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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 0-19771
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DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Number of shares outstanding of the registrant's common stock, as of
October 31, 1999: 7,433,278
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 and September 30, 1999..............1
Consolidated Statements of Operations
for the three month and nine month periods ended
September 30, 1998 and September 30, 1999...................2
Consolidated Statement of Changes in Shareholders' Equity
for the nine month period ended
September 30, 1999..........................................3
Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 1998 and September 30, 1999...................4
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 2. Changes in Securities and Use of Proceeds...........................13
Item 6. Exhibits and Reports on Form 8-K....................................14
Signatures ..................................................................15
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company expects," "the Company anticipates," "the Company believes," "the
Company estimates," and other phrases of similar meaning. Whether such
statements ultimately prove to be accurate depends upon a variety of factors
that may affect the business and operations of the Registrant.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
ASSETS 1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,003 $ 467
Short-term interest bearing bank deposits 1,252 243
Marketable equity securities, available for sale 1,383 --
Restricted cash 752 209
Trade accounts receivable, net 7,244 8,614
Inventory 704 2,399
Other current assets 960 941
-------- --------
Total current assets 13,298 12,873
-------- --------
Investments 56,490 48,700
-------- --------
Property and equipment, net 1,738 3,121
-------- --------
Other assets:
Goodwill, net 190 2,635
License, net 471 412
Other 1,057 946
-------- --------
1,718 3,993
-------- --------
Total assets $ 73,244 $ 68,687
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 470 $ 7,699
Current maturities of long-term debt 504 90
Trade accounts payable 2,105 4,653
Accrued payroll, payroll taxes and social benefits 2,561 1,661
Other current liabilities 1,939 1,968
-------- --------
Total current liabilities 7,579 16,071
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 102 30
Other 585 609
-------- --------
Total long term liabilities 687 639
-------- --------
Commitments and contingencies
Minority interests 25,560 21,298
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized, 20,000,000 shares;
Issued, 7,923,540 shares 79 79
Additional paid-in capital 34,979 35,051
Deferred compensation expense (327) (136)
Retained earnings 6,942 (1,950)
-------- --------
41,673 33,044
Treasury stock, at cost - 490,262 shares (2,365) (2,365)
Accumulated other comprehensive income 110 --
-------- --------
Total shareholders' equity 39,418 30,679
-------- --------
Total liabilities and shareholders' equity $ 73,244 $ 68,687
======== ========
</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 and Comprehensive Loss (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
----------------------- -----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Products $ 15,029 $ 10,632 $ 3,205 $ 4,315
Services 14,573 14,526 4,946 4,902
-------- -------- -------- --------
29,602 25,158 8,151 9,217
-------- -------- -------- --------
Cost of sales:
Products 11,865 9,007 2,587 4,022
Services 11,192 10,937 3,864 3,460
-------- -------- -------- --------
23,057 19,944 6,451 7,482
-------- -------- -------- --------
Gross profit 6,545 5,214 1,700 1,735
Research and development
expenses, net 1,254 777 496 196
Selling, general and
administrative expenses 10,581 8,842 2,825 3,180
-------- -------- -------- --------
Operating loss (5,290) (4,405) (1,621) (1,641)
Interest income 144 293 19 4
Interest expense (215) (275) (49) (160)
Gain on sale of division 5,998 -- -- --
Other expense, net (2,126) (263) (1,744) (242)
-------- -------- -------- --------
Loss before income taxes (1,489) (4,650) (3,395) (2,039)
Provision for income taxes 32 32 (41) 20
-------- -------- -------- --------
Loss after income taxes (1,521) (4,682) (3,354) (2,059)
Minority interests 579 204 184 95
Loss in affiliates, net of minority
interests (2,932) (4,414) (1,336) (1,140)
-------- -------- -------- --------
Net loss $ (3,874) $ (8,892) $ (4,506) $ (3,104)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.53) $ (1.20) $ (0.62) $ (0.42)
======== ======== ======== ========
Weighted average number of shares
outstanding 7,359 7,433 7,310 7,433
======== ======== ======== ========
</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
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Deferred other
Common paid-in comp- Treasury Retained comprehensive
Shares stock capital ensation stock earnings income Total
--------- --------- --------- ---------- --------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
January 1, 1999 7,924 $ 79 $ 34,979 $ (327) $ (2,365) $ 6,942 $ 110 $ 39,418
Amortization of warrants 27 27
Amortization of restricted
stock award compensation
and warrants 45 191 236
Unrealized gain on securities
available for sale (110) (110)
Net loss (8,892) (8,892)
--------- --------- --------- --------- --------- ---------- -------- ---------
Balances as of
September 30, 1999
(unaudited) 7,924 $ 79 $ 35,051 $ (136) $ (2,365) $ (1,950) $ -- $ 30,679
========= ========= ========= ========== ========== ========== ======== ========
</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 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(3,874) $(8,892)
Adjustments to reconcile net loss to net cash used
in operating activities - see Schedule A (79) 3,208
------- -------
Net cash used in operating activities (3,953) (5,685)
------- -------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net (1,965) 1,009
Restricted cash 1,134 543
Investment in marketable securities (5,898) --
Proceeds from realization of marketable securities 6,528 1,520
Net proceeds from sale of division-see Schedule B 6,595 --
Acquisitions of property and equipment (821) (2,139)
Proceeds from sale of property and equipment 135 117
Acquisition of intangible assets (474) (2,692)
------- -------
Net cash provided by (used in) investing activities 5,234 (1,642)
