v) any
other event shall occur that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act.
(d) During any Consulting Period hereunder, the Executive shall
render such advisory and consultative services concerning the business of the
Company as may be requested from time-to-time by the Board of Directors, and in
performing such services he shall report directly to the Board of Directors.
During any Consulting Period, the Executive shall not be required to render any
services at a distance of more than 50 miles from his then home. The Executive
shall be required to perform consulting services under this Agreement only at
times and places consistent with his other employment or with his private
activities.
2. Compensation.
(a) (1) During the Employment Period the Company shall pay the
Executive a salary at the rate of $420,000 per annum, and commencing on January
1, 1998, said rate shall be increased annually effective January 1 of each year
based upon the percentage year-to-year increase
4
<PAGE>
in the cost of living index in the New York City metropolitan area as compared
to the immediately preceding year (using as the basis of such computation the
"Consumer Price Index for All Urban Consumers -- New York and Northeastern New
Jersey", hereinafter called the "Index", published by the Bureau of Labor
Statistics of the United States Department of Labor, or if publication of the
Index is discontinued, the parties shall accept comparable statistics on the
cost of living for the New York City metropolitan area as computed and published
by an agency of the United States or by a responsible financial periodical of
recognized authority then to be selected by the parties). During the Employment
Period, the Executive's salary rate shall be reviewed annually by the Board of
Directors of the Company. Upon each such review the Executive's salary rate may
be increased to such rate as shall be considered appropriate and as shall be
fixed by the Board. The salary shall be paid to the Executive in appropriate
installments in accordance with the Company's usual and customary payroll
practices for executive officers. The Executive's election pursuant to
Paragraphs 1(b) or 1(c) hereof to serve as a Consultant to the Company hereunder
shall not adversely affect the Executive's right to receive any compensation
accrued prior to the date of such election.
(2) The Company shall pay the Executive as compensation for
his services as a Consultant hereunder during any Consulting Period a consulting
fee at the annual rate hereinafter set forth:
(i) During that portion of any Consulting Period commencing after
the exercise by the Executive of his option to serve as a Consultant pursuant to
Paragraph 1(c) hereof as a result of a breach of the Company's obligations
hereunder or a Change in Control of the Company and ending on December 31, 2001,
the Executive shall receive a consulting fee at an annual rate equal to the
Executive's annual salary at the rate in effect immediately prior to the
commencement of the
5
<PAGE>
Consulting Period, which annual rate shall be adjusted annually in January of
each year throughout the remaining term of this Agreement commencing January 1,
1998 for the percentage increase in the Index in accor dance with the provisions
of Paragraph 2(a)(1) hereof (the "Base Rate").
(ii) Except as otherwise provided in Paragraph 2(a)(2)(i) hereof,
the Executive shall receive a consulting fee for his services as a Consultant
hereunder at an annual rate equal to: (A) 50% of the Base Rate (the "50% Rate")
for the portion of the Consulting Period ending December 31 of the fourth full
calendar year of the Consulting Period; and (B) 25% of the Base Rate for the
remainder of the Consulting Period. All such consulting fees shall be paid to
the Executive in appropriate installments in accordance with the Company's usual
and customary payroll practices for executive officers.
(iii) At the commencement of any Consulting Period under this
Agreement, the Company shall take appropriate action to fund the payment of all
consulting fees to become payable to the Executive throughout the entire
Consulting Period, by purchase of an annuity from a reputable insurance company,
deposit of funds or U.S. Treasury Securities having maturities of less than one
year in a special account with a commercial or savings bank acceptable to the
Executive or pursuant to other arrangements acceptable to the Executive in his
sole discretion. Such fund shall not be used by the Company for any purpose
other than the payment of consulting fees to the Executive.
(b) During the Employment Period and any Consulting Period the
Executive shall also be reimbursed by the Company for reasonable business
expenses actually incurred or paid by him, consistent with the policies of the
Company, in rendering to the Company the services provided for herein. In lieu
of accounting for his expenses, Executive may opt to be reimbursed for his
expenses for meals and lodging while traveling on Company business in accordance
with the per diem
6
<PAGE>
allowances established by the Internal Revenue Service. All air travel shall be
first class or business class.
(c) During the Employment Period and any Consulting Period, the
Executive shall participate in all of the Company's employee benefit plans,
including without limitation, group life insurance, hospitalization and surgical
and major medical coverages, pension and retirement plans, long-term disability,
sick leave, vacations, holidays and such other related fringe benefits as are or
may be made available from time to time to executive employees of the Company,
and the amounts payable thereunder shall be no less (after adjustment for
changes in the Index as compared to the immediately preceding calendar year)
than those received for and in respect of the Company's previous fiscal year,
and the Executive shall be eligible to participate in the Company's 1994 Stock
Incentive Plan and any other stock option, savings, bonus, appreciation, profit
sharing, thrift, incentive, pension or similar plan designed to compensate
employees of the Company. In addition, during the Employment Period and any
Consulting Period, the Executive will be entitled to such other perquisites as
he has received as President and Chief Executive Officer of the Company prior to
the date hereof.
(d) At all times during the Employment Period and any Consulting
Period the Company shall maintain in full force and effect and continue to make
premium payments under the $500,000 whole life insurance policy on the life of
the Executive, of which Executive's spouse or his estate may be the beneficiary.
In addition, during each year of this Agreement, the Company shall obtain and
maintain in full force and effect a term life insurance policy or policies on
the Executive's life, of which Executive's spouse or his estate may be the
beneficiary, in the amount of $1.1 million.
7
<PAGE>
(e) The Company shall make available to the Executive during the
Employment Period and any Consulting Period two automobiles for the Executive's
exclusive use at the Company's expense. The Company shall also at its own
expense pay for all operating costs, repairs and insurance for such automobiles.
(f) The Company shall during the Employment Period and any
Consulting Period contribute to the retirement fund heretofore established on
behalf of the Executive each pay period an amount equal to not less than 25% of
the Executive's salary for such period in a manner consisting with existing
practice.
(g) During the Employment Period, the Company shall at its expense
cause to be provided for the Executive's use office facilities at the Company's
principal office at least comparable to his present office facilities and such
secretarial services as the Executive may reasonably require in carrying out his
obligations under this Agreement. During the Consulting Period, the Company
shall at its expense cause to be provided for the Executive's use such office
facilities and secretarial services as the Executive may reasonably require in
carrying out his obligations under this Agreement.
(h) The Executive shall be entitled to five weeks paid vacation.
Such vacation shall be taken at such time or times as shall be mutually agreed
to by the Board of Directors, the Company and the Executive.
3. Disability. If during the Employment Period the Executive should
suffer from a disability, the Company shall continue to pay to the Executive (or
his legal representative) the compensation payable to the Executive under
Paragraphs 2(a)(1) and 2(g) hereunder. The disability of the Executive during
the Consulting Period shall not reduce the compensation payable to him (or his
legal representative) pursuant to Paragraphs 2(a)(2) and 2(g) hereof. Any
payments which the
8
<PAGE>
Executive shall receive under any salary continuation or disability insurance
plan of the Company shall be deducted from the payments which would otherwise be
made under this Paragraph 3. Executive shall continue to receive the other
benefits to which he would be entitled under Paragraph 2 hereof. Nothing herein
contained shall be deemed to limit or abrogate any insurance benefits or other
benefits available to the Executive.
4. Death.
(a) If the Executive dies during the Employment Period or the
Consulting Period, the Company shall continue to pay to the estate of the
Executive all compensation that would otherwise accrue or be payable to the
Executive for the period ending on the later of December 31, 2001 and 180 days
from the date of death at the rate and in the manner set forth in Paragraph 2(g)
and in Paragraph 2(a)(1) or 2(a)(2) hereof, whichever is applicable.
(b) If the Executive dies during the term of this Agreement, the
Executive's surviving spouse shall be entitled to continued coverage under the
Company's hospitalization and surgical and major medical plans at the Company's
expense.
(c) Promptly following the death of the Executive (and in no event
later than 15 days after the date of his death), the Company shall take
appropriate action to fund the payment of all amounts payable to the estate of
the Executive pursuant to this Paragraph 4, in a manner acceptable to the
executor of the Executive's estate (or other legal representative of such
estate).
5. Other Activities. The Executive expressly agrees, as a condition
to the performance by the Company of its obligations hereunder, particularly its
obligations under Paragraphs 2, 3 and 4 hereof, that at all times during the
Employment Period and the Consulting Period, the Executive shall not directly or
indirectly engage in, as a director, officer, employee, partner
9
<PAGE>
or stockholder, any business, association, firm or corporation (other than the
Company or any parent, subsidiary or successor of it) that is engaged in whole
or in part in a business that is in substantial and direct competition with the
business of the Company or any of its subsidiaries, except that the Executive
may own not in excess of 10% (or such greater percentage as to which the Board
of Directors of the Company shall consent) of any class of securities of any
such competitive entity that is registered under Section 12 of Exchange Act or
otherwise publicly traded.
6. Termination.
(a) The Company may terminate this Agreement and all the Company's
obligations hereunder, except for obligations accrued but unpaid to the
effective date of termination, only for the Executive's willful failure to
perform his obligations under Paragraph 1 hereof. Such termination shall be
effected by notice thereof, hand delivered by the Company to the Executive and,
except as hereinafter provided, shall be effective as of the tenth day after
receipt by the Executive of such notice.
(b) If, within the 10-day period following the date of receipt of
such notice of termination, the Executive shall use his best efforts to perform
such obligations, the termination shall not be effective.
(c) This Agreement may be terminated by the Executive upon not less
than ten days' prior written notice to the Company because of a material breach
by the Company of its obligations hereunder or immediately upon written notice
to the Company of the occurrence of a Change in Control of the Company. In such
event, although the Employment Period (or the Consulting Period, as the case may
be) will then be terminated, the Executive shall continue to receive all the
compensation provided for in Paragraph 2 hereof and shall be entitled to all the
benefits other-
10
<PAGE>
wise provided for herein for the Employment Period (or the Consulting period, as
the case may be), notwithstanding such termination. An election by the
Executive, pursuant to Paragraphs 1(b) or 1(c) hereof, to function as a
Consultant may not be rescinded by the Executive, and after such election the
Executive may terminate only for a material breach of this Agreement during the
Consulting Period or a Change in Control of the Company.
(d) In the event of a termination of this Agreement by the Executive
as a result of the material breach of this Agreement by the Company of any of
its obligations hereunder or a Change in Control of the Company, or in the event
of the termination of the Executive's employment by the Company in breach of
this Agreement, the Executive shall not be required to seek other employment in
order to mitigate his damages hereunder, and no amounts received from any such
employment shall reduce any amount that the Company would otherwise be required
to pay to him as a result of such breach.
(e) In the event that the Executive institutes any legal action to
enforce his rights under, or to recover damages for breach of this Agreement,
the Executive, if he is the prevailing party, shall be entitled to recover from
the Company any actual expenses of such action, including attorneys' fees and
disbursements, incurred by him.
7. Confidentiality. The Executive shall not during the term of this
Agreement or thereafter disclose to any person, firm or corporation, except as
otherwise required by law, any information concerning the business, clients or
affairs of the Company that he may have acquired in the course of, or as an
incident to, his employment by the Company, for his own benefit or that of any
such person, firm or corporation, or to the detriment or intended or probable
detriment of the Company.
11
<PAGE>
8. Indemnification. The Executive shall be entitled throughout the
term of this Agreement and thereafter to indemnification in respect of any
actions or omissions as an employee, officer or director of the Company (or any
successor pursuant to Paragraph 14 hereof) to the fullest extent permitted by
the Delaware General Corporation Law or other applicable law.
