<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 ON
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 COMMISSION FILE NUMBER 0-19771
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
------------------------------------------
DELAWARE 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 ROUTE 17, MAHWAH, NEW JERSEY 07430
(Address of principal executive offices) (Zip code)
(201) 529-2026
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
Number of shares outstanding of the registrant's common stock, as of
April 30, 1998: 7,369,178
================================================================================
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q REFLECTS CERTAIN AMENDMENTS MADE
BY THE REGISTRANT RESTATING ITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD PRESENTED HEREIN AS DESCRIBED IN NOTE 7 TO THE REGISTRANT'S
CONSOLIDATED FINANCIAL STATEMENTS. THE RESTATEMENT RELATES TO AN ORDER OF THE
ISRAEL SECURITIES AUTHORITY THAT THE REGISTRANT'S DECISION SYSTEMS ISRAEL
LTD. SUBSIDIARY RESTATE ITS FINANCIAL STATEMENTS FOR ALL PERIODS COMMENCING
DECEMBER 31, 1992 THROUGH MARCH 31, 1998 AND EXPENSE CERTAIN ITEMS ON ITS
BALANCE SHEETS, PRIMARILY ALL PREVIOUSLY CAPITALIZED SOFTWARE DEVELOPMENT
COSTS ASSOCIATED WITH ITS ELECTRIC POWER SUPPLY MANAGEMENT SYSTEM. UNLESS
OTHERWISE NOTED, ALL INFORMATION PROVIDED IN THIS QUARTERLY REPORT ON FORM
10Q IS CURRENT AS OF MAY 14, 1998, THE ORIGINAL FILING DATE OF THE FORM 10-Q.
INFORMATION REGARDING RECENT EVENTS AT THE REGISTRANT CAN BE OBTAINED FROM
RECENT PERIODIC REPORTS FILED BY THE REGISTRANT WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheets (Restated) as of December 31, 1997 and March 31, 1998........... 1
Consolidated Statements of Operations (Restated) for the three month periods ended
March 31, 1997 and 1998.................................................................. 2
Consolidated Statement of Changes in Shareholders' Equity (Restated) for the three month period
ended March 31, 1998..................................................................... 3
Consolidated Statements of Cash Flows (Restated) for the three month periods ended
March 31, 1997 and 1998.................................................................. 4
Schedules to Consolidated Statements of Cash Flows (Restated) for the three month periods
ended March 31, 1997 and 1998............................................................ 5
Notes to Consolidated Financial Statements ............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 10
Item 6. Exhibits and Reports on Form 8-K ........................................................... 10
SIGNATURES ............................................................................................ 11
</TABLE>
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 Registrant.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1997 1998
-------- --------
(UNAUDITED)
(AS RESTATED; SEE NOTE 7)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,424 $ 1,400
Short-term interest bearing bank deposits 73 223
Marketable debt securities 1,600 -
Restricted cash 1,786 330
Trade accounts receivable, net 9,003 10,346
Inventory 377 841
Note receivable 2,248 2,289
Other current assets 1,173 897
-------- --------
Total current assets 17,684 16,326
-------- --------
Investments 70,695 70,091
-------- --------
Property and equipment, net 2,181 2,475
-------- --------
Other assets:
Intangible assets, net 338 755
Other 1,468 1,364
-------- --------
1,806 2,119
-------- --------
Total assets $ 92,366 $ 91,011
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - banks and others $ 2,581 $ 1,909
Current maturities of long-term debt - banks and others 1,128 1,181
Trade accounts payable 2,606 4,960
Accrued payroll, payroll taxes and social benefits 2,464 2,685
Other current liabilities 1,704 1,590
-------- --------
Total current liabilities 10,483 12,325
-------- --------
Long-term liabilities 481 561
-------- --------
Minority interests 29,094 28,666
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized - 20,000,000 shares; Issued - 7,708,540 shares 77 77
Additional paid-in capital 34,193 34,242
Retained earnings 19,886 16,988
-------- --------
54,156 51,307
Treasury stock, at cost - 339,362 shares (1,848) (1,848)
-------- --------
Total shareholders' equity 52,308 49,459
-------- --------
Total liabilities and shareholders' equity $ 92,366 $ 91,011
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-1-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1998