------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net 55 46
Purchase of treasury stock (495) --
Proceeds from sale of shares received in partial
conversion of note receivable 1,871 --
Short-term debt, net (2,303) 7,229
Proceeds of long-term debt 102 39
Repayments of long-term debt (880) (523)
------- -------
Net cash provided by (used in) financing activities (1,650) 6,791
------- -------
Net decrease in cash and cash equivalents (369) (536)
Cash and cash equivalents at beginning of period 1,424 1,003
------- -------
Cash and cash equivalents at end of period $ 1,055 $ 467
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 172 $ 188
======= =======
Income taxes $ 151 $ 44
======= =======
</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 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1999
------- -------
<S> <C> <C>
A. Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization $ 822 $ 906
Minority interests (2,591) (3,928)
Allowance for writeoff against note receivable 610 --
Allowance for bank guarantees for affiliate 1,135 --
Writeoff of investment in affiliate and related receivables 256 --
Earnings on marketable debt securities (30) --
Deferred interest -- 27
Increase in liability for severance pay 195 24
Loss in affiliates 4,954 7,454
Gain on sale of division - See Schedule B (5,998) --
Gain on sale of securities (192) (247)
(Gain) loss on sale of property, plant and equipment, net (38) 38
Amortization of restricted stock award compensation 147 191
Other (4) --
Decrease (increase) in accounts receivable and other current assets 1,355 (1,351)
Increase in inventory (490) (1,695)
Decrease in long-term receivables 97 111
Increase (decrease) in accounts payable and other current liabilities (372) 1,677
Increase (decrease) in liability in respect of customer advances, net 65 --
------- -------
$ (79) $ 3,207
======= =======
B. Assets/liabilities transferred upon sale of division:
Trade accounts receivable, net $ 754
Property and equipment, net 405
Accrued payroll, payroll taxes and social benefits (111)
Other current liabilities (452)
-------
$ 596
=======
C. Non-cash activities:
Issuance of 250,000 warrants to lender in connection with loan received $ 318
=======
Receipt of capital stock in partial conversion of note receivable $ 1,871
=======
</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)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Certain financial information, which is
normally included in financial statements prepared in accordance with generally
accepted accounting principles but which is not required for interim reporting
purposes, has been omitted. The accompanying consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. Certain amounts included in the consolidated statements of operations
for the three and nine month periods ended September 30, 1998 have been
reclassified to conform with current presentation. The results of operations for
the nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
Note 2: Investment in Tower
Although the Company maintains the 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:
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
------------------------------ -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 52,926 $ 47,332 $ 15,167 $ 18,190
Gross loss (4,939) (8,500) (2,691) (624)
Research and development expenses 6,104 6,956 1,894 2,131
Sales, general and administrative 6,292 6,371 2,254 2,339
Operating loss (17,335) (21,827) (6,839) (5,094)
</TABLE>
Note 3: Effects of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities,
requiring the recognition of all derivatives as either assets or liabilities and
the measurement of those instruments at fair value, as well as the
identification of the conditions for which a derivative may be specifically
designed as a hedge. SFAS 133 is effective for fiscal years beginning after June
15, 2000. Management is currently addressing the financial reporting measures
that will be needed in order to comply with this disclosure requirement.
Note 4: Acquisition
In the third quarter of 1999, the Company has acquired the assets of the
Control Systems division of Scientific-Atlanta, Inc., making it an integral part
of the Company's data communications solutions for utilities segment. The
purchase price for the acquisition, including cash paid, contingent payments and
fees related to the transaction, was $4,181, of which, $1,862 was allocated to
inventory, $1,810 to property and equipment and $509 to patents and patents
pending. The patents and patents pending are being amortized over the remaining
life of the patent, 15 years from patent approval. The acquisition has been
accounted for by the purchase method of accounting and accordingly, the purchase
price has been allocated to the assets acquired based on their estimated fair
value at the date of the acquisition. The valuation of these acquired assets is
preliminary and as a result, the allocation among the different assets may
change. In addition, the purchase price is subject to certain adjustments a year
after the closing in the third quarter of 2000.
The Company financed the acquisition with a short term bank loan, bearing
interest of prime +1% per annum payable monthly, with the principal payable in
August 2000. In addition, the Company issued to the lender 250,000 warrants to
purchase Common Stock of the Company, with an exercise price of $3.31 per share,
the fair market value of the Company's Common Stock on the date of the grant,
expiring on August 30, 2002. The Company recorded $318 of deferred interest
expense related to the issuance of the warrants, using the Black Scholes option
pricing model to determine the fair value of the warrants. The Company amortizes
the deferred interest expense over the life of the short term bank loan. The
loan is secured by substantially all the Company's assets.
-6-
<PAGE>
Pro Forma Operations Data. The following pro forma statements of operations
information gives effect to this acquisition, assuming it had been consummated
at the beginning of the earliest period presented:
Nine months ended September 30,
1998 1999
-------- ---------
Revenues $ 39,667 $ 29,985
Net loss (9,114) (10,873)
Net loss per share $ (1.24) $ (1.46)
The pro forma information is not necessarily indicative of the results that
would actually have occurred had the transactions been consummated on the dates
indicated, nor are they necessarily indicative of future operating results of
the Company.