9. Remedies. The Company hereby waives, and will not assert, any
right to set off the amount of any claims, liabilities, damages or losses the
Company may have against any amounts payable by the Company to the Executive
hereunder, and any amounts payable to or otherwise accrued for the account of
the Executive in respect of any period prior to the effective termination of
this Agreement shall be paid as provided in this Agreement.
10. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association, and judgment
upon such award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The arbitrator shall not have the power to direct
equitable relief. The arbitration shall be held in New York, New York, or such
other place as may be agreed upon at the time by the parties to the arbitration.
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York.
12. Termination of Prior Employment Agreement. This Agreement
supersedes and replaces in its entirety the 1994 Employment Agreement, which is
hereby terminated and without further force or effect, except as to amounts
accrued and payable to the Executive thereunder as of the date hereof.
12
<PAGE>
13. Entire Agreement. This Agreement constitutes the whole agreement
of the parties hereto in reference to any employment or consultation of the
executive by the Company and in reference to any of the matters or things herein
provided for or hereinbefore discussed or mentioned in reference to such
employment, all prior agreements, promises, representations and understandings
relative thereto being herein merged.
14. Assignability.
(a) In the event that the Company shall merge or consolidate with
any other corporation or all or substantially all the Company's business or
assets shall be transferred in any manner to any other person, such successor
shall thereupon succeed to, and be subject to, all rights, interests, duties and
obligations of, and shall thereafter be deemed for all purposes hereto to be,
the Company hereunder. This Agreement shall be binding upon and inure to the
benefit of any such successor and the legal representatives of the Executive.
(b) This Agreement is personal in nature and neither of the parties
hereto shall assign or transfer this Agreement or any rights or obligations
hereunder, except by operation of law or pursuant to the terms of this Paragraph
14.
(c) Except as otherwise provided in this Paragraph 14 nothing
expressed or implied herein is intended or shall be construed to confer upon or
give to any person, other than the parties hereto any right, remedy or claim
under or by reason of this Agreement or of any term, covenant or condition
hereof.
15. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived only by a written instrument executed by both of the parties hereto,
or in the case of a waiver, by the party
13
<PAGE>
waiving compliance. The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect the right at a
later time to enforce the same. No waiver by either party of the breach of any
term or covenant contained in this Agreement, whether by conduct or otherwise,
in any one or more instances, shall be deemed to be, or construed as, a further
or continuing waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Agreement.
16. Notices. All notices and other communications given pursuant to
this Agreement shall be in writing and shall be deemed given (i) on the day of
delivery, if delivered by hand, (ii) on the fourth business day after mailing,
if mailed, by registered or certified mail (return receipt requested), postage
prepaid, or (iii) on the second business day after deposit, if deposited with
Federal Express or other recognized over-night courier service, to any party
addressed as follows (or to such other address as shall be specified by a party
by like notice):
If to the Company:
Data Systems & Software Inc.
200 Route 17
Mahwah, New Jersey 07430
If to the Executive:
George Morgenstern
5 Shalvah Place
Monsey, New York 10952
17. Severability. If for any reason any provision of this Agreement
shall be determined to be illegal and unenforceable by any court of law, the
validity and effect of all other provisions hereof shall not be affected
thereby.
18. Headings. Section headings are for convenience only and shall
not be considered a part of the terms and provisions of this Agreement.
14
<PAGE>
19. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and which together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
as of the day and year first above written.
/s/ George Morgenstern
-----------------------------
George Morgenstern
DATA SYSTEMS & SOFTWARE INC.
By: /s/ Yacov Kaufman
-----------------------------------
Yacov Kaufman, Vice President and
Chief Financial Officer
By: /s/ Robert L. Kuhn
-----------------------------------
Robert L. Kuhn, On Behalf
of the Board of Directors
15
[LOGO]
GEOTEK
COMMUNICATIONS, INC.
February 26, 1998
BY AIRBORNE EXPRESS
Data Systems & Software, Inc.
200 Route 17
Mahwah, New Jersey 07430
Attention: Mr. George Morgenstern
Re: $2,000,000 Unsecured Promissory Note (the "Note") dated July 1, 1996
by Geotek Communications, Inc. ("Geotek") to Decision Systems Israel
Ltd. ("DSI")
Maturity Date: July 1, 1998
Dear George:
Geotek and DSI hereby agree that all principal amounts outstanding on the
Note and all accrued and unpaid interest thereon as of the Conversion Date (as
defined below) shall be converted (the "Conversion") on the Conversion Date into
shares of Common Stock of Geotek ("Common Stock") in accordance with the terms
hereof. Upon consummation of the Conversion all obligations of Geotek under the
Note and any related documentation shall be satisfied. DSI shall be entitled to
receive in the Conversion a whole number of shares of Common Stock (the "Common
Shares") equal to the principal amount outstanding on the Note and all accrued
and unpaid interest thereon as of the Conversion Date divided by the closing bid
price of the Common Stock on the principal market on which shares of Common
Stock are traded on the day the Registration Statement (as defined below) is
declared effective (the "Conversion Date").
Geotek shall file a registration statement on Form S-3 (the "Registration
Statement") registering the resale of the Common Shares on or prior to April 1,
1998. Geotek shall deliver to DSI the Common Shares no later than three days
after the Conversion Date by DWAC transfer to a brokerage account designated in
writing by DSI. In the event the Registration Statement is not declared
effective on or prior to May 15, 1998, this Agreement shall become void and of
no further force and effect, and the original terms of the Note shall remain in
full force and effect as set forth therein.
102 Chestnut Ridge Road, Montvale, New Jersey 07645
Tel. (201) 930-9305, Fax (201) 930-1332
http://www.geotek.com
<PAGE>
Mr. George Morgenstern
February 26, 1997
Page Two
DSI represents to Geotek that it is an "accredited investor" as defined in
Rule 501 promulgated under the Securities Act of 1933, as amended.
Please confirm DSI's acceptance of this agreement by signing the enclosed
copy of this letter below and returning it to me at your earliest opportunity.
Sincerely yours,
GEOTEK COMMUNICATIONS, INC.
/s/ Yaron Eitan
Yaron Eitan
Chairman and Chief Executive Officer
Accepted and Agreed:
DECISION SYSTEMS ISRAEL, LTD.
/s/ George Morgenstern
- -----------------------------
By: George Morgenstern
Its: Chairman
THIS NOTE SUPERSEDES AND REPLACES INSTALLMENT PROMISSORY NOTE DATED
IN ORIGINAL PRINCIPAL AMOUNT OF $1,200,000
** Wherever used herein, the name Bank Leumi Trust Company of New York is
replaced with Bank Leumi USA
NOTE: Fill in all blanks before signing. If a particular provision is not
desired or has no applicability, delete the provision or, if it
contains a blank space, insert "N/A" or the words "Not Applicable"
in such space. All deletions should be initialled by the Borrower
and the Bank.
- --------------------------------------------------------------------------------
INSTALLMENT PROMISSORY NOTE
[LOGO] Bank Leumi
Trust Company of New York New York, N.Y.
MEMBER FDIC
Feruary 9, 1998
------------ ----
$ 1,200,000.00
----------------------
A. GENERAL; TERMS OF PAYMENT
1. FOR VALUE RECEIVED, the undersigned, Data Systems & Software Inc. and
----------------------------------
(Exact Name of Borrower)
Databit Inc , a corporations (1) organized under the laws of the State of
- ------------------ ------------
Delaware (the "Borrower"), hereby promises to pay to the order of BANK
- ------------------ **
LEUMI TRUST COMPANY OF NEW YORK (the "Bank"), at its office at 564 Fifth Avenue
-----------------
(Address of Branch Office)
the principal sum of One Million Two Hundred Thousand
-----------------------------------------------------------
(Write Out Principal Sum)
Dollars ($1,200,000.00):
-------------
|X| in twenty one (21) consecutive monthly (2) installments;
--------------- -------------
the first twenty ( 20 ) installments of which shall each be in the amount
----------
of $ 57,142.86 , and the last installment of which shall be in the amount of
--------------
$ 57,142.80 , payable on the first day of each month (3) in each
-------------- --------- ---------
year, commencing May 1 , 1998 ; (or)
--------------- ---------
|_| in ( ) installments, to be paid on on the dates
------------
and in the amounts set forth in the following schedule:
Date Principal
Payment Due Amount of Payment
----------- -----------------
The Borrower will pay interest on the unpaid principal amount hereof from time
to time outstanding, computed on the basis of a 360-day year (the charging of
interest on the basis of a 360-day year results in the payment of more interest
than would be required if interest were charged on the basis of the actual
number of days in the year), at a rate per annum which shall be equal to
|_| % per annum; or
-----------
|X| 1 % per annum above the rate of interest designated by
----------- the Bank, and in effect from time to time, as its
"Reference Rate", adjusted when said Reference Rate changes. (The
Borrower acknowledges that the Reference Rate may not necessarily
represent the lowest rate of interest charged by the Bank to
customers.)
The Borrower will pay interest, at the rate described above, monthly on the
first day of each month in each year, commencing March 1 , 1998, at maturity
------------ ----
(whether by acceleration or otherwise) and upon the making of any prepayment,
as hereinafter provided. In addition, the Borrower will pay interest on any
overdue installment of principal for the period for which overdue, on demand,
at a rate equal to 3% per annum above the rate of interest hereinabove
indicated.
In no event shall interest exceed the maximum legal rate permitted by law.
- ----------
(1) Insert the word "corporation" or "partnership," as applicable, or strike the
phrase if Borrower is an individual.
(2) Insert the word "monthly," "quarter-annual" or "semi-annual," as applicable.
(3) Insert the word "month" if installments are payable monthly or, if the
installments are payable quarterly or semi-annually, the names of the months
in each quarter or 6-month period in which payable.
Form No. 640 (R10/86)
<PAGE>
2. All Property (as hereinafter defined) held by the Bank shall be subject
to a security interest in favor of the Bank as security for any and all
Liabilities (as hereinafter defined). The term "Property" shall mean the balance
of every deposit account of the Borrower with the Bank or any of the Bank's
nominees or agents and all other obligations of the Bank or any of its nominees
or agents to the Borrower, whether now existing or hereafter arising, and all
other personal property of the Borrower (including without limitation all money,
accounts, general intangibles, goods, instruments, documents and chattel paper)
which, or evidence of which, are now or at any time in the future shall come
into the possession or under the control of or be in transit to the Bank or any
of its nominees or agents for any purpose, whether or not accepted for the
purposes for which it was delivered. The term "Liabilities" shall mean the
indebtedness evidenced by this Note and all other indebtedness, liabilities and
obligations of any kind of the Borrower (or any partnership or other group of
which the Borrower is a member) to (a) the Bank, (b) any group of which the Bank
is a member, or (c) any other person if the Bank has a participation or other
interest in such indebtedness, liabilities or obligations, whether (i) for the
Bank's own account or as agent for others, (ii) acquired directly or indirectly
by the Bank from the Borrower or others, (iii) absolute or contingent, joint or
several, secured or unsecured, liquidated or unliquidated, due or not due,
contractual or tortious, now existing or hereafter arising, or (iv) incurred by
the Borrower as principal, surety, endorser, guarantor or otherwise, and
including without limitation all expenses, including attorneys' fees, incurred
by the Bank in connection with any such indebtedness, liabilities or obligations
or any of the Property (including any sale or other disposition of the
Property).
3. Prepayment. The Borrower shall have the right to prepay this Note in
whole at any time or in part from time to time (but if in part, in the principal
amount of $5,000.00 or any whole multiple thereof), in each case upon not less
than 10 days prior written notice to the Bank, without penalty or premium,
provided that on each prepayment the Borrower shall pay accrued interest on the
principal amount so prepaid to the date of such prepayment, and each partial
prepayment shall be applied to the installments of this Note in the inverse
order of their stated maturities.