-------- --------
(AS RESTATED; SEE NOTE 7)
<S> <C> <C>
Sales:
Products $ 5,403 $ 6,765
Services 4,637 4,952
-------- --------
10,040 11,717
-------- --------
Cost of sales:
Products 6,324 5,797
Services 3,965 3,402
-------- --------
10,289 9,199
-------- --------
Gross profit (loss) (249) 2,518
-------- --------
Research and development expenses, net 338 342
Selling, general and administrative expenses 4,391 4,889
-------- --------
Operating loss (4,978) (2,713)
Interest income 260 61
Interest expense (152) (92)
Other income, net 2 45
-------- --------
Loss before income taxes (4,868) (2,699)
Income tax expense 484 23
-------- --------
Loss after income taxes (5,352) (2,722)
Minority interests 245 173
Equity (loss) in affiliates 1,041 (349)
-------- --------
Net loss $ (4,066) $ (2,898)
======== ========
Basic net loss per share $ (0.55) $ (0.39)
======== ========
Weighted average number of shares outstanding (in thousands) 7,369 7,369
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER ADDITIONAL
OF COMMON PAID-IN TREASURY RETAINED
SHARES STOCK CAPITAL STOCK EARNINGS TOTAL
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances as of
January 1, 1998 7,708,540 $77 $ 34,193 $ (1,848) $ 23,813 $ 56,235
Prior period
adjustment (See Note 7) - - - - (3,927) (3,927)
Balances, January 1, 1998,
as restated (See Note 7) 7,708,540 77 34,193 (1,848) 19,886 52,308
Unamortized
restricted stock
award compensation - - 49 - - 49
Net loss,
as restated (See Note 7) - - - - (2,908) (2,908)
Balances, March 31, 1998,
as restated (See Note 7) 7,708,540 $77 $ 34,242 $ (1,848) $ 16,978 $ 49,449
========= === ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1998
-------- --------
(As restated; see Note 7)
<S> <C> <C>
Cash flows (used in) operating activities:
Net loss $ (4,066) $ (2,898)
Adjustments to reconcile net loss to net cash used
in operating activities - see Schedule A 1,832 1,782
-------- --------
Net cash (used in) operating activities (2,234) (1,116)
-------- --------
Cash flows provided by (used in) investment activities:
Short-term and long-term bank deposits, net 12 (150)
Restricted cash, net - 1,456
Investment in marketable securities (15,325) -
Proceeds from realization of marketable securities 17,607 1,600
Acquisof property and equipment (364) (630)
Proceeds from sale of property and equipment 32 115
Acquisition of intangible assets - (500)
Increase in other assets (708) (23)
Net effect of change in reporting from
equity to consolidation method - see Schedule B 102 -
-------- --------
Net cash provided by investment activities 1,356 1,868
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net 49 -
Short-term debt, net 55 (672)
Repayments of long-term debt (54) (104)
-------- --------
Net cash provided by (used in) financing activities 50 (776)
-------- --------
Net decrease in cash and cash equivalents (828) (24)
Cash and cash equivalents at beginning of period 2,464 1,424
-------- --------
Cash and cash equivalents at end of period $ 1,636 $ 1,400
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 57 $ 61
======== ========
Income taxes $ 23 $ 50
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1998
-------- --------
(As restated; see Note 7)
<S> <C> <C>
A. Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization $ 568 $ 385
Minority interests 478 (450)
Write-down of capitalized software development costs 1,663 -
Earnings on marketable debt securities (56) (6)
Deferred income taxes 807 433
Increase in liability for severance pay 183 136
(Equity) loss in affiliates (1,764) 604
Gain on sale of property, plant and equipment, net (1) (42)
Other (318) 166
Increase in accounts receivable and other current assets (1,322) (1,501)
(Increase) decrease in inventory 240 (465)
Increase in long-term receivables (41) (41)
Increase in accounts payable and other current liabilities 1,395 2,476
Increase in liability in respect of customer advances, net - 87
-------- --------
$ 1,832 $ 1,782
======== ========
B. Net effect of change in reporting from
equity to consolidation method:
Working capital, net of cash $ (18)
Investment recorded 1,157
Other assets (1,037)
--------
$ 102
========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Such adjustments included, in addition
to adjustments of a normal recurring nature, the discontinuation of CybrCard
development and marketing activity, although most of the entries in this regard
were included in the financial statements for the year ended December 31, 1997.