Note 5: Segment Information
<TABLE>
<CAPTION>
Computer VAR Data Multimedia
consulting computer communication Help desk entertainment
services hardware for utilities software software Other* Total
-------- -------- ------------- -------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 1999:
Revenues from external customers .............. $ 13,753 $ 9,218 $ 1,360 -- $ 38 $ 519 $ 24,888
Intersegment revenues ......................... 113 26 331 -- -- -- 470
Segment profit (loss) ......................... (21) 74 (2,688) -- 22 (305) (2,918)
Nine months ended September 30, 1998:
Revenues from external customers .............. $ 13,967 $ 13,502 $ 175 $ 785 $ 123 $ 780 $ 29,332
Intersegment revenues ......................... 103 18 -- -- 158 -- 279
Segment profit (loss) ......................... 5,898 1,466 (2,573) (1,330) (651) (251) 2,559
Three months ended September 30, 1999:
Revenues from external customers .............. $ 4,123 $ 4,072 $ 718 -- $ -- $ 214 $ 9,127
Intersegment revenues ......................... 27 10 (15) -- -- -- 22
Segment profit (loss) ......................... (289) 151 (1,326) -- 1 31 (1,432)
Three months ended September 30, 1998:
Revenues from external customers .............. $ 4,750 $ 3,079 $ -- -- $ 30 $ 151 $ 8,010
Intersegment revenues ......................... 42 7 -- -- -- -- 49
Segment profit (loss) ......................... -- 241 (1,060) -- (55) (24) (898)
</TABLE>
- ----------
* Represents two operating segments below the quantitative thresholds of FAS
131, a VAR software operation in Israel and an Internet database venture.
Reconciliation of Segment Profit to Consolidated Net Loss Nine months ended
September 30, 1999:
Total loss for reportable segments $(2,613)
Other operational segment loss (305)
Unallocated amounts: Net loss of corporate headquarters* (5,974)
-------
Total consolidated net loss $(8,892)
=======
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* Includes equity in losses of Tower (net of minority interest) of
$4,342.
Nine months ended September 30, 1998:
Total income for reportable segments $ 2,810
Other operational segment loss (251)
Unallocated amounts: net loss of corporate headquarters* (6,433)
-------
Total consolidated net income $(3,874)
=======
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* Includes equity in losses of Tower (net of minority interest) of
$2,821.
-7-
<PAGE>
Three months ended September 30, 1999:
Total loss for reportable segments $(1,463)
Other operational segment profit 31
Unallocated amounts: Net loss of corporate headquarters* (1,672)
-------
Total consolidated net loss $(3,104)
=======
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* Includes equity in losses of Tower (net of minority interest) of
$1,115.
Three months ended September 30, 1998:
Total loss for reportable segments $ (874)
Other operational segment loss (24)
Unallocated amounts: Net loss of corporate headquarters* (3,608)
-------
Total consolidated net loss $(4,506)
=======
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* Includes equity in losses of Tower (net of minority interest) of
$1,299.
Note 6: Contingencies
Tower has been approached separately by two parties alleging that Tower is
infringing on certain semiconductor production patents owned by such parties and
requesting that Tower enter into negotiations for a royalty-bearing license for
the use of the technology covered by such patents.
Tower has successfully obtained, without royalty or other payments, a
license to use such technology from one of the parties and is engaged in
discussions with the other party to determine the merits of its claims. Tower
and the Company are unable to determine at this time with any certainty the
ultimate outcome of these discussions or the possible effect, if any, of this
matter on Tower's and the Company's financial condition, operating results and
business.
Note 7: Purchase of Outstanding Minority Interest in Subsidiary
In April 1999, the Company completed successfully a tender offer for all of
the publicly-held shares of a foreign subsidiary. The Company recorded goodwill
resulting from the purchase of the outstanding minority interest in the
subsidiary of approximately $2,200, which is being amortized over seven years.
The cost of the tender offer was approximately $2,700. The Company financed the
offer primarily by short-term bank credit and cash.
Note 8: Subsequent Event
In October 1999, the Company completed a private placement of $2,000 of 0%
Convertible Subordinated Debentures (the "Debentures") and 100,000 warrants to
purchase Common Stock of the Company. The Company also issued 20,000 warrants as
compensation to a finder in connection with the placement. The Debentures, which
are payable in October 2001, do not bear interest. Interest will be imputed on
the debentures and will be amortized over the life of the Debentures. The
Debentures are convertible into Common Stock of the Company at a conversion
price equal to the lower of (i) $3.06625 and (ii) 85% of the average of the
closing bid prices for the Common Stock for the five trading days preceding
delivery of a notice of conversion. The Company intends to record deferred
interest expense related to the issuance of the warrants using the Black Scholes
option pricing model to determine the fair value of the warrants, amortizing the
deferred interest over the life of the Debenture. A charge related to the
discount on conversion feature of the Debentures will be recorded and amortized
as interest expense over the life of the Debentures. The warrants are
exercisable at a price of $3.06625 per share and expire in October 2002.
-8-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Data Systems & Software Inc. through its subsidiaries in the United States
and in Israel (collectively, the "Company"), (i) provides consulting and
development services for computer software and systems, (ii) is an authorized
dealer and a value-added-reseller ("VAR") of computer hardware, and (iii) is a
provider of data communications solutions for utilities. Through its equity
investment in Tower Semiconductor Ltd. ("Tower"), the Company also engages in
the manufacture of semiconductor products. Although the Company has retained
effective control of Tower, the Company does not control more than 50% of
Tower's voting shares, and accordingly accounts for its interest in Tower's
results under the equity investment method.
The Company's future operating results are subject to various risks and
uncertainties. See "Item 1. Business - Factors Which May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the nine months and three months ended
September 30, 1998 and 1999, including the percentage of total revenues during
each period attributable to selected components of operations statement data,
and for the period to period percentage changes in such components.