4. Manner of Payment. All payments by the Borrower on account of
principal, interest or fees hereunder shall be made in lawful money of the
United States of America, in immediately available funds. The Borrower
authorizes (but shall not require) the Bank to debit any account maintained by
the Borrower with the Bank, at any date on which a payment is due under this
Note, in an amount equal to any unpaid portion of such payment. If any payment
of principal or interest becomes due on a day on which the Bank is closed (as
required or permitted by law or otherwise), such payment shall be made not later
than the next succeeding business day, and such extension shall be included in
computing interest in connection with such payment.
B. EVENTS OF DEFAULT: REMEDIES
If any of the following events shall occur and be continuing:
1. the Borrower shall fail to make any payment of principal of or interest
on this Note, or any fee provided for herein, when due:
2. the Borrower shall default in the performance or observance of any
covenant or agreement contained herein;
3. an event of default or default shall occur and be continuing under any
other agreement, document or instrument executed and delivered to the Bank by
the Borrower or any guarantor or hypothecator relating to any Liabilities;
4. any representation or warranty made by or on behalf of the Borrower in
this Note or in any other certificate, agreement, instrument or statement
delivered to the Bank by or on behalf of the Borrower shall at any time prove to
have been incorrect when made in any material respect;
5. the Borrower or any Subsidiary (as hereinafter defined) shall default
in the payment of principal of or interest on any indebtedness for borrowed
money (including any such indebtedness in the nature of a lease) or shall
default in the performance or observance of the terms of any instrument pursuant
to which such indebtedness was created or is secured, the effect of which
default is to cause or permit any holder of any such indebtedness to cause the
same to become due prior to its stated maturity (and whether or not such default
is waived by the holder thereof);
6. any change in the condition or affairs (financial or otherwise) of the
Borrower or any Subsidiary shall occur which, in the opinion of the Bank,
increases its risk with respect to the loan evidenced by this Note or impairs
any security therefor;
7. any judgment against the Borrower or any Subsidiary or any attachment,
levy or execution against any of their properties for any amount shall remain
unpaid, or shall not be released, discharged, dismissed, stayed or fully bonded
for a period of thirty (30) days or more after its entry, issue or levy, as the
case may be;
8. the Borrower or any Subsidiary shall become insolvent (however
evidenced) or be unable, or admit in writing its inability, to pay its debts as
they mature; or
9. the Borrower or any Subsidiary shall make an assignment for the benefit
of creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or any Subsidiary or for any of their property, or the commencement of
any proceedings by the Borrower or any Subsidiary under any bankruptcy,
reorganization, arrangement of debt, insolvency, readjustment of debt,
receivership, liquidation or dissolution law or statute (including, if the
Borrower is a partnership, its dissolution pursuant to any agreement or
statute), or the commencement of any such proceedings without the consent of the
Borrower or any Subsidiary and such proceedings shall continue undischarged for
a period of 30 days, or the death of the Borrower (if an individual) or any
member of the Borrower (if a partnership); [or]
<PAGE>
10. [Other] (4)
then, and in any such event, the Bank may declare the entire unpaid principal
amount of this Note and all interest and fees accrued and unpaid hereon to be
forthwith due and payable, whereupon the same shall become and be forthwith due
and payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived by the Borrower. The balance of every account
of the Borrower with, and each claim of the Borrower against, the Bank existing
from time to time shall be subject to a lien and subject to be set off against
any and all Liabilities, including those hereunder.
For purposes of this Note, the term "Subsidiary" shall mean and include any
corporation of which more than 50% of the outstanding shares of capital stock
having ordinary voting power to elect a majority of the Board of Directors of
such corporation (irrespective of whether or not at the time capital stock of
any other class or classes of such corporation shall or might have voting power
upon the occurrence of any contingency) is at the time, directly or indirectly,
owned by the Borrower or by one or more other Subsidiaries.
C. MISCELLANEOUS
1. Covenants. So long as this Note shall remain outstanding, the Borrower
agrees to (a) furnish to the Bank within 90 days after the end of each fiscal
year of the Borrower, financial statements (including a balance sheet and an
operating statement), prepared and certified by independent accountants
acceptable to the Bank, and within 45 days after the end of each fiscal quarter
of the Borrower, unaudited quarterly financial statements (including a balance
sheet and an operating statement), (b) furnish to the Bank, with reasonable
promptness, such other information concerning the business, operations,
properties and condition, financial or otherwise, of the Borrower as the Bank
may reasonably request from time to time, and (c) at any reasonable time and
from time to time, permit the Bank or any of its agents or representatives to
examine and make copies of and abstracts from its records and books of account,
visit its properties and discuss its affairs, finances and accounts with any of
its officers, directors or independent accountants.
2. No Waiver; Remedies Cumulative. No failure on the part of the Bank to
exercise, and no delay in exercising any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Bank of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
3. Costs and Expenses. The Borrower shall reimburse the Bank for all costs
and expenses incurred by it and shall pay the reasonable fees and disbursements
of counsel to the Bank in connection with enforcement of the Bank's rights
hereunder. The Borrower shall also pay any and all taxes (other than taxes on or
measured by net income of the holder of this Note) incurred or payable in
connection with the execution and delivery of this Note.
4. Amendments. No amendment, modification or waiver of any provision of
this Note nor consent to any departure by the Borrower therefrom shall be
effective unless the same shall be in writing and signed by the Bank and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
5. Construction. This Note shall be deemed to be a contract made under the
laws of the State of New York and shall be construed in accordance with the laws
of said State.
6. Successors and Assigns. This Note shall be binding upon the Borrower
and its heirs, legal representatives, successors and assigns and the terms
hereof shall inure to the benefit of the Bank and its successors and assigns,
including subsequent holders hereof.
7. Severability. The provisions of this Note are severable, and if any
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Note in any jurisdiction.
- ----------
(4) Insert the word "None" if no additional events of default are to be included
in this Note.
<PAGE>
8. Jurisdiction; Waiver of Jury Trial. The Borrower hereby irrevocably
consents to the jurisdiction of any New York State or Federal court located in
New York City over any action or proceeding arising out of any dispute between
the Borrower and the Bank and the Borrower further irrevocably consents to the
service of process in any such action or proceeding by the mailing of a copy of
such process to the Borrower at the address set forth below. In the event of
litigation between the Borrower and the Bank over any matter connected with this
Note or resulting from transactions hereunder, the right to a trial by jury is
hereby waived by the Borrower and the Bank.
D. ADDITIONAL PROVISIONS (5)
The undersigned, if more than one, shall be jointly and severally liable
hereunder.
Data Systems & Software Inc.
-----------------------------------------
(Name of Borrower)
President and
Chief Executive
By /s/ George Morgenstern, Officer
-----------------------------------------
(Title)
By /s/ Sheldon Krause, Secretary
-----------------------------------------
(Title)
200 Route 17 Mahwah, NJ 07430
-----------------------------------------
(Address of Borrower)
[Corporate Seal] Databit Inc.
---------------------------------
/s/ Shlomie Morgenstern
---------------------------------
200 Route 17, Mahwah, NJ 07430
---------------------------------
- ----------
(5) Insert the word "None" if no additional provisions are to be included in
this Note.
[LOGO]BankLeumi Exhibit 10.34
Trust Company of New York
Member FDIC
SECURITY AGREEMENT
** Wherever used herein, the name Bank Leumi Trust Company of New York is
replaced with the name Bank Leumi USA.
In consideration of financial accommodations heretofore extended or to be
extended or continued to the undersigned the BANK LEUMI TRUST COMPANY OF NEW
YORK (the "Bank"), the undersigned hereby agrees as follows:
1. As security for the full and prompt payment of any and all Liabilities
(as hereinafter defined), the undersigned hereby assigns and transfers to the
Bank and grants the Bank a security interest in all Security (as hereinafter
defined). Said grant is made for the benefit of the Bank and or any others
having a participation or other interest in any of the Liabilities, in such
proportions as the Bank shall in its sole discretion determine.
2. The term "Liabilities" as used herein shall include all liabilities and
obligations of any kind of the undersigned (or any partnership or other group of
which the undersigned is a member) of to (i) the Bank, (ii) any group of which
the Bank is a member or (iii) any other person if the Bank has a participation
or other interest in such liabilities or obligations, whether (a) for the Bank's
own account or as agent for others, (b) acquired directly or indirectly by the
Bank from the undersigned or others, (c) absolute or contingent, joint or
several, secured or unsecured, liquidated or unliquidated, due or not due,
contractual or tortious, now existing or hereinafter arising, or (d) incurred by
the undersigned as principal, surety, endorser, guarantor or otherwise, and
including without limitation all expenses, including attorneys' fees, incurred
by the Bank in connection with any such liabilities or obligations or any
Security therefor.
3. The term "Security" as used herein shall include all of the property
described in Schedule A hereto.
4. The right is granted to the Bank, in its discretion, to file one or
more financing statements (with or, to the extent permitted by law, without the
signature of the undersigned) under the Uniform Commercial Code naming the
undersigned as debtor and the Bank as secured party and indicating therein the
types or describing the items of Security herein specified. The undersigned will
execute, file and record any notices, affidavits or other documents and take all
such other actions as the Bank may deem appropriate to protect or perfect its
security interest in the Security or to otherwise accomplish the purposes of
this agreement. The undersigned hereby agrees to pay on demand, and/or
authorizes the Bank to charge its account with the cost of, any and all filing,
recording and other fees and expenses which the Bank deems appropriae in order
to protect or perfect its security or to otherwise accomplish the purpose of
this agreement, including without limitation the cost of all searches of public
records as the Bank in its sole discretion shall require. The undersigned will
promptly notify the Bank of the imposition at any time of any lien or
encumbrance upon any of the Security. Notwithstanding the foregoing, the
undersigned represents, warrants and covenants that all of the Security now
existing or hereafter arising or acquired is and will be owned by the
undersigned free and clear of all security interests, liens and encumbrances of
any kind, except for the security interest herein granted to the Bank. The
undersigned shall promptly pay when due all taxes and transportation, storage
and warehousing charges affecting or arising out of the Security. The
undersigned will defend the Security against all claims and demands of all
persons at any time claiming the same or any interest therein adverse to the
Bank.
Notwithstanding the foregoing, the Bank shall base no obligation to comply
with any recording, re-recording, filing, re-filing, or other legal requirements
necessary to establish or maintain the validity, priority or enforceability of,
or the Bank's right in or to, the Security or any part thereof.
5. The right is granted to the Bank, in its discretion, at any time, (a)
to transfer to or register in the name of itself or any of its nominees any of
the Security, and whether or not so transferred or registered, to receive the
income and dividends thereon, including stock dividends and rights to subscribe,
and to hold the same as a part of the Security and/or apply the same as
hereinafter provided; (b) to exchange any of the Security for other property
upon any reorganization, recapitalization, or other readjustment and in
connection therewith to deposit any of the Security with any committee or
depositary upon such terms as the Bank may determine, (c) in any bankruptcy or
similar proceeding to file a proof of claim for the full amount of the Security
and to vote such claim for or against any arrangement or with respect to any
other matter; (d) in its own name or in the name of the undersigned or any other
appropriate person, to demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for, or make any
compromise or settlement it may deem desirable with respect to, any of the
Security, (e) to extend the time of payment, arrange for payment in
installments, or otherwise modify the terms of, or release, any of the Security;
(f) to contest, pay and/or discharge all liens, encumbrances, taxes or
assessments on, or claims, actions or demands against, any of the Security and
to take all actions and proceedings in its own name or in the name of the
undersigned or any other appropriate person in order to remove or contest such
liens, encumbrances, taxes, assessments, claims, actions or demands; or to
refrain from doing any of the foregoing, all without affecting the Liabilities
and the Security and without notice or liability to or the consent of the
undersigned except to account for property actually received by the Bank. The
undersigned hereby irrevocably appoints the Bank its attorney-in-fact, with
authority to receive, open and dispose of all mail addressed to the undersigned
and its notify the Post Office authorities to change the address for delivery of
mail addressed to the undersigned to such address as the Bank may designate; to
endorse the name of the undersigned on any instruments that may come into the
Bank's possession; to sign the name of the undersigned on any notices its
account debtors of the undersigned and requests for verification of accounts; to
sign the name of the undersigned on any assignment or other instruments of
conveyance or transfer of any of the Security; and to take all such other
actions as the Bank may deem appropriate to carry our and enforce this agreement
and to exercise the Bank's rights hereunder. The Bank shall not be obligated to
exercise any authority or right granted to it hereunder and shall not be liable
for any action taken or omitted or the manner of taking any action, except for
its willful misconduct, and in no event for consequential damages.