Certain financial information, which is normally included in financial
statements prepared in accordance with generally accepted accounting principles
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997, as filed on
September 15, 1998. Certain amounts included in the consolidated statements of
operations for the three month period ended March 31, 1997, have been
reclassified to conform with current presentation. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2: INVESTMENT IN TOWER
Although the Company maintains effective control of Tower Semiconductor
Ltd. ("Tower"), the Company does not have voting control of Tower and therefore
consolidates Tower's operations on an equity basis.
SUMMARIZED STATEMENT OF OPERATIONS INFORMATION OF TOWER IS AS FOLLOWS:
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1998
-------- --------
Sales $ 29,121 $ 23,187
Gross profit 8,059 990
Research and development 1,309 2,140
Sales, general and administrative 1,917 1,947
Operating income (loss) 4,833 (3,097)
NOTE 3: IMPLEMENTATION OF ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 132 "Employers'
Disclosure about Pensions and Other Postretirement Benefits". SFAS No. 132
revises and standardizes employers' disclosures regarding pension and other
post-retirement benefit plans. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. Management has evaluated the effect of the
adoption of this statement on its financial reporting and believes that it is in
compliance with this disclosure requirement.
NOTE 4: INVENTORY
Inventory includes almost exclusively merchandise and finished goods.
NOTE 5: ACQUISITION
In January 1998, the Company acquired certain assets and licensed
intellectual property from Lucent Technologies, Inc. This technology will be
used by the Company's recently formed Comverge Technologies subsidiary which
will market the Customer Connection for Utilities (CCU) to customers in the US.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price of $1,250 has been allocated to the assets
acquired based on their estimated fair value at the date of acquisition. Of the
purchase price, $500 has been allocated to the license agreement and is being
amortized over the five year period of this agreement. The valuation of the
acquired assets is preliminary and as a result, the allocation of the
acquisition costs among the tangible and intangible assets may change.
NOTE 6: SUBSEQUENT EVENTS
In 1996, the Company sold its shares in Mobile Information Systems
Ltd., a joint venture of the Company's subsidiary, Decision Systems Israel Ltd.
("DSI Israel") and Geotek Communications, Inc. ("Geotek") to Geotek in
-6-
<PAGE>
exchange for a $2,000 unsecured note, bearing annual interest of 8.25%,
payable July 1, 1998. In February 1998, the note was modified to make it
convertible into freely tradable shares of Geotek Common Stock. In April
1998, the Company converted the note Geotek issued to the Company into
3,000,000 shares of Geotek common stock. The delivery of these shares
represented payment of approximately $1,700 of the approximately $2,300
principal of, and accrued interest, on the note. These shares were
subsequently sold by the Company for approximately $1,900. In June 1998,
Geotek filed for protection under Chapter 11 of the Bankruptcy Act. The
Company, in the second quarter of 1998, established an allowance for doubtful
accounts equal to approximately $610, which represented the remaining amount
then outstanding on the note. The expense resulting from this allowance was
partially offset in the second quarter of 1998 by the profit from the sale of
the Geotek common stock.
In April 1998 the Company sold certain assets and the technology
related to its PHD product for approximately $7,000. The Company recognized a
gain of approximately $5,000 before taxes in the second quarter of 1998 in
connection with such sale.
Due to decline in the market price for Tower's shares, at August 31,
1998 the market value of the Company's investment in Tower was $20,322,
significantly below the carrying value of the equity investment as of March 31,
1998 of $40,362 (after minority interest). The Company has no current intentions
to dispose of its investment in Tower.