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
----------------------------------- Change ----------------------------------------- Change
from from
1998 1999 1998 1998 1999 1998
--------------- --------------- ---- ----------------- -------------------- ----
% of % of % of % of % of % of
($,000) sales ($,000) sales 1998 ($,000) sales ($,000) sales 1998
------- ----- ------- ----- ---- ------- ----- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 29,602 100% $ 25,158 100% (15)% $ 8,151 100% $ 9,217 100% 13%
Cost of sales 23,057 78 19,944 79 (14) 6,451 79 7,482 81 16
-------- --- -------- --- -------- --- -------- ---
Gross profit 6,545 22 5,214 21 (20) 1,700 21 1,735 19 2
R&D expenses, net 1,254 4 777 3 (38) 496 6 196 2 (60)
SG&A expenses 10,581 36 8,842 35 (16) 2,825 35 3,180 35 13
-------- --- -------- --- -------- --- -------- ---
Operating loss (5,290) (18) (4,405) (17) (17) (1,621) (20) (1,641) (18) 1
Interest income (expense),
net (71) (--) 18 -- 125 (30) -- (156) (2) (420)
Gain on sale of division 5,998 20 -- -- (100) -- -- -- --
Other expense, net (2,126) (7) (263) (1) 88 (1,744) (21) (242) (3) 86
-------- --- -------- --- -------- --- -------- ---
Loss before income taxes (1,489) (5) (4,650) (18) (212) (3,395) (41) (2,039) (23) 40
Income tax expense 32 -- 32 -- -- (41) -- 20 -- (149)
-------- --- -------- --- -------- --- -------- ---
Loss after income taxes (1,521) (5) (4,682) (18) (208) (3,354) (41) (2,059) (23) 39
Minority interests 579 2 204 1 (65) 184 2 95 1 (48)
Loss in affiliates,
net of minority
interests (2,932) (10) (4,414) (18) (51) (1,336) (16) (1,140) (12) 15
-------- --- -------- --- -------- --- -------- ---
Net loss $ (3,874) (13)% $ (8,892) (35)% (130)% $ (4,506) (55)% $ (3,104) (34)% 32%
======== === ======== === ======== === ======== ===
</TABLE>
SALES. The increase in sales in the third quarter of 1999 as compared to
the same period in 1998, was primarily due to increased sales in the data
communication solutions for utilities segment, as well as increased VAR computer
hardware segment sales. These improvements were partially offset by a decrease
in sales from computer consulting in Israel. The decrease in sales in the nine
months ended September 30, 1999, as compared to the same periods in 1998, was
primarily due to decreased VAR computer hardware segment sales, the sale of the
former help desk segment and decreased sales from computer consulting in Israel.
This decrease was partially offset by increased sales in the data communication
solutions for utilities segment. Data communication solutions for utilities
sales were up more than 29% and computer hardware VAR sales were up 42% in the
third quarter of 1999 as compared to the immediately preceding quarter.
-9-
<PAGE>
GROSS PROFIT. The increase in gross profits in the third quarter of 1999 as
compared to the same period in 1998, was due to increased gross profit in all
areas of activity except for consulting activities in Israel which had lower
gross profits due to the aforementioned decrease in sales. The decrease in gross
profit in the nine months ended September 30, 1999 as compared to the same
period in 1998, was primarily due to the aforementioned decrease in VAR computer
hardware segment sales and decreased consulting services sales in Israel. The
decrease in the gross profit margin in these periods as compared to the
comparable periods in 1998 was primarily the result of decreased gross profit
margins from consulting services provided in Israel and from the VAR computer
hardware segment.
RESEARCH AND DEVELOPMENT ("R&D"). The decrease in R&D in the nine months
and three months ended September 30, 1999, as compared to the same periods in
1998, is due to lower development costs in the Company's data communication for
utilities segment as it shifts the focus of its activities from product
development to the marketing of its products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in SG&A
in the third quarter of 1999 as compared to the same period in 1998, was
primarily due to increased marketing expenses in the data communication for
utilities segment and the VAR computer hardware segments. The decrease in SG&A
in the nine months ended September 30, 1999, as compared to the same period in
1998, was primarily due to the sale of the former help desk segment and the
suspension of operations of the multimedia entertainment software segment, as
well as reduced corporate SG&A.
OPERATING LOSS. Operating loss in the third quarter of 1999 was relatively
unchanged as compared with the third quarter of 1998, reflecting an increase in
gross profits and reduction in R&D expenses, which were offset by increased SG&A
expenses as described above. The decrease in the operating loss in the nine
months ended September 30, 1999, as compared to the same period in 1998, was
primarily attributable to the decrease in SG&A and R&D, partially offset by the
decrease in gross profit for this period.
OTHER EXPENSE. In 1998 other expense was primarily due to the accrual of
loss contingencies in connection with guarantees by the Company of the debt of
an affiliate and the writeoff of the Company's investment in such affiliate, as
well as to the settlement of certain litigation. In 1999 other expense was
primarily due to writing down of inventories to market value.
SHARE OF AFFILIATED COMPANY'S NET LOSS. The decrease in the equity loss,
net of minority interests, in the third quarter of 1999 as compared to the same
period in 1998, was due to decreased operating losses at Tower, as a result of
increased sales and capacity utilization. The increase in the equity loss in the
nine months ended September 30, 1999 as compared to the same period in 1998,
resulted from increased losses at Tower, primarily attributable to a decrease in
Tower sales and capacity utilization in the first six months of 1999.
NET LOSS. The decrease in net loss in the third quarter of 1999 as compared
to the same period in 1998, was primarily due to other expenses recorded in the
third quarter of 1998. The increased net loss in the nine months ended September
30, 1999 as compared with net loss in the comparable period in 1998 was almost
entirely due to a nonrecurring gain from the sale of the former help desk
segment in the second quarter of 1998 as well as to the aforementioned increase
in equity losses from Tower.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 1999, the Company had negative working capital of $3.2
million, including cash, cash equivalents and short term deposits of $710,000.