6. The undersigned will pay to the Bank all costs and expenses incurred
and sums paid by the Bank (including without limitation attorneys' fees,
insurance premiums and sales commissions) in connection with the custody, care,
collection, repair, storage or preparation for or any actual or attempted
disposition of any of the Security, the collection of any proceeds of insurance
with respect to the Security or otherwise in connection with this agreement.
7. At any time and from time to time, upon demand by the Bank, the
undersigned will (a) deliver to the Bank, endorsed and/or accompanied by
instruments of assignment and transfer, in such form and containing such terms
as the Bank may request, any and all instruments, documents and/or chattel paper
constituting part of the Security, as the Bank may specify in its demand, (b)
mark all Security and all books and records relating thereto in such manner as
the Bank may require, and (c) permit representatives of the Bank at any time to
inspect the Security and to inspect and make abstracts from any of the
undersigned's books and records and to answer promptly all of the Bank's written
or oral inquiries with respect thereto, If the undersigned, as registered holder
of any of the Security, shall receive any stock certificate, option or right,
whether as an addition to, or in substitution or exchange for, any Security, or
otherwise, the undersigned agrees to accept the same as the Bank's agent and to
hold the same in trust for the Bank, and to forthwith deliver the same to the
Bank in the exact form received, with the undersigned's endorsement thereof if
requested by the Bank, to be held by the Bank as part of the Security. The
undersigned assigns to the Bank all of the undersigned's rights (but none of its
obligations) in, to and under all collateral, guarantees, subordinations and
other rights and benefits now or hereafter received by the undersigned with
respect to the Security and agrees to deliver to the Bank, upon demand, all
agreements, instruments and/or documents evidencing same, endorsed and/or
accompanied by instruments of assignment and transfer, in such form and
containing such terms as the Bank may request.
8. Upon demand from the Bank at any time that any of the Liabilities are
outstanding, the undersigned will assign and transfer to the Bank and grant to
the Bank a security interest in additional Security of a value and character
satisfactory to the Bank or make such payment on account of the Liabilities as
the Bank may require.
9. Upon the occurrence of an Event of Default (as hereinafter defined),
(a) any or all of the Liabilities shall, at the option of the Bank and
notwithstanding any time or credit allowed by any instrument evidencing a
Liability, be immediately due and payable without notice, demand or presentment;
(b) the Bank may, in its discretion, take possession of the Security and, for
that purpose, may enter, with the assistance of any persons, any premises where
the Security or any part thereof may be located, and retain possession of the
Security at such premises or remove the same therefrom; (c) the undersigned
shall, at the request of the Bank, assemble the Security at such places as the
Bank may designate and cooperate in all other respects with the Bank in the
exercise of its rights hereunder; (d) the Bank may vote any shares of stock or
other securities and exercise all or any powers with respect thereto with the
same force and effect as an absolute owner thereof; (e) the Bank may sell any of
the Security or cause the same to be sold in the Borough of Manhattan, New York
City, or elsewhere, in one or more sales or parcels, at such price and on such
terms as the Bank may deem advisable, for cash or on credit, for immediate or
future delivery, without assumption of any credit risk, at any public or private
sales or other dispositions, without demand of performance (which demand is
hereby expressly waived), on at least 5 days notice to the undersigned (if any
notice is required by law) of any public sale or the time after which a private
sale or other disposition may be made (which notice the undersigned acknowledges
is reasonable), and in connection therewith may grant options and may impose
reasonable conditions thereon, and the purchasers of
Form No. 421 (R 2/83)
<PAGE>
any of the Security so sold shall thereafter hold the same absolutely, free from
any claim or right of any kind, including any equity of redemption of the
undersigned (any such equity being hereby expressly waived and released), and
the Bank or any of its nominees or agents may buy at any public sale and if the
Security is of a type sold in a recognized market, or is of a type which is the
subject of widely distributed standard price quotations, buy at private sale;
and (f) in addition to and notwithstanding any other rights granted by law or
herein (or any limitations contained herein on any such rights), the Bank shall
have the rights and remedies with respect to the Security of a secured party
under the Uniform Commercial Code of the State of New York. The undersigned
agrees that any action taken by the Bank in accordance with this paragraph shall
be deemed to be commercially reasonable.
10. As used in this agreement, the term" Event of Default" shall mean: (a)
nonpayment when due of any of the Liabilities or failure on the part of an
Obligor (as hereinafter defined) to observe or perform any agreement or
obligation to be observed or performed hereunder or under any other agreement or
instrument relating to the Liabilities or to any other liability or obligation
of an Obligor to the Bank; (b) making by an Obligor of any misrepresentation to
the Bank or failure on the part of an Obligor to disclose to the Bank any
material fact in connection with obtaining credit or an extension of credit,
either contemporaneously herewith or at any time prior or subsequent to the
execution hereof; (c) failure of an Obligor to furnish financial information
forthwith on demand by the Bank or to permit the inspection of any books or
records; (d) failure of an Obligor to pay, withhold, collect or remit when
assessed or due any tax, assessment or other sum payable with respect to any of
the Security (including without limitation any premium on any insurance policy
assigned to the Bank as part of the Security), or the making of any tax
assessment against any Obligor by the United States or any state or local
government; (e) commencement of any proceeding, procedure, or remedy
supplementary to or in enforcement of any judgement (including without
limitation a proceeding under Article 52 of the New York Civil Practice law and
Rules), issuance of any writ or order of attachment or garnishment, or the
existence of any other lien against or with respect to any property of an
Obligor; (f) death of an Obligor, if an individual, or any member of an Obligor,
if a partnership or Joints Venture; (g) dissolution, liquidation or other
termination of existence, or adoption of any resolution for the dissolution,
liquidation or other termination of existence, of any Obligor (h) suspension of
the usual business of an Obligor or the condemnation or seizure of a substantial
part of an Obligor's property by any governmental authority or court at the
instance thereof; (i) failure of an Obligor to generally pay its debts as they
become due or insolvency or business failure of an Obligor, filing of an
application for or appointment of a trustee, custodian or receiver for an
Obligor or of any part of an Obligor's property, assignment for the benefit of
creditors by an Obligor, filing of a petition in bankruptcy by or against an
Obligor, or commencement by or against an Obligor of any proceeding under any
bankruptcy or insolvency law or any other law relating to the relief of debtors,
readjustment of indebtedness, reorganization, receivership, composition or
extension; (j) making or sending notice of any intended bulk transfer by an
Obligor; (k) failure on the part of the undersigned or any of the Security to
comply with Regulation U of the Federal Reserve Board or any comparable
provision of law hereinafter enacted; (l) such a change in the condition or
affairs (financial or otherwise) of an Obligor as in the opinion of the Bank
impairs the Security or increases the Bank's risk with respect to the
Liabilities; or (m) default (which shall be continuing) with respect to any
indebtedness of an Obligor to any other individual or entity if such default
would enable said individual or entity to accelerate the maturity of such
indebtedness.
For the purposes of this agreement, the term "Obligor" shall include the
undersigned and any maker, drawer, acceptor, endorser, guarantor, hypothecator,
surety, accommodation party, or other party liable for any of the Liabilities in
addition to the undersigned.
11. Notwithstanding the continued possession of the Security by the Bank,
whether on its own behalf or on behalf of others, the undersigned shall remain
liable for the payment in full of the Liabilities. The undersigned assumes all
liability and responsibility for the Security, and the obligation of the
undersigned to pay the liabilities shall in no way be affected or diminished by
reason of the fact that any of the Security may be lost, destroyed, stolen,
damaged or for any other reason whatsoever unavailable to the undersigned or
that the value of the Security shall be diminished. In the event of any partial
or complete loss or destruction of any of the Security by any means, the
undersigned shall, at its own expense, cause such repairs to be made as the Bank
may deem appropriate for its protection or, at the option of the Bank, replace
the Security with new Security having a value equal to the value of the lost or
destroyed Security prior to such loss or destruction. The undersigned agrees, at
its own expense, to keep all insurable Security insured against loss or damage
by fire, theft or any other risk to which the Security may be subject (including
without limitation such hazards as the Bank may specify), for the full insurable
value thereof, under policies and with insurers acceptable to the Bank, which
policies shall provide for all losses to be payable to the Bank and for at least
30 days prior notice to the Bank of any intended cancellation or modification of
the policy. The undersigned will deliver to the Bank on request policies or
certificates of such insurance with evidence of payment of the premium thereon.
If the undersigned fails to maintain said insurance, then, in addition to any
other right or remedy that the Bank may have and without waiving the
consequences of such default, the Bank may but need not obtain and maintain said
insurance, at the expense of the undersigned, which expense shall be deemed one
of the Liabilities and shall be payable to the Bank on demand. The Bank is
irrevocably authorized to file claims and shall have the sole right to adjust,
settle and collect claims under said insurance by such means, at such times, on
such terms and in the name of the Bank or the undersigned, as the Bank may see
fit, and in the name and on behalf of the undersigned to execute releases and
endorse checks or drafts payable in respect of any such insurance claims. All
sums received by the Bank from any such insurance may be held as part of the
Security and/or applied as hereinafter provided.
12. The Bank, at any time, at its option, may apply all of any net cash
receipts from the Security (whether received on a sale of the Security in
accordance with paragraph 9 hereof, on collection in accordance with paragraph 5
hereof, as proceeds of insurance in accordance with paragraph 11 hereof, or
otherwise) to the payment, in whole or in part, of principal of and/or interest
on any or all of the Liabilities, whether or not then due, allocating the same
as it shall elect, making rebate of interest or discount to the extent required
by law and so as not to make the rate of interest ?pledged unlawful with respect
to the undersigned. If any Liabilities shall be contingent, the Bank may retain
a sufficient amount of the net cash receipts from the Security to cover the
largest aggregate sum which may become due or owing thereunder with prospective
interest, costs, expenses and attorneys' fees and shall not be charged with any
interest with respect thereto.
13. Until the occurrence of an Event of Default or notice from the Bank
terminating or limiting the right of the undersigned to do so, or, in the case
of the collection, compromise, or adjustment of accounts receivable, until the
Bank takes any action pursuant to paragraph (5)(e) hereof, the undersigned may
sell or lease in the ordinary course of its regular business inventory
constituting a part of the Security and may collect, compromise and adjust
accounts receivable constituting a part of the Security, all on such terms as
the undersigned may in good faith deem advisable in the ordinary course of its
regular business, and may retain all sums so collected. Except as permitted by
this paragraph 13, the undersigned may not sell, lease, assign or otherwise
dispose of any of the Security without the prior written consent of the Bank. In
addition, the undersigned may not sell, assign or otherwise dispose of any
shares of stock or other securities now owned or hereafter acquired by the
undersigned which are issued by the same issuer and are of the same class as any
shares of stock or other securities constituting a part of the Security. The
undersigned shall keep all of the Non-Possessory Security (as described in
Schedule A hereto) at the undersigned's premises listed in Schedule A hereto and
shall not remove any of the Non-Possessory Security therefrom without the Bank's
prior written consent.