NOTE 7: RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, a subsidiary filed restated financial statements with the Israel
Securities Authority ("ISA") which reflect adjustments having a material effect
on the Company's consolidated financial statements. The subsidiary's restatement
relates to an order of the ISA which required primarily the expensing of
previously capitalized software development costs. As a result, capitalized
software development costs on the Company's consolidated balance sheets as of
December 31, 1997 and as of March 31, 1998 and R&D expenses on the Company's
consolidated statements of for the three months ended March 31, 1997 and March
31, 1998 have been restated to reflect the order of the ISA. In addition,
deferred income taxes, which had been classified as part of other current assets
and as part of other noncurrent assets, on the Company's consolidated balance
sheets as of December 31, 1997 and as of March 31, 1998 have been restated to
reflect the order of the ISA.
The effects of the restatements on the Company's consolidated
statements of operations for the three months ended March 31, 1997 and 1998 and
balance sheet as of December 31, 1997 and March 31, 1998 are summarized as
follows:
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
--------------------------- -------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Research and development expenses, net $ 161 $ 338 $ 298 $ 342
Operating loss $ (4,801) $ (4,978) $ (2,669) $ (2,713)
Loss before income taxes $ (4,691) $ (4,868) $ (2,655) $ (2,699)
Income tax expense (benefit) $ (164) $ 484 $ 23 $ 23
loss after income taxes $ (4,527) $ (5,352) $ (2,678) $ (2,722)
Minority interests $ 88 $ 245 $ 414 $ 429
Net loss $ (3,398) $ (4,066) $ (2,869) $ (2,898)
Basic Net loss per share $ (0.46) $ (0.55) $ (0.39) $ (0.39)
</TABLE>
-7-
<PAGE>
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------- -------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Other current assets $ 1,446 $ 1,173 $ 1,250 $ 897
Total current assets $ 17,957 $ 17,684 $ 16,679 $ 16,326
Capitalized software development costs, net $ 4,630 - $ 4,674 -
Other noncurrent assets $ 1,670 $ 1,468 $ 1,486 $ 1,364
Total other assets $ 6,638 $ 1,806 $ 6,915 $ 2,119
Total assets $ 97,471 $ 92,366 $ 96,160 $ 91,011
Minority interests $ 30,272 $ 29,094 $ 29,859 $ 28,666
Retained earnings $ 23,813 $ 19,886 $ 20,944 $ 16,988
Total liabilities and shareholders' equity $ 97,471 $ 92,366 $ 96,160 $ 91,011
</TABLE>
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Data Systems & Software Inc. through its subsidiaries in the United
States and in Israel (collectively, the "Company") is a provider of computer
consulting and development services and is an authorized direct seller and
value-added-reseller ("VAR") of computer hardware products. Through its
investment in Tower, the Company also engages in the manufacture of
semiconductors.
Although the Company maintains effective control of Tower, the Company
does not have voting control of Tower and is therefore consolidating Tower's
operations on an equity basis, including its pro-rata share of Tower's net
income (loss) as equity income (loss).
The Company's future operating results are subject to various risks and
uncertainties. See "Item 1. Business Factors Which May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, as amended to date (the "1997 10-K"). The figures cited in the
following discussion reflect restated amounts for all of the periods.
RESULTS OF OPERATIONS (AS RESTATED)
The following table sets forth certain information with respect to the
results of operations of the Company for the three months ended March 31, 1997
and 1998, including the percentage of total revenues during each period
attributable to selected components of operations statement data, and for the
period to period percentage changes in such components.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------- CHANGE FROM
1997 1998 1997
------------------------- ------------------------ ---------
% OF % OF % OF
($,000) SALES ($,000) SALES 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 10,040 100% $ 11,717 100% 17%
Cost of sales 10,289 103 9,199 79 (11)
--------- --------- --------- ---------
Gross profit (loss) (249) (3) 2,518 21
R&D expenses, net 338 3 342 3 1
SG&A expenses 4,391 44 4,889 41 11
--------- --------- --------- ---------
Operating loss (4,978) (50) (2,713) (23) 46
Interest income (expense), net 108 1 (31) - 129
Other income, net 2 - 45 -
--------- --------- --------- ---------
Loss before income taxes (4,868) (49) (2,699) (23) 45
Income tax expense 484 5 23 - 95
--------- --------- --------- ---------
Loss after income taxes (5,352) (54) (2,722) (23) 49
Equity income (loss), net of
minority interests 1,286 13 (176) (2) (114)
--------- --------- --------- ---------
Net loss $ (4,066) (41%) $ (2,898) (25%) 29%
========= ========= ========= =========
</TABLE>
SALES. The increase in sales in the three months ended March 31, 1998, as
compared to the same period in 1997, was due to a 33% increase in Computer-VAR
sales and a 27% increase in sales from consulting and development services in
the Company's Israeli operations. This increase was partially offset by a
decrease in sales from the United States consulting services.