The Company also had restricted cash of approximately $459,000. DSSI has a
credit line from a bank of up to $2.2 million, which is secured by accounts
receivable and inventory of its US subsidiaries, of which $1.4 million was being
utilized at September 30, 1999.
The negative working capital was primarily due to the Company financing its
recent acquisitions with short term bank loans as described below. The Company
intends to continue financing its operating activities and the service on its
debt for the remainder of 1999 from cash on hand and credit lines, to the extent
available. The Company is also seeking alternative and additional long term
financing for its data communications solutions for utilities segment. The
Company is considering various avenues for financing its ongoing activities,
including the selling of certain assets and obtaining additional financing. To
the extent that these resources are unavailable or insufficient, the Company may
have to curtail and/or discontinue certain of its activities.
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In the second quarter of 1999, the Company completed successfully a tender
offer for all of the publicly-held shares of a foreign subsidiary, approximately
77% of the shares of which it had owned up to the date of the tender offer. The
cost of the tender offer was approximately $2.7 million and was financed
primarily by short-term bank credit and also by cash that resulted in part from
the sale of the balance of the Company's marketable securities for $1.6 million.
In the third quarter of 1999, the Company acquired the assets of the
Control Systems division of Scientific-Atlanta, Inc., making it an integral part
of the Company's data communications solutions for utilities segment. The
purchase price for the acquisition, including cash paid, contingent payments and
fees related to the transaction, was $4.18 million, of which $1.86 million was
allocated to inventory, $1.81 million to property and equipment, and $509,000 to
patents and patents pending. The patents and patents pending are being amortized
over the remaining life of the patent, 15 years from patent approval. The
acquisition has been accounted for by the purchase method of accounting and
accordingly, the purchase price has been allocated to the assets acquired based
on their estimated fair value at the date of the acquisition. The valuation of
these acquired assets is preliminary and as a result, the allocation among the
different assets may change. In addition, the purchase price is subject to
certain adjustments a year after the closing in the third quarter of 2000.
The Company financed the acquisition with a short term bank loan, bearing
interest of Prime +1% per annum, principle payable in August 2000 and interest
paid on a current basis. In addition, the Company issued to the lender 250,000
warrants to purchase Common Stock of the Company. The warrants are exercisable
at an exercise price of $3.31 per share, the fair market value of the Company's
Common Stock on the date of the grant, and expire on August 30, 2002. The
Company recorded $318 of deferred interest expense related to the issuance of
the warrants, using the Black Scholes option pricing model to determine the fair
value of the warrants. The Company amortizes the deferred interest expense over
the life of the short term bank loan. The loan is secured by substantially all
the Company's assets.
The increase in trade accounts receivable during the third quarter of 1999
reflected primarily a higher level of hardware sales during the quarter as well
as sales in the recently expanded data communication segment. The increase in
short term debt was attributable to utilization of the credit line to fund, in
part, the purchase by the Company of the publicly held shares of DSI Israel as
well as short term loans and to finance the aforementioned acquisition of the
Scientific-Atlanta Control Systems division.
In October 1999, the Company completed a private placement of $2 million of
0% Convertible Subordinated Debentures (the "Debentures") and 100,000 warrants
to purchase Common Stock of the Company. The Company also issued 20,000 warrants
as compensation to a finder in connection with the placement. The Debentures,
which are payable in October 2001, do not bear interest. The Debentures are
convertible into Common Stock of the Company at a conversion price equal to the
lower of (i) $3.06625 and (ii) 85% of the average of the closing bid prices for
the Common Stock for the five trading days preceding delivery of a notice of
conversion. The warrants are exercisable at an exercise price of $3.06625 per
share and expire in October 2002. Conversion of the Debentures could result in
significant dilution of the interests of shareholders of the Company.
Year 2000 Disclosure
The Company has conducted a review of its computer systems and operations,
both those for internal use and those developed for customers, to identify and
determine the extent to which any systems may be vulnerable to potential errors
and failures as a result of the "Year 2000 problem." Any of these programs that
have sensitive software could experience system failures or miscalculations and
result in disruption of operations.
The Company has completed a comprehensive review of these computer systems
to ensure that all such systems are Year 2000 compliant prior to the
commencement of the year 2000. The Company's plan for its Year 2000
compatibility effort includes the following: (i) conducting a comprehensive
inventory of the Company's internal systems, including non-information
technology systems (e.g. switching, billing and other platforms and electrical
systems) and any systems intended to be acquired by the Company, (ii) conducting
a comprehensive review of the systems developed by or licensed to the Company
for customers either under development or within their warranty period, (iii)
assessing and prioritizing any required remediation, and (iv) remedying any
problems by modifying, or replacing where appropriate, non-compliant systems.
In connection with its Year 2000 remediation efforts, the Company has not
and does not expect to incur any significant costs. Any such efforts are
expected to be handled by Company personnel as part of their regular duties. In
respect of Tower's remediation efforts, Tower expects to incur staff costs well
as consulting and other expenses incremental to current spending levels. Tower
anticipates that such costs will not be material. Tower estimates that the total
cost associated with the Year 2000 projects will be $1.5 million, of which
approximately $1.1 million has been expended to date. Tower has financed its
Year 2000 related costs from its working capital and has expensed them as
incurred.
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Both the Company and Tower do not believe that any of its products have any
direct material Year 2000 compliance problems.
In addition to assessing its own internal or externally supplied systems,
the Company has made efforts to identify and remedy potential implications to
the Company as a result of its suppliers' vulnerability to Year 2000 problems.