14. In any litigation or legal proceeding arising out of, or relating to,
this agreement or any of the Liabilities or Security, in which the Bank and the
undersigned shall be adverse parties, the undersigned waives the right to
interpose any defense, set-off or counterclaim of any kind not directly arising
herefrom or therefrom, as the case may be, and also waives the right to a trial
by jury. In the event that the Bank brings any action or suit in any court of
record of New York State or the Federal Government to enforce any or all of the
Liabilities or any of the Bank's rights hereunder, service of process may be
made upon the undersigned by mailing a copy of the summons to the undersigned at
its chief executive office set forth in Schedule A hereto, and the undersigned
hereby irrevocably submits to the jurisdiction of any New York State or Federal
Court located in New York City over any action, suit or proceeding arising out
of any dispute between the undersigned and the Bank.
15. If in its sole discretion the Bank deems it desirable, it may remove
any Security held by it from the place where it may now or hereafter be located
to any other place and deal with it there as herein provided.
16. Upon the occurrence of an Event of Default, and at any time
thereafter, the Bank shall have and may exercise, without further notice, a
right of set-off and/or banker's lien against and in respect of any of the
Security then or thereafter held by the Bank. Any right of set-off exercised by
the Bank shall be deemed to have been exercised immediately on the occurrence of
an Event of Default, even though such set-off is made or entered on the books of
the Bank subsequent thereto.
17. If the time for payment of principal of or interest on any of the
Liabilities or any other money payable hereunder or with respect to any of the
Liabilities is extended because said sum becomes due on a Saturday, Sunday or
public holiday, interest shall be payable for such extended time.
18. The Bank shall not be deemed to have modified or waived any of its
rights hereunder or any terms or conditions hereof unless such modification or
waiver is in writing and signed by a duly authorized officer of the Bank. No
such modification or waiver, unless so expressly stated herein, shall be
effective as to any transaction which occurs subsequent to the date of such
modification or waiver nor shall it constitute a continuing modification or
waiver. No delay on the part of the Bank in exercising any power or right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any power or right hereunder preclude any other or further exercise
thereof or the exercise of any other power or right. All rights and remedies of
the Bank with respect to the Liabilities or Security, whether evidenced hereby
or by any other instrument or paper, shall be cumulative and may be exercised
singularly or concurrently.
19. The Bank may assign and/or transfer to any assignee or transferee of
any of the Liabilities any or all of the Security and the Bank's rights
hereunder with respect thereto, and thereafter the Bank shall be fully
discharged from all responsibility with respect to the Security so assigned
and/or transferred, Such assignee
<PAGE>
or transferee shall be vested with all the powers and rights of the Bank
hereunder with respect to such Security, but the Bank shall retain all rights
and powers hereby given with respect to any of the Security not so assigned or
transferred. The undersigned will not assert against any assignee or transferee
of any of the Liabilities any claims or defenses it may have against the Bank.
20. The undersigned hereby waives presentment, notice of dishonor and
protest with respect to all instruments included in or evidencing the
Liabilities or the Security and, except as specified herein, any and all other
notices and demands whatsoever, whether or not relating to such instruments.
21. The undersigned will indemnify and save the Bank harmless from and
against all loss or damage to it and any claims and actions, whether groundless
or otherwise, arising in connection with this agreement, the Liabilities or the
Security, and all costs and expenses (including attorneys' fees) incurred by the
Bank in respect thereof.
22. If any term, condition or provision of this agreement or any other
agreement or document executed in connection herewith or in connection with any
of the Liabilities or Security is determined to be invalid or unenforceable,
such determination shall not affect the validity or enforceability of any other
term, condition or provision.
23. Any demand upon or notice to the undersigned that the Bank may elect
to give shall be effective if deposited in the mails addressed to or otherwise
delivered to the undersigned at its chief executive office or if the undersigned
has notified the Bank in writing by registered mail of a change of address, at
the last address of which the Bank has received notice. Demands or notices
addressed or otherwise delivered to the address as which the Bank customarily
communicates with the undersigned shall also be effective.
24. If any of the Security is or is to be attached to or installed or
located on real estate, the undersigned will upon demand furnish the Bank with a
disclaimer signed by all persons having an interest in said real estate of any
interest prior to the Bank's interest in the Security.
25. From and after maturity (whether by acceleration or otherwise) of any
of the Liabilities, any unpaid balance remaining shall bear interest at the
higher of 12% per annum or 3% in excess of the rate specified in the instrument
evidencing the Liabilities. Anything in this agreement or any other agreement,
instrument or document to the contrary notwithstanding, in no event shall
interest on any Liability exceed the maximum rate permitted under any applicable
law or regulation, and if any provision of this agreement or any other
agreement, instrument or document is in contravention of any such law or
regulation, such provisions shall be deemed amended so provide for interest at
said maximum rate.
26. The undersigned, if more than one, shall be jointly and severally
liable hereunder and all provisions hereof regarding the Liabilities or Security
shall apply to any Liability or any Security of any or all of them. This
agreement shall be binding upon the heirs, executors, administrators, successors
and assigns of the undersigned and shall inure to the benefit of the Bank and
its successors and assigns. For purposes of this agreement, the term "Bank"
shall include the Bank any and all subsidiaries of the Bank. If all Liabilities
shall at any time be paid in full, this agreement shall nonetheless remain in
full force and effect with respect to any Liabilities thereafter incurred. If
the undersigned is a corporation, this agreement shall be binding upon any other
corporation into or with which the undersigned shall be merged, consolidated,
reorganized or absorbed, or which shall acquire the undersigned's business or
substantially all of its assets. If the undersigned is a partnership, the
members thereof shall also be individually bound and liable hereunder and this
agreement shall continue in force notwithstanding any change in or termination
of such partnership, whether such change occurs through death, retirement or
otherwise. Except as otherwise provided herein, all terms used herein which are
defined in the Uniform Commercial Code of the State of New York shall have the
meanings therein stated. If this agreement shall differ in terms with any other
agreement or obligation or the terms of any of the Liabilities, that which gives
the Bank the greater right shall prevail.
27. If any of the Security is applied on account of any of the
Liabilities, the undersigned shall not have any right of subrogation to the
Bank's right in any other Security held by the Bank with respect to the
Liabilities or any right of contribution from the Bank by reason thereof.
28. The Bank is authorized to correct patent errors herein. This agreement
shall take effect immediately upon execution by the undersigned, and the
execution hereof by the Bank shall not be required as a condition to the
effectiveness of this agreement.
29. Notwithstanding anything to the contrary contained herein, the term
"Security" as used herein shall be deemed to include any and all book-entry U.S.
Treasury bills and other book-entry securities purchased on behalf of the
undersigned and maintained in an account at the Bank, which may have a related
account at a bank which is a member of the Federal Reserve System. The
undersigned authorizes the Bank to serve as its bailee and agent with respect to
the aforementioned book-entry Treasury bills and other book-entry securities and
to take such action and so execute and deliver such documents on behalf of the
undersigned as the Bank deems necessary or desirable in order to perfect the
Bank's security interest therein. The undersigned hereby gives notice to the
Bank, in the Bank's capacity as bailee and agent, of the Bank's security
interest in the aforementioned book-entry Treasury bills and other book-entry
securities.
30. This agreement shall be interpreted, and all the rights and
obligations arising hereunder or from any document relating hereto shall be
determined, in accordance with the laws of the State of New York.
31. The undersigned represents and warrants that it is the sole beneficial
owner of the Security in which it purports to grant a security interest.
32. The undersigned represents and warrants that the pledged stock
evidenced by Certificate No. 1 in the name of the undersigned for 6,000 shares
("Certificate) is duly authorized, validly existing, fully paid and
non-assessable and none of such pledged stock is or will be subject to any
contractual restriction, or any restriction under the charter or by-laws of the
issuer of such pledged stock, upon the transfer of such pledged stock.
33. The undersigned represents and warrants that the pledged stock
evidenced by the Certificate constitutes all of the issued and outstanding
shares of capital stock of any class of the issuers thereof beneficially owned
by the undersigned on the date hereof (whether or not registered in the name of
the undersigned).
34. The undersigned agrees to deliver to the Bank all shares of stock of
Clearon, Inc. of whatever class, now or hereafter owned by the undersigned,
together with stock powers, executed in blank for each such certificate.
Data Systems & Software Inc.
(formerly Defense Software & Systems, Inc.)
[Name of borrower]
By: /s/ George Morgenstern
----------------------------------------
Its: President and Chief Executive
Officer
SCHEDULE A
The term "Security" shall include:
(1) All Possessory Security identified in paragraph (a) below,
(2) Unless box (v) below is checked and initialed by the Bank and the
undersigned, all Non-Possessory Security identified in paragraph (b) below
wherever located and whether now owned or hereafter acquired, and
(3) All substitutions for, all additions to (including without limitation
all dividends and other distributions on and all rights, privileges and
options relating to or declared or granted in connection with) and all
proceeds and products of all the foregoing in any form whatsoever
(including without limitation all proceeds of insurance thereon).
(a) Possessory Security shall mean the balance of every deposit account of
the undersigned with the Bank or any of the Bank's nominees or agents and all
other obligations of the Bank or any of its nominees or agents to the
undersigned, whether now existing or hereafter arising, and all other personal
property of the undersigned (including without limitation all money, accounts,
general intangibles, goods, instruments, documents and chattel paper) which, or
any evidence of which, are now or as any time in the future shall come into the
possession or under the control of or be in transit to the Bank or any of its
nominees or agents for any purpose, whether or not accepted for the purposes for
which it was delivered.
(b) Non-Possessory Security. Unless one or more boxes below are checked
and initialled by the Bank and the undersigned, Non-Possessory Security shall
mean all personal property of the undersigned, including without limitation all
accounts, general intangibles, goods, instruments, documents and chattel paper,
ONLY IF THE NON-POSSESSORY SECURITY IS TO BE LIMITED, SHOULD ANY OF THE BOXES
BELOW BE CHECKED AND INITIALLED. If any of boxes (i) through (iv) below are
checked and initialled by the Bank and the undersigned, the Non-Possessory
Security shall be limited to whatever is checked.
BANK UNDERSIGNED DESCRIPTION
___________________________________________________ [ ] (i) All Inventory and
Documents
___________________________________________________ [ ] (ii) All Accounts,
Chattel Paper and
Instruments and all
Goods returned to or
repossessed or otherwise
reacquired by the
undersigned which relate
to the foregoing
___________________________________________________ [ ] (iii) All Equipment and
Fixtures, including
without limitation the
equipment shown on the
attached schedule (if
any)
___________________________________________________ [X] (iv) All Property shown
on any attached schedule
___________________________________________________ [ ] (v) POSSESSORY SECURITY
ONLY
<PAGE>
The undersigned represents and warrants to the Bank that (a) the location
of the undersigned's chief executive office is as set forth below, (b) except as
set forth below, all of the Non-Possessory Security is located as the
undersigned's chief executive office, and (c) each premises where any of the
Non-Possessory Security us located is owned or leased by the undersigned.
Chief Executive Office--(street address: county; state; zip code):
200 Route 17
Mahwah, NJ 07430
Other premises where Security is located --(street address: county; state; zip
code):
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
New York, New York
______________________________, 19 ______
(Individuals sign below)
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
(Corporations or Partnerships sign below)
Data Systems & Software Inc.