GROSS PROFIT. The increase in gross profit in the three months ended March
31, 1998, as compared to the same period in 1997, was primarily due to one-time
writedowns of development expenses in the first quarter of 1997. In addition,
gross profits in the Company's other activities increased by over 40%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in SG&A
in the three months ended March 31, 1998, by 11%, as compared to the same period
in 1997, was primarily due to increased professional fees. In both periods a
significant portion of SG&A expenses were attributable to marketing efforts
related to the Company's PHD and CybrCard products. These efforts have since
been discontinued. See "Liquidity and Capital Resources".
OPERATING LOSS. The decrease in the operating loss in the three months
ended March 31, 1998, as compared to the same period in 1997, was attributable
to the aforementioned increase in gross profits, partially offset by the
increase in SG&A.
-9-
<PAGE>
EQUITY INCOME (LOSS), NET OF MINORITY INTERESTS. The decrease in the equity
income (loss), net of minority interests, was a result of a loss in Tower,
primarily attributable to lower sales and capacity utilization, as well as
increased R&D. See "Financial Condition".
NET LOSS. The decrease in the net loss in the three months ended March 31,
1998, as compared to the same period in 1997, was attributable to a decrease in
operating losses in the Company's computer activities, as described above,
partially offset by the equity losses from Tower.
FINANCIAL CONDITION
As of March 31, 1998, DSSI and its wholly owned subsidiaries had working
capital of $1.9 million (including unrestricted cash and cash equivalents of
$1.7 million). Although there is no legal restriction preventing disposition of
the Company's investments in its less than wholly owned subsidiaries, or the
distribution to the Company of their earnings, cash of these subsidiaries
(including DSSI's principal subsidiaries, DSI Israel and Tower) is generally not
available for use by DSSI or other subsidiaries. In the past, DSSI has financed
the operations of its wholly owned subsidiaries from the proceeds of a public
offering in 1993, an institutional private placement in June 1994 and the
receipt of cash dividends from Tower in December 1996 and 1997.
The decrease in working capital as compared with the working capital as of
December 31, 1997 was due to operating losses during the first quarter of 1998,
primarily attributable to the Company's investment in the production and
marketing of its PHD and CybrCard products.
In February 1998, the Company discontinued all CybrCard development and
marketing activity due to the high costs involved in continued marketing
efforts. In April 1998 the Company sold certain assets and the technology
related to its PHD product to Computer Associates International, Inc. for
approximately $7 million, and will recognize a capital gain of approximately $5
million before tax in the second quarter of 1998. DSSI, through one of its
wholly owned subsidiaries, has at its disposal $2.2 million of bank credit,
secured by accounts receivable of this subsidiary, none of which is being used
currently. DSSI believes that it has adequate liquidity to finance its ongoing
corporate activities.
DSI Israel has satisfied its financial and operating requirements
principally from operations and the net proceeds of its initial public offering
in December 1992. As of March 31, 1998, DSI Israel had working capital of $2.4
million, net of short- term bank credit of $759,000. DSI Israel has at its
disposal additional bank credit should it require additional funds. Certain of
its bank deposits serve as collateral for bank loans and guarantees.
Although the Company maintains effective control of Tower, the Company does
not have voting control of Tower and, therefore, includes the results of Tower's
operations on an equity basis. Tower has satisfied its financial and operating
requirements principally through cash from operations, grants from the
Government of Israel Investment Center, an advance from a customer and the net
proceeds of its public offerings in 1994 and 1995. As of March 31, 1998, Tower
had working capital of $91 million, including cash, short-term bank deposits and
marketable securities of $85.2 million.