There can be no assurance that the Company has or will be able to identify all
aspects of its business that are subject to Year 2000 problems of customers or
suppliers that affect the Company's business. There can also be no assurance
that the Company's software suppliers are correct in their assertions that the
software is Year 2000 compliant. Should either the Company's internal systems or
the internal systems of any of its more significant suppliers or customers fail
to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected. The Company has reviewed all of its key
systems and has satisfied itself that it has identified substantially all
systems with potential problems and has either corrected or is in the process of
replacing them. As of September 30, 1999, the Company's Year 2000 remediation
efforts were almost completed. The Company expects to complete the remediation
by December 1999.
Tower believes that it has or will have addressed all Year 2000 issues
before the end of 1999, except with respect to certain embedded fab machinery as
a result of no response on the part of certain vendors; however, there can be no
assurance that Tower will achieve Year 2000 compliance as scheduled.
Quantitative and Qualitative Disclosures About Market Risk
General
The Company is required to make certain disclosures with respect to its
financial instruments, including derivatives, if any. 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. The disclosures below 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.
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).
Although the Company has retained effective control of Tower, the Company no
longer maintains voting control of Tower. The Company does not hold or issue
derivative financial instruments for trading purposes.
Foreign Exchange Transactions
No such transactions are reflected for the nine-month and three-month
periods ended September 30, 1998 and 1999.
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 $286,000 as of September 30, 1999) was not
practicable, although the Company believes that the estimated fair value of such
financial instruments was not materially different from their book value.
The market value of the Company's investment in Tower as of September 30,
1999 was approximately $29.7 million, above the carrying value of the equity
investment (after minority interest) as of September 30, 1999 of $27.5 million.
Concentrations of Credit Risk
The Company is subject to credit risk through its trade receivables. As of
September 30, 1999, approximately 9% 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. Approximately 17% of the trade accounts receivable were due from
a U.S. customer that continues to pay its trade receivables over usual credit
periods. The remaining balance consists primarily of receivables from various
customers.
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DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
PART II - Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities
Set forth below is certain information concerning sales by the Company
of unregistered securities during the third quarter of 1999. The
issuance by the Company of the securities sold in the transaction
referenced below were not registered under the Securities Act of 1933,
pursuant to the exemption contemplated by Section 4(2) thereof for
transactions not involving a public offering.
In August 1999, the Company issued, in connection with a credit
agreement between the Company and Bank Leumi U.S.A., warrants to
purchase an aggregate of 250,000 shares of Common Stock of the Company
to Bank Leumi USA and Bank Leumi le-Israel. The warrants may be
exercised at any time on or before August 30, 2002 at an exercise
price of $3.31 per share. The warrant agreement and the form of
warrant are included as Exhibit 4.1 to this Quarterly Report. Pursuant
to the terms of the warrants, the Company is required to file, make
effective and maintain the effectiveness of a registration statement
covering the resale of the shares of Common Stock underlying the
warrants. The Company has filed the registration statement which is
awaiting review by the Securities and Exchange Commission.
The proceeds from the exercise of the warrants, if any, will be used
for working capital and general corporate purposes.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Warrant Agreement dated August 30, 1999 between Bank Leumi USA
and the Registrant, including form of warrant annexed thereto.
10.1 Amended and Restated Credit Agreement dated August 30, 1999
between Bank Leumi USA and the Registrant.
10.2 Term Note dated August 30, 1999 of the Registrant payable to Bank
Leumi USA for the principal sum of $5,947,482 due August 1, 2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report of the Company on Form 8-K dated September 9, 1999, as amended
by Amendment No. 1 on Form 8-K/A dated November 12, 1999.
Report of the Company on Form 8-K dated October 5, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: November 15, 1999
By: /s/ Yacov Kaufman
Yacov Kaufman
Chief Financial Officer
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WARRANT AGREEMENT, dated as of August 30, 1999, between Data Systems &
Software Inc., a Delaware corporation (the "Company"), and the persons whose
names and addresses are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to a Credit Agreement even date hereof between the
Company and the Bank Leumi USA, Inc. (the "Credit Agreement"), the Company has
agreed to issue to the Holders an aggregate of 250,000 warrants to purchase
shares of the Company's Common Stock, par value $.01 per share ("Common Stock";
shares of Common Stock shall be referred to as "Common Shares"), at an initial
exercise price of $3.31 per share (the "Warrants").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company shall issue to each Holder a certificate (the
"Warrant Certificate") dated as of the date hereof providing each such Holder
with the right to purchase, at any time, from August 30, 1999, until 5:30 p.m.,
New York time, on August 30, 2002, the number of Common Shares listed next to
the name of each such Holder on Exhibit I, subject to adjustment as provided in
Section 9 hereof (the "Warrant Shares"), at an initial exercise price of $3.31
per Common Share, subject to adjustment as provided in Section 9 hereof (the
"Exercise Price").
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit A, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time from August 30, 1999, until 5:30 p.m., New York time, on August 30, 2002.
4. Procedure for Exercise of Warrants. (a)Exercise for Cash. The Warrants
are exercisable at the Exercise Price which shall be payable by certified check
or official bank check in New York Clearing House funds. Upon surrender of a
Warrant Certificate with the annexed Form of Election to Purchase fully
completed and duly executed, together (except in the case of exercise pursuant
to Section 4(b) below) with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Mahwah, New Jersey (presently located at 200 Route 17, Mahwah, New Jersey 07430)
the registered holder of a Warrant Certificate (individually a "Holder" and
sometimes collectively the "Holders") shall be entitled to receive a certificate
for the Warrant Shares so purchased. In lieu of payment as provided above, the
Holder may make such payment by reduction by Bank Leumi USA
<PAGE>
of the outstanding principal amount of the promissory note delivered in
connection with the Credit Agreement. The purchase rights represented by the
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional Common Shares underlying the
Warrants). In the case of the purchase of less than all the Warrant Shares
purchasable under the Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Warrant Shares
purchasable thereunder.