- -----------------------------------------
(Name of Corporation or Partnership)
Chairman,
By: /s/ George Morgenstern President & CEO
- --------------------------------------------
(Title)
By: /s/ Sheldon Krause Secretary
- --------------------------------------------
(Title)
By:
- --------------------------------------------
(Title)
<PAGE>
SCHEDULE TO SECURITY AGREEMENT
Certificate Nos. 1 representing 6,000 shares of common stock of Tower
Semiconductor Holdings 1993 Ltd. issued to Data Systems & Software Inc. together
with all distributions, cash, instruments and other property or proceeds from
time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all such shares.
[LOGO]BankLeumi Exhibit 10.35
Trust Company of New York
Member FDIC
SECURITY AGREEMENT
** Wherever used herein, the name Bank Leumi Trust Company of New York is
replaced with the name Bank Leumi USA.
In consideration of financial accommodations heretofore extended or to be
extended or continued to the undersigned the BANK LEUMI TRUST COMPANY OF NEW
YORK (the "Bank"), the undersigned hereby agrees as follows:
1. As security for the full and prompt payment of any and all Liabilities
(as hereinafter defined), the undersigned hereby assigns and transfers to the
Bank and grants the Bank a security interest in all Security (as hereinafter
defined). Said grant is made for the benefit of the Bank and or any others
having a participation or other interest in any of the Liabilities, in such
proportions as the Bank shall in its sole discretion determine.
2. The term "Liabilities" as used herein shall include all liabilities and
obligations of any kind of the undersigned (or any partnership or other group of
which the undersigned is a member) of to (i) the Bank, (ii) any group of which
the Bank is a member or (iii) any other person if the Bank has a participation
or other interest in such liabilities or obligations, whether (a) for the Bank's
own account or as agent for others, (b) acquired directly or indirectly by the
Bank from the undersigned or others, (c) absolute or contingent, joint or
several, secured or unsecured, liquidated or unliquidated, due or not due,
contractual or tortious, now existing or hereinafter arising, or (d) incurred by
the undersigned as principal, surety, endorser, guarantor or otherwise, and
including without limitation all expenses, including attorneys' fees, incurred
by the Bank in connection with any such liabilities or obligations or any
Security therefor.
3. The term "Security" as used herein shall include all of the property
described in Schedule A hereto.
4. The right is granted to the Bank, in its discretion, to file one or
more financing statements (with or, to the extent permitted by law, without the
signature of the undersigned) under the Uniform Commercial Code naming the
undersigned as debtor and the Bank as secured party and indicating therein the
types or describing the items of Security herein specified. The undersigned will
execute, file and record any notices, affidavits or other documents and take all
such other actions as the Bank may deem appropriate to protect or perfect its
security interest in the Security or to otherwise accomplish the purposes of
this agreement. The undersigned hereby agrees to pay on demand, and/or
authorizes the Bank to charge its account with the cost of, any and all filing,
recording and other fees and expenses which the Bank deems appropriae in order
to protect or perfect its security or to otherwise accomplish the purpose of
this agreement, including without limitation the cost of all searches of public
records as the Bank in its sole discretion shall require. The undersigned will
promptly notify the Bank of the imposition at any time of any lien or
encumbrance upon any of the Security. Notwithstanding the foregoing, the
undersigned represents, warrants and covenants that all of the Security now
existing or hereafter arising or acquired is and will be owned by the
undersigned free and clear of all security interests, liens and encumbrances of
any kind, except for the security interest herein granted to the Bank. The
undersigned shall promptly pay when due all taxes and transportation, storage
and warehousing charges affecting or arising out of the Security. The
undersigned will defend the Security against all claims and demands of all
persons at any time claiming the same or any interest therein adverse to the
Bank.
Notwithstanding the foregoing, the Bank shall base no obligation to comply
with any recording, re-recording, filing, re-filing, or other legal requirements
necessary to establish or maintain the validity, priority or enforceability of,
or the Bank's right in or to, the Security or any part thereof.
5. The right is granted to the Bank, in its discretion, at any time, (a)
to transfer to or register in the name of itself or any of its nominees any of
the Security, and whether or not so transferred or registered, to receive the
income and dividends thereon, including stock dividends and rights to subscribe,
and to hold the same as a part of the Security and/or apply the same as
hereinafter provided; (b) to exchange any of the Security for other property
upon any reorganization, recapitalization, or other readjustment and in
connection therewith to deposit any of the Security with any committee or
depositary upon such terms as the Bank may determine, (c) in any bankruptcy or
similar proceeding to file a proof of claim for the full amount of the Security
and to vote such claim for or against any arrangement or with respect to any
other matter; (d) in its own name or in the name of the undersigned or any other
appropriate person, to demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for, or make any
compromise or settlement it may deem desirable with respect to, any of the
Security, (e) to extend the time of payment, arrange for payment in
installments, or otherwise modify the terms of, or release, any of the Security;
(f) to contest, pay and/or discharge all liens, encumbrances, taxes or
assessments on, or claims, actions or demands against, any of the Security and
to take all actions and proceedings in its own name or in the name of the
undersigned or any other appropriate person in order to remove or contest such
liens, encumbrances, taxes, assessments, claims, actions or demands; or to
refrain from doing any of the foregoing, all without affecting the Liabilities
and the Security and without notice or liability to or the consent of the
undersigned except to account for property actually received by the Bank. The
undersigned hereby irrevocably appoints the Bank its attorney-in-fact, with
authority to receive, open and dispose of all mail addressed to the undersigned
and its notify the Post Office authorities to change the address for delivery of
mail addressed to the undersigned to such address as the Bank may designate; to
endorse the name of the undersigned on any instruments that may come into the
Bank's possession; to sign the name of the undersigned on any notices its
account debtors of the undersigned and requests for verification of accounts; to
sign the name of the undersigned on any assignment or other instruments of
conveyance or transfer of any of the Security; and to take all such other
actions as the Bank may deem appropriate to carry our and enforce this agreement
and to exercise the Bank's rights hereunder. The Bank shall not be obligated to
exercise any authority or right granted to it hereunder and shall not be liable
for any action taken or omitted or the manner of taking any action, except for
its willful misconduct, and in no event for consequential damages.
6. The undersigned will pay to the Bank all costs and expenses incurred
and sums paid by the Bank (including without limitation attorneys' fees,
insurance premiums and sales commissions) in connection with the custody, care,
collection, repair, storage or preparation for or any actual or attempted
disposition of any of the Security, the collection of any proceeds of insurance
with respect to the Security or otherwise in connection with this agreement.
7. At any time and from time to time, upon demand by the Bank, the
undersigned will (a) deliver to the Bank, endorsed and/or accompanied by
instruments of assignment and transfer, in such form and containing such terms
as the Bank may request, any and all instruments, documents and/or chattel paper
constituting part of the Security, as the Bank may specify in its demand, (b)
mark all Security and all books and records relating thereto in such manner as
the Bank may require, and (c) permit representatives of the Bank at any time to
inspect the Security and to inspect and make abstracts from any of the
undersigned's books and records and to answer promptly all of the Bank's written
or oral inquiries with respect thereto, If the undersigned, as registered holder
of any of the Security, shall receive any stock certificate, option or right,
whether as an addition to, or in substitution or exchange for, any Security, or
otherwise, the undersigned agrees to accept the same as the Bank's agent and to
hold the same in trust for the Bank, and to forthwith deliver the same to the
Bank in the exact form received, with the undersigned's endorsement thereof if
requested by the Bank, to be held by the Bank as part of the Security. The
undersigned assigns to the Bank all of the undersigned's rights (but none of its
obligations) in, to and under all collateral, guarantees, subordinations and
other rights and benefits now or hereafter received by the undersigned with
respect to the Security and agrees to deliver to the Bank, upon demand, all
agreements, instruments and/or documents evidencing same, endorsed and/or
accompanied by instruments of assignment and transfer, in such form and
containing such terms as the Bank may request.
8. Upon demand from the Bank at any time that any of the Liabilities are
outstanding, the undersigned will assign and transfer to the Bank and grant to
the Bank a security interest in additional Security of a value and character
satisfactory to the Bank or make such payment on account of the Liabilities as
the Bank may require.
9. Upon the occurrence of an Event of Default (as hereinafter defined),
(a) any or all of the Liabilities shall, at the option of the Bank and
notwithstanding any time or credit allowed by any instrument evidencing a
Liability, be immediately due and payable without notice, demand or presentment;
(b) the Bank may, in its discretion, take possession of the Security and, for
that purpose, may enter, with the assistance of any persons, any premises where
the Security or any part thereof may be located, and retain possession of the
Security at such premises or remove the same therefrom; (c) the undersigned
shall, at the request of the Bank, assemble the Security at such places as the
Bank may designate and cooperate in all other respects with the Bank in the
exercise of its rights hereunder; (d) the Bank may vote any shares of stock or
other securities and exercise all or any powers with respect thereto with the
same force and effect as an absolute owner thereof; (e) the Bank may sell any of
the Security or cause the same to be sold in the Borough of Manhattan, New York
City, or elsewhere, in one or more sales or parcels, at such price and on such
terms as the Bank may deem advisable, for cash or on credit, for immediate or
future delivery, without assumption of any credit risk, at any public or private
sales or other dispositions, without demand of performance (which demand is
hereby expressly waived), on at least 5 days notice to the undersigned (if any
notice is required by law) of any public sale or the time after which a private
sale or other disposition may be made (which notice the undersigned acknowledges
is reasonable), and in connection therewith may grant options and may impose
reasonable conditions thereon, and the purchasers of
Form No. 421 (R 2/83)
<PAGE>
any of the Security so sold shall thereafter hold the same absolutely, free from
any claim or right of any kind, including any equity of redemption of the
undersigned (any such equity being hereby expressly waived and released), and
the Bank or any of its nominees or agents may buy at any public sale and if the
Security is of a type sold in a recognized market, or is of a type which is the
subject of widely distributed standard price quotations, buy at private sale;
and (f) in addition to and notwithstanding any other rights granted by law or
herein (or any limitations contained herein on any such rights), the Bank shall
have the rights and remedies with respect to the Security of a secured party
under the Uniform Commercial Code of the State of New York. The undersigned
agrees that any action taken by the Bank in accordance with this paragraph shall
be deemed to be commercially reasonable.