Upon announcing its financial results for the first quarter of 1998, Tower
also announced that it expected losses of approximately $5 million in the second
quarter of 1998.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
In the first quarter of 1998, a majority of the Company's sales was
denominated in dollars. The remaining portion was primarily denominated in New
Israel Shekels ("NIS") that were linked to the dollar. These transaction amounts
were linked to the dollar between the date the transactions were entered into
and the date they were effected and billed. Subsequent thereto, through the date
of settlement, amounts are primarily unlinked. The majority of the Company's
expenses in the three months ended March 31, 1998 was in dollars or
dollar-linked NIS and virtually all the remaining expenses was in NIS. The
dollar cost of the Company's operations in Israel is influenced by the timing
and extent of any increase in the rate of inflation in Israel over the rate of
inflation in the United States that is not offset by the devaluation of the NIS
in relation to the dollar. The Company believes that the rate of inflation in
Israel has had a minor effect on its business to date. However, the Company's
dollar costs in Israel would increase if inflation in Israel were to exceed the
devaluation of the NIS against the dollar or the timing of such devaluation lags
behind inflation in Israel, as it occasionally has in the past.
The Company does not engage in any hedging activities.
As of March 31, 1998, virtually all of the Company's monetary assets and
liabilities that were not denominated in dollars or dollar-linked NIS were
denominated in NIS, and the net amount of such monetary assets and liabilities
was not material. In the event that in the future the Company has material net
monetary assets or liabilities that are not denominated in dollar-linked NIS,
such net assets or liabilities would be subject to the risk of currency
fluctuations.
-10-
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1997 10-K for a discussion of
material litigation to which the Company is a party.
Item 6: Exhibits and Reports on Form 8-K
(c) Exhibits
10.1 Settlement Agreement dated February 6, 1998, by and among
Jeffrey A. Cummer, Dwayne A. Moyers, Cummer/Moyers Capital
Advisors, Inc., Cummer/Moyers Capital Partners, Inc.,
Cummer/Moyers Holdings, Inc. Profit Sharing Plan,
Cummer/Moyers Holdings, Inc., Cummer/Moyers Securities, Inc.,
IRA for Dwayne A. Moyers and The Committee to Enhance Data
Systems & Software Inc. Stockholder Value and Data the Company
(incorporated by reference to Exhibit 99.1 to the Company's
Report of Form 8-K filed with the Commission on February 9,
1998).
10.2 License Agreement dated as of January 9, 1998, between Lucent
Technologies Inc. and the Company (incorporated by reference
to Exhibit 99.1 to the Company's Report on Form 8-K filed with
the Commission on February 17, 1998).
10.3 Bill of Sale dated as of January 9, 1998, by and from Lucent
Technologies to the Company (incorporated by reference to
Exhibit 99.2 to the Company's Report on Form 8-K filed with
the Commission on February 17, 1998).
Exhibit 27.1 - Financial Data Schedule
REPORTS ON FORM 8-K
Report of the Company on form 8-K dated February 9, 1998.
Report of the Company on form 8-K dated February 17, 1998.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: October 1, 1998
By: /s/ Yacov Kaufman
------------------------------
Yacov Kaufman
Chief Financial Officer
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,953
<SECURITIES> 0
<RECEIVABLES> 10,739
<ALLOWANCES> 393
<INVENTORY> 841
<CURRENT-ASSETS> 16,326
<PP&E> 5,474
<DEPRECIATION> 2,999
<TOTAL-ASSETS> 91,011
<CURRENT-LIABILITIES> 12,325
<BONDS> 561
0
0
<COMMON> 77
<OTHER-SE> 49,382
<TOTAL-LIABILITY-AND-EQUITY> 91,011
<SALES> 6,765
<TOTAL-REVENUES> 11,717
<CGS> 5,797
<TOTAL-COSTS> 9,199
<OTHER-EXPENSES> 5,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> (2,699)
<INCOME-TAX> 23
<INCOME-CONTINUING> (2,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,898)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