(b) "Cashless" Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4(a) above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Warrant Shares equal to the product of (x) the number
of Warrant Shares as to which the Warrants are being exercised, multiplied by
(y) a fraction, the numerator of which is the Current Market Price of the Shares
(as defined below) less the Exercise Price then in effect and the denominator of
which is the Current Market Price. The term "Current Market Price" shall mean
(i) if the Common Shares are traded in the over-the-counter market or on the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ"), the average per Share closing prices on the five consecutive trading
days immediately preceding the date of exercise, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Shares are
traded on a national securities exchange, the average for the five consecutive
trading days immediately preceding the exercise date of the daily per Common
Share closing prices on the principal stock exchange on which the Common Shares
are listed, as the case may be. The closing price referred to in clause (ii)
above shall be the last reported sales price or, if no such reported sale takes
place on such day, the average of the reported closing bid and asked prices, in
either case on the national securities exchange on which the Shares are then
listed.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares shall be made forthwith (and in any event
within five business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificate shall (subject to the provisions of
Sections 6 and 8 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificate unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the then President or
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any Vice President of the Company, attested to by the manual or facsimile
signature of the then Secretary or any Assistant Secretary of the Company. The
Warrant Certificate shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price. Except as otherwise provided in Section 9 hereof, the
Exercise Price of each Warrant shall be the price set forth in Section 1 hereof
per Warrant Shares issuable thereunder, as adjusted from time to time to reflect
any and all adjustments in accordance provisions of Section 9 hereof.
8. Registration Under the Securities Act of 1933.
8.1 Warrants and Warrant Shares not Registered. Subject to the provisions
of Section 8.2 hereof with respect to Company's obligation to register the
Warrant Shares for resale, neither the Warrants nor the Warrant Shares have been
registered under the Securities Act of 1933, as amended (the "Act"). The Warrant
Certificates and any certificates representing Warrant Shares issued upon
exercise of the Warrants shall bear the following legend unless such Warrant
Shares previously have been registered under the Act in accordance with the
terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii)
TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION
SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
Upon effectiveness of the Registration Statement (as defined below), any Warrant
Shares issued to the holder of any Warrant shall bear the following legend:
THE RESALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAS BEEN REGISTERED PURSUANT TO A REGISTRATION STATEMENT
FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION. THESE SECURITIES MAY BE SOLD OR OTHERWISE
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TRANSFERRED ONLY IN ACCORDANCE WITH SUCH REGISTRATION
STATEMENT AND ANY AND ALL APPLICABLE FEDERAL AND STATE
SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION THEREFROM.
8.2 Resale Registration. As soon as practicable after the date hereof, but
in no event later than 60 days from the date hereof, the Company will file a
registration statement under the Act, with respect to all Warrant Shares which
shall register the resale by the Holders of the Warrant Shares from time to time
(the "Registration Statement"), and the Company shall use its best efforts to
cause such registration statement to become effective within 90 days following
the date hereof, all at its sole cost and expense. If the Company is then
eligible to use a Form S-3 (or other short-form registration statement), such
registration statement shall be on such form. The Holder undertakes in
connection therewith to provide in a timely manner all such information and
materials pertaining to it as may be required in order to permit the Company to
comply with all applicable requirements of the Securities and Exchange
Commission and to obtain the acceleration of the effective date of the
registration statement. In connection with the Registration Statement, the
Company shall:
(i) use its best efforts to keep the registration statements effective
until the earliest of (x) when the Holder has sold its Warrant Shares or
(y) when the Warrant Shares may be sold by the Holder under Rule 144 of the
Act without restriction or limitation;
(ii) as expeditiously as possible furnish to the Holder such
reasonable numbers of copies of the prospectus included in the Registration
Statement as the Holder may reasonably request in order to facilitate the
public sale or other disposition of the Warrant Shares;
(iii) as expeditiously as possible use its best efforts to register or
qualify the Warrant Shares under the securities or Blue Sky laws of such
states as the Holder shall reasonably request, provided, however, that the
Company shall not be required in connection with this paragraph (iii) to
qualify as a foreign corporation or execute a general consent to service of
process in any jurisdiction; and
(iv) pay all costs and expenses incident to the Registration
Statement;
The Holder shall pay any and all brokerage fees and transfer taxes incident to
the sale of the Warrant Shares sold by the Holder pursuant to this Section 8.2
and the fees and disbursements of any counsel retained by any Holder.
8.3 Indemnification.
(a) The Company shall indemnify and hold harmless the Holder, and each
other person, if any, who controls the Holder within the meaning of the Act or
the Securities Exchange Act of 1934, as amended (the "Exchange Act") against any
losses, claims, damages, or liabilities, joint or several, to which the Holder,
or controlling person may become subject under the Act, the Exchange Act, state
securities or Blue Sky laws, or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue
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statement or alleged untrue statement of any material fact contained in any
registration statement under which the Warrant Shares were registered under the
Act, any preliminary prospectus or final prospectus contained in any such
registration statement, or any amendment or supplement to such registration
statement, or arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and (subject to Section 8.3 (c) hereof) the
Company will reimburse the Holder and controlling person for reasonable expenses
in connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon any untrue statement or omission made in such
registration statement, preliminary prospectus, or final prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of the Holder or
controlling person specifically for use in the preparation thereof.