10. As used in this agreement, the term" Event of Default" shall mean: (a)
nonpayment when due of any of the Liabilities or failure on the part of an
Obligor (as hereinafter defined) to observe or perform any agreement or
obligation to be observed or performed hereunder or under any other agreement or
instrument relating to the Liabilities or to any other liability or obligation
of an Obligor to the Bank; (b) making by an Obligor of any misrepresentation to
the Bank or failure on the part of an Obligor to disclose to the Bank any
material fact in connection with obtaining credit or an extension of credit,
either contemporaneously herewith or at any time prior or subsequent to the
execution hereof; (c) failure of an Obligor to furnish financial information
forthwith on demand by the Bank or to permit the inspection of any books or
records; (d) failure of an Obligor to pay, withhold, collect or remit when
assessed or due any tax, assessment or other sum payable with respect to any of
the Security (including without limitation any premium on any insurance policy
assigned to the Bank as part of the Security), or the making of any tax
assessment against any Obligor by the United States or any state or local
government; (e) commencement of any proceeding, procedure, or remedy
supplementary to or in enforcement of any judgement (including without
limitation a proceeding under Article 52 of the New York Civil Practice law and
Rules), issuance of any writ or order of attachment or garnishment, or the
existence of any other lien against or with respect to any property of an
Obligor; (f) death of an Obligor, if an individual, or any member of an Obligor,
if a partnership or Joints Venture; (g) dissolution, liquidation or other
termination of existence, or adoption of any resolution for the dissolution,
liquidation or other termination of existence, of any Obligor (h) suspension of
the usual business of an Obligor or the condemnation or seizure of a substantial
part of an Obligor's property by any governmental authority or court at the
instance thereof; (i) failure of an Obligor to generally pay its debts as they
become due or insolvency or business failure of an Obligor, filing of an
application for or appointment of a trustee, custodian or receiver for an
Obligor or of any part of an Obligor's property, assignment for the benefit of
creditors by an Obligor, filing of a petition in bankruptcy by or against an
Obligor, or commencement by or against an Obligor of any proceeding under any
bankruptcy or insolvency law or any other law relating to the relief of debtors,
readjustment of indebtedness, reorganization, receivership, composition or
extension; (j) making or sending notice of any intended bulk transfer by an
Obligor; (k) failure on the part of the undersigned or any of the Security to
comply with Regulation U of the Federal Reserve Board or any comparable
provision of law hereinafter enacted; (l) such a change in the condition or
affairs (financial or otherwise) of an Obligor as in the opinion of the Bank
impairs the Security or increases the Bank's risk with respect to the
Liabilities; or (m) default (which shall be continuing) with respect to any
indebtedness of an Obligor to any other individual or entity if such default
would enable said individual or entity to accelerate the maturity of such
indebtedness.
For the purposes of this agreement, the term "Obligor" shall include the
undersigned and any maker, drawer, acceptor, endorser, guarantor, hypothecator,
surety, accommodation party, or other party liable for any of the Liabilities in
addition to the undersigned.
11. Notwithstanding the continued possession of the Security by the Bank,
whether on its own behalf or on behalf of others, the undersigned shall remain
liable for the payment in full of the Liabilities. The undersigned assumes all
liability and responsibility for the Security, and the obligation of the
undersigned to pay the liabilities shall in no way be affected or diminished by
reason of the fact that any of the Security may be lost, destroyed, stolen,
damaged or for any other reason whatsoever unavailable to the undersigned or
that the value of the Security shall be diminished. In the event of any partial
or complete loss or destruction of any of the Security by any means, the
undersigned shall, at its own expense, cause such repairs to be made as the Bank
may deem appropriate for its protection or, at the option of the Bank, replace
the Security with new Security having a value equal to the value of the lost or
destroyed Security prior to such loss or destruction. The undersigned agrees, at
its own expense, to keep all insurable Security insured against loss or damage
by fire, theft or any other risk to which the Security may be subject (including
without limitation such hazards as the Bank may specify), for the full insurable
value thereof, under policies and with insurers acceptable to the Bank, which
policies shall provide for all losses to be payable to the Bank and for at least
30 days prior notice to the Bank of any intended cancellation or modification of
the policy. The undersigned will deliver to the Bank on request policies or
certificates of such insurance with evidence of payment of the premium thereon.
If the undersigned fails to maintain said insurance, then, in addition to any
other right or remedy that the Bank may have and without waiving the
consequences of such default, the Bank may but need not obtain and maintain said
insurance, at the expense of the undersigned, which expense shall be deemed one
of the Liabilities and shall be payable to the Bank on demand. The Bank is
irrevocably authorized to file claims and shall have the sole right to adjust,
settle and collect claims under said insurance by such means, at such times, on
such terms and in the name of the Bank or the undersigned, as the Bank may see
fit, and in the name and on behalf of the undersigned to execute releases and
endorse checks or drafts payable in respect of any such insurance claims. All
sums received by the Bank from any such insurance may be held as part of the
Security and/or applied as hereinafter provided.
12. The Bank, at any time, at its option, may apply all of any net cash
receipts from the Security (whether received on a sale of the Security in
accordance with paragraph 9 hereof, on collection in accordance with paragraph 5
hereof, as proceeds of insurance in accordance with paragraph 11 hereof, or
otherwise) to the payment, in whole or in part, of principal of and/or interest
on any or all of the Liabilities, whether or not then due, allocating the same
as it shall elect, making rebate of interest or discount to the extent required
by law and so as not to make the rate of interest ?pledged unlawful with respect
to the undersigned. If any Liabilities shall be contingent, the Bank may retain
a sufficient amount of the net cash receipts from the Security to cover the
largest aggregate sum which may become due or owing thereunder with prospective
interest, costs, expenses and attorneys' fees and shall not be charged with any
interest with respect thereto.
13. Until the occurrence of an Event of Default or notice from the Bank
terminating or limiting the right of the undersigned to do so, or, in the case
of the collection, compromise, or adjustment of accounts receivable, until the
Bank takes any action pursuant to paragraph (5)(e) hereof, the undersigned may
sell or lease in the ordinary course of its regular business inventory
constituting a part of the Security and may collect, compromise and adjust
accounts receivable constituting a part of the Security, all on such terms as
the undersigned may in good faith deem advisable in the ordinary course of its
regular business, and may retain all sums so collected. Except as permitted by
this paragraph 13, the undersigned may not sell, lease, assign or otherwise
dispose of any of the Security without the prior written consent of the Bank. In
addition, the undersigned may not sell, assign or otherwise dispose of any
shares of stock or other securities now owned or hereafter acquired by the
undersigned which are issued by the same issuer and are of the same class as any
shares of stock or other securities constituting a part of the Security. The
undersigned shall keep all of the Non-Possessory Security (as described in
Schedule A hereto) at the undersigned's premises listed in Schedule A hereto and
shall not remove any of the Non-Possessory Security therefrom without the Bank's
prior written consent.
14. In any litigation or legal proceeding arising out of, or relating to,
this agreement or any of the Liabilities or Security, in which the Bank and the
undersigned shall be adverse parties, the undersigned waives the right to
interpose any defense, set-off or counterclaim of any kind not directly arising
herefrom or therefrom, as the case may be, and also waives the right to a trial
by jury. In the event that the Bank brings any action or suit in any court of
record of New York State or the Federal Government to enforce any or all of the
Liabilities or any of the Bank's rights hereunder, service of process may be
made upon the undersigned by mailing a copy of the summons to the undersigned at
its chief executive office set forth in Schedule A hereto, and the undersigned
hereby irrevocably submits to the jurisdiction of any New York State or Federal
Court located in New York City over any action, suit or proceeding arising out
of any dispute between the undersigned and the Bank.
15. If in its sole discretion the Bank deems it desirable, it may remove
any Security held by it from the place where it may now or hereafter be located
to any other place and deal with it there as herein provided.
16. Upon the occurrence of an Event of Default, and at any time
thereafter, the Bank shall have and may exercise, without further notice, a
right of set-off and/or banker's lien against and in respect of any of the
Security then or thereafter held by the Bank. Any right of set-off exercised by
the Bank shall be deemed to have been exercised immediately on the occurrence of
an Event of Default, even though such set-off is made or entered on the books of
the Bank subsequent thereto.
17. If the time for payment of principal of or interest on any of the
Liabilities or any other money payable hereunder or with respect to any of the
Liabilities is extended because said sum becomes due on a Saturday, Sunday or
public holiday, interest shall be payable for such extended time.
18. The Bank shall not be deemed to have modified or waived any of its
rights hereunder or any terms or conditions hereof unless such modification or
waiver is in writing and signed by a duly authorized officer of the Bank. No
such modification or waiver, unless so expressly stated herein, shall be
effective as to any transaction which occurs subsequent to the date of such
modification or waiver nor shall it constitute a continuing modification or
waiver. No delay on the part of the Bank in exercising any power or right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any power or right hereunder preclude any other or further exercise
thereof or the exercise of any other power or right. All rights and remedies of
the Bank with respect to the Liabilities or Security, whether evidenced hereby
or by any other instrument or paper, shall be cumulative and may be exercised
singularly or concurrently.
19. The Bank may assign and/or transfer to any assignee or transferee of
any of the Liabilities any or all of the Security and the Bank's rights
hereunder with respect thereto, and thereafter the Bank shall be fully
discharged from all responsibility with respect to the Security so assigned
and/or transferred, Such assignee
<PAGE>
or transferee shall be vested with all the powers and rights of the Bank
hereunder with respect to such Security, but the Bank shall retain all rights
and powers hereby given with respect to any of the Security not so assigned or
transferred. The undersigned will not assert against any assignee or transferee
of any of the Liabilities any claims or defenses it may have against the Bank.
20. The undersigned hereby waives presentment, notice of dishonor and
protest with respect to all instruments included in or evidencing the
Liabilities or the Security and, except as specified herein, any and all other
notices and demands whatsoever, whether or not relating to such instruments.
21. The undersigned will indemnify and save the Bank harmless from and
against all loss or damage to it and any claims and actions, whether groundless
or otherwise, arising in connection with this agreement, the Liabilities or the
Security, and all costs and expenses (including attorneys' fees) incurred by the
Bank in respect thereof.
22. If any term, condition or provision of this agreement or any other
agreement or document executed in connection herewith or in connection with any
of the Liabilities or Security is determined to be invalid or unenforceable,
such determination shall not affect the validity or enforceability of any other
term, condition or provision.
23. Any demand upon or notice to the undersigned that the Bank may elect
to give shall be effective if deposited in the mails addressed to or otherwise
delivered to the undersigned at its chief executive office or if the undersigned
has notified the Bank in writing by registered mail of a change of address, at
the last address of which the Bank has received notice. Demands or notices
addressed or otherwise delivered to the address as which the Bank customarily
communicates with the undersigned shall also be effective.
24. If any of the Security is or is to be attached to or installed or
located on real estate, the undersigned will upon demand furnish the Bank with a
disclaimer signed by all persons having an interest in said real estate of any
interest prior to the Bank's interest in the Security.
25. From and after maturity (whether by acceleration or otherwise) of any
of the Liabilities, any unpaid balance remaining shall bear interest at the
higher of 12% per annum or 3% in excess of the rate specified in the instrument
evidencing the Liabilities. Anything in this agreement or any other agreement,
instrument or document to the contrary notwithstanding, in no event shall
interest on any Liability exceed the maximum rate permitted under any applicable
law or regulation, and if any provision of this agreement or any other
agreement, instrument or document is in contravention of any such law or
regulation, such provisions shall be deemed amended so provide for interest at
said maximum rate.
26. The undersigned, if more than one, shall be jointly and severally
liable hereunder and all provisions hereof regarding the Liabilities or Security
shall apply to any Liability or any Security of any or all of them. This
agreement shall be binding upon the heirs, executors, administrators, successors
and assigns of the undersigned and shall inure to the benefit of the Bank and
its successors and assigns. For purposes of this agreement, the term "Bank"
shall include the Bank any and all subsidiaries of the Bank. If all Liabilities
shall at any time be paid in full, this agreement shall nonetheless remain in
full force and effect with respect to any Liabilities thereafter incurred. If
the undersigned is a corporation, this agreement shall be binding upon any other
corporation into or with which the undersigned shall be merged, consolidated,
reorganized or absorbed, or which shall acquire the undersigned's business or
substantially all of its assets. If the undersigned is a partnership, the
members thereof shall also be individually bound and liable hereunder and this
agreement shall continue in force notwithstanding any change in or termination
of such partnership, whether such change occurs through death, retirement or
otherwise. Except as otherwise provided herein, all terms used herein which are
defined in the Uniform Commercial Code of the State of New York shall have the
meanings therein stated. If this agreement shall differ in terms with any other
agreement or obligation or the terms of any of the Liabilities, that which gives
the Bank the greater right shall prevail.
27. If any of the Security is applied on account of any of the
Liabilities, the undersigned shall not have any right of subrogation to the
Bank's right in any other Security held by the Bank with respect to the
Liabilities or any right of contribution from the Bank by reason thereof.
28. The Bank is authorized to correct patent errors herein. This agreement
shall take effect immediately upon execution by the undersigned, and the
execution hereof by the Bank shall not be required as a condition to the
effectiveness of this agreement.
29. Notwithstanding anything to the contrary contained herein, the term
"Security" as used herein shall be deemed to include any and all book-entry U.S.
Treasury bills and other book-entry securities purchased on behalf of the
undersigned and maintained in an account at the Bank, which may have a related
account at a bank which is a member of the Federal Reserve System. The
undersigned authorizes the Bank to serve as its bailee and agent with respect to
the aforementioned book-entry Treasury bills and other book-entry securities and
to take such action and so execute and deliver such documents on behalf of the
undersigned as the Bank deems necessary or desirable in order to perfect the
Bank's security interest therein. The undersigned hereby gives notice to the
Bank, in the Bank's capacity as bailee and agent, of the Bank's security
interest in the aforementioned book-entry Treasury bills and other book-entry
securities.
30. This agreement shall be interpreted, and all the rights and
obligations arising hereunder or from any document relating hereto shall be
determined, in accordance with the laws of the State of New York.
SCHEDULE A
The term "Security" shall include:
(1) All Possessory Security identified in paragraph (a) below,
(2) Unless box (v) below is checked and initialed by the Bank and the
undersigned, all Non-Possessory Security identified in paragraph (b) below
wherever located and whether now owned or hereafter acquired, and
(3) All substitutions for, all additions to (including without limitation
all dividends and other distributions on and all rights, privileges and
options relating to or declared or granted in connection with) and all
proceeds and products of all the foregoing in any form whatsoever
(including without limitation all proceeds of insurance thereon).
(a) Possessory Security shall mean the balance of every deposit account of
the undersigned with the Bank or any of the Bank's nominees or agents and all
other obligations of the Bank or any of its nominees or agents to the
undersigned, whether now existing or hereafter arising, and all other personal
property of the undersigned (including without limitation all money, accounts,
general intangibles, goods, instruments, documents and chattel paper) which, or
any evidence of which, are now or as any time in the future shall come into the
possession or under the control of or be in transit to the Bank or any of its
nominees or agents for any purpose, whether or not accepted for the purposes for
which it was delivered.
(b) Non-Possessory Security. Unless one or more boxes below are checked
and initialled by the Bank and the undersigned, Non-Possessory Security shall
mean all personal property of the undersigned, including without limitation all
accounts, general intangibles, goods, instruments, documents and chattel paper,
ONLY IF THE NON-POSSESSORY SECURITY IS TO BE LIMITED, SHOULD ANY OF THE BOXES
BELOW BE CHECKED AND INITIALLED. If any of boxes (i) through (iv) below are
checked and initialled by the Bank and the undersigned, the Non-Possessory
Security shall be limited to whatever is checked.
BANK UNDERSIGNED DESCRIPTION
___________________________________________________ [ ] (i) All Inventory and
Documents
___________________________________________________ [ ] (ii) All Accounts,
Chattel Paper and
Instruments and all
Goods returned to or
repossessed or otherwise
reacquired by the
undersigned which relate
to the foregoing
___________________________________________________ [ ] (iii) All Equipment and
Fixtures, including
without limitation the
equipment shown on the
attached schedule (if
any)
___________________________________________________ [ ] (iv) All Property shown
on any attached schedule
___________________________________________________ [ ] (v) POSSESSORY SECURITY
ONLY
<PAGE>
The undersigned represents and warrants to the Bank that (a) the location
of the undersigned's chief executive office is as set forth below, (b) except as
set forth below, all of the Non-Possessory Security is located as the
undersigned's chief executive office, and (c) each premises where any of the
Non-Possessory Security us located is owned or leased by the undersigned.
Chief Executive Office--(street address: county; state; zip code):
200 Route 17
Mahwah, NJ 07430
Other premises where Security is located --(street address: county; state; zip
code):
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
New York, New York
______________________________, 19 ______
(Individuals sign below)
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
(Corporations or Partnerships sign below)
Databit Inc.
- -----------------------------------------
(Name of Corporation or Partnership)
By: /s/ Shlomie Morgenstern Treasurer
- --------------------------------------------
(Title)
By: /s/ Sheldon Krause Assistant Secretary
- --------------------------------------------
(Title)
By:
- --------------------------------------------
(Title)
PROMISSORY NOTE
US$650,000.00 Mahwah, New Jersey
December 31, 1997
FOR VALUE RECEIVED, George Morgenstern (the "Borrower"), hereby promises
to pay to the order of DATA SYSTEMS & SOFTWARE INC., a Delaware corporation (the
"Lender"), at the office of the Lender at 200 Route 17, Mahwah, New Jersey
07430, the principal sum of Six Hundred Fifty Thousand Dollars ($650,000.00) in
lawful money of the United States of America plus interest from the date hereof
on such principal amount hereof at the rate of 7% per annum, payable in like
funds, at said offices.
The principal amount of this Note and interest thereon shall be payable as
follows: (i) one hundred five (105) bi-weekly payments of $3,000 each,
commencing on January 2, 1998; (ii) four (4) annual payments of $72,000 each,
commencing on December 31, 1998; and (iii) one (1) final payment of the then
unpaid principal amount of the Note and all interest accrued thereon, on
December 31, 2001. All installments shall be applied first against any accrued
and unpaid interest and then against principal.
By written notice to the Borrower, this Note shall be declared immediately
due and payable in full in the event that any overdue payment of principal or
interest is not paid in full within thirty (30) days after such notice.
The Borrower shall have the right to prepay this Note in whole or in part,
without premium or penalty. The Borrower hereby waives diligence, presentment,
demand, protest and notice of any kind whatsoever. The non-exercise by the
holder of this Note of any of its rights hereunder in any particular instance
shall not constitute a waiver thereof in that or any subsequent instance.
This Note will be secured by a guarantee of Florence Morgenstern (the
"Guarantor") and by the recording of a mortgage lien on the Guarantor's
leasehold interest in the apartment identified in the Israel Land Registry in
Jerusalem as Parcel 6 in Block 30165, Apartment 17, Building 1 (the
"Apartment").
The outstanding principal of this Note and all interest accrued thereon
shall be due and payable upon the sale of the Guarantor's leasehold interest in
the Apartment.
IN WITNESS WHEREOF, the undersigned has executed this Note this 31st
day of December, 1997.
/s/ George Morgenstern
----------------------
George Morgenstern
<PAGE>
GUARANTEE
FOR VALUE RECEIVED, the undersigned hereby unconditionally guarantees the
punctual payment when due, at stated maturity, by acceleration or otherwise, of
all obligations now or hereafter existing of George Morgenstern under that
certain Promissory Note dated December 31, 1997 in the principal amount of Six
Hundred Fifty Thousand Dollars ($650,000.00).
This guarantee will be secured by recording of mortgage lien on the
Guarantor's leasehold interest in the apartment identified in the Israel Land
Registry in Jerusalem, where the lease was registered in the Guarantor's name on
December 15, 1996, as Parcel 6 in Block 30165, Apartment 17, Building 1.
The Guarantor waives notice of acceptance of this guarantee by the
Borrower and notice of presentment, demand for payment, protest and any notices
of default in the payment of the Note.
The Guarantor represents that at the time of execution and delivery of
this Guarantee, no condition or breach of any obligation exists to impair the
effectiveness of the liability of the Guarantor to the Lender hereunder or the
immediate taking effect of this Guarantee as the sole agreement between the
Guarantor and the Lender with respect to guaranteeing the Borrower's obligations
to the Lender under the Note.
The Guarantor waives any requirement that the Lender or its successors or
assigns, first make demand upon, or seek to enforce remedies against, the
Borrower before seeking to enforce this Guarantee.
The whole of this Guarantee is herein set forth and there is no verbal or
other written agreement, and no understanding or custom, affecting the terms
hereof. This Guarantee may be modified only by a written instrument signed by
the party to be charged therewith.
This Guarantee is delivered and made in, and shall be construed pursuant
to the laws of, the State of New York and is legally binding in accordance with
the terms and conditions contained herein upon the Guarantor and its legal
representatives, successors or assigns.
IN WITNESS WHEREOF, the undersigned has executed this Guarantee this day
31st of December 1997.
/s/ Florence Morgenstern
------------------------
Florence Morgenstern
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF ROCKLAND )
On the 31st day of December 1997 before me personally came Florence Morgenstern,
to me known to be the individual who executed the foregoing instrument, and
acknowledged that she executed the same.
------------------
Notary Public
Exhibit 21.1
- --------------------------------------------------------------------------------
Subsidiary Parent
- ---------- ------
- --------------------------------------------------------------------------------
Decision Systems Israel Limited DSSI
- --------------------------------------------------------------------------------
D.S.S. Defense Systems and Software Ltd. Decision Systems Israel Limited
- --------------------------------------------------------------------------------
D.I. Aerospace Software N.V. DSSI
- --------------------------------------------------------------------------------
DSI, S.A. D.I. Aerospace
- --------------------------------------------------------------------------------
The Korfund Co. (Canada) Ltd. DSSI
- --------------------------------------------------------------------------------
International Data Operations, Inc. DSSI
- --------------------------------------------------------------------------------
Databit Inc. DSSI
- --------------------------------------------------------------------------------
Tower Semiconductor Holdings (1993) Ltd. DSSI
- --------------------------------------------------------------------------------
Tower Semiconductor Ltd. Tower Semiconductor Holdings
- --------------------------------------------------------------------------------
ComMuNet Inc. DSSI
- --------------------------------------------------------------------------------
CybrCard Inc. DSSI
- --------------------------------------------------------------------------------
Cybrcard LP DSSI
- --------------------------------------------------------------------------------
Comverge Technologies Inc. DSSI
- --------------------------------------------------------------------------------
Exhibit 24.1
[DELOITTE & TOUCHE LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements of
Data Systems & Software Inc. (Forms S-3 Nos. 33-81298 and 33-94428 and Forms S-8
Nos. 33-88442 and 33-99196) of our report dated March 30, 1998 (relating to
Data Systems & Software Inc.), appearing in the Annual Report on Form 10-K of
Data Systems & Software Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
New York, New York
March 31, 1998
Exhibit 24.2
[DELOITTE TOUCHE TOHMATSU IGAL BRIGHTMAN & CO. LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements of
Data Systems & Software Inc. (Forms S-3 Nos. 33-81298 and 33-94428 and Forms
S-8 Nos. 33-88442 and 33-99196) of our reports dated March 31, 1997 (relating
to Data Systems & Software Inc.) and January 27, 1998 (relating to Tower
Semiconductor Ltd.), appearing in the Annual Report on Form 10-K of Data
Systems & Software Inc. for the year ended December 31, 1997.
IGAL BRIGHTMAN & CO.
Certified Public Accountants (Isr.)
Tel Aviv, Israel
March 31, 1998
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,283
<SECURITIES> 1,600
<RECEIVABLES> 9,441
<ALLOWANCES> 438
<INVENTORY> 377
<CURRENT-ASSETS> 17,957
<PP&E> 5,108
<DEPRECIATION> 2,927
<TOTAL-ASSETS> 97,471
<CURRENT-LIABILITIES> 10,483
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 56,158
<TOTAL-LIABILITY-AND-EQUITY> 97,471
<SALES> 19,950
<TOTAL-REVENUES> 39,996
<CGS> 16,744
<TOTAL-COSTS> 32,437
<OTHER-EXPENSES> 19,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (225)
<INCOME-PRETAX> (12,161)
<INCOME-TAX> 3,032
<INCOME-CONTINUING> (15,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,939)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