(b) The Holder shall indemnify and hold harmless the Company, and each
other person, if any, who controls the Company within the meaning of the Act or
the Exchange Act against any losses, claims, damages, or liabilities, joint or
several, to which the Company, or controlling person may become subject under
the Act, the Exchange Act, state securities or Blue Sky laws, or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement or omission made in such registration statement, preliminary
prospectus, or final prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of the Holder or controlling person specifically for
use in the preparation thereof and (subject to Section 8.3 (c) hereof) the
Holder will reimburse the Company and controlling person for reasonable expenses
in connection with investigating or defending any such loss, claim, damage,
liability, or action.
(c) If any action is brought against a person entitled to indemnification
pursuant to this Section 8.3 (an "indemnified party") in respect of which
indemnity may be sought against a person granting indemnification (an
"indemnifying party") pursuant to such Section, such indemnified party shall
promptly notify such indemnifying party in writing of the commencement thereof
(provided the omission to so notify the indemnifying party of any such action
shall not release the indemnifying party from any liability it may have to such
indemnified party except to the extent such failure shall have actually and
materially prejudiced the indemnifying party as a result thereof). In case any
such action is brought against any indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying party against
which a claim is to be made will be entitled to participate in the defense
thereof and, to the extent that it may wish, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall reasonably conclude based
upon advice of counsel that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party shall have the right
to select separate counsel to assume such legal defenses and otherwise to
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice
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from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by that indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8.3 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence, (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. An indemnifying
party shall not be liable for any settlement of any action or proceeding
effected without its written consent.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of the Warrants, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of the
Warrants at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Warrant Shares purchasable at such price upon the exercise of the Warrants,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common
Shares;
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(b) the Company shall declare any dividend upon its Common Shares
payable in securities (other than a dividend payable solely in Common
Shares) or make any special dividend or other distribution to the holders
of its Common Shares;
(c) there shall be any consolidation or merger of the Company with
another corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation
or winding- up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered Holder of the
Warrants at the address of such Holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event described above, except as provided in Sections 9.1 and 9.4, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the Common Shares in such event.
9.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non- corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and the Warrants shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of
7
<PAGE>
securities or other property to which such Holder would actually have been
entitled as a holder of an Common Share upon the consummation of the Transaction
if such Holder had exercised such Warrant immediately prior thereto. The
provisions of this Section 9.4 shall similarly apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares.
12. Reservation of Common Shares. The Company shall at all times reserve
and keep available out of its authorized Common Shares, solely for the purpose
of issuance upon the exercise of the Warrants, such number of Common Shares as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Common Shares issuable upon such exercise shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
holder of Common Shares.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of an Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
8
<PAGE>
(a) If to the registered Holder of any Warrant, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof
(with copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th
Street, 17th Floor, New York, NY 10036; Attention: Sheldon Krause, Esq.) or
to such other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
9
<PAGE>
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the day and year first above written.
DATA SYSTEMS & SOFTWARE INC.
By: /s/ George Morgenstern
---------------------------
Name: George Morgenstern
Title: President and CEO
ACCEPTED AND AGREED TO:
BANK LEUMI USA, INC.
/s/ Steven Laufer
------------------------
Assistant Vice President
/s/ Sarit Brosh
------------------------
First Vice President
10
<PAGE>
SCHEDULE I
Holder Warrant Certificate No. No. of Warrants
------ ----------------------- ---------------
Bank Leumi USA W-1 83,333
564 Fifth Avenue
New York, New York 10036
Bank Leumi le-Israel, B.M. W-2 166,667
32 Yehuda Halevi
Tel Aviv, ISRAEL
11
<PAGE>
EXHIBIT A
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM AUGUST 30, 1999
UNTIL
5:30 P.M., NEW YORK TIME, AUGUST 30, 2002
No. W- [ ] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that or his/her registered assigns
("Holder"), is the registered holder of [ ] Warrants to purchase initially at
any time from August 30, 2002, until 5:30 p.m. New York time on August 30, 2002
("Expiration Date"), up to [ ] fully-paid and non-assessable shares of common
stock, par value $.01 per share ("Common Shares") of Data Systems & Software
Inc., a Delaware corporation (the "Company"), at an initial exercise price of
$3.31 per Common Share, subject to adjustment in certain events (the "Exercise
Price"), upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the Warrant Agreement dated as of the date hereof between
the Company and Holder (the "Warrant Agreement"). Payment of the Exercise Price
shall be made by certified check or official bank check in New York Clearing
House funds payable to the order of the Company, except as may otherwise be
provided in Section 4 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a
<PAGE>
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the Holder (the word "Holder" meaning
the registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the Holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
Holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the Holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered Holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the Holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated:
DATA SYSTEMS & SOFTWARE INC.
By: ________________________
Authorized Officer
2
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase Common Shares and herewith
tenders in payment for such securities a certified check or official bank check
payable in New York Clearing House Funds to the order of Data Systems & Software
Inc. in the amount of $ , all in accordance with the terms of Section 4 of the
Warrant Agreement dated as of August ___,1999 between Data Systems & Software
Inc. and the undersigned (or its assignor). The undersigned requests that a
certificate for such securities be registered in the name of whose address is
and that such Certificate be delivered to whose address is .
Dated:
Signature _____________________________
(Signature must conform in
all respects to name of
Holder as specified on the
face of the Warrant
Certificate.)
___________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
3
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________ hereby
sells, assigns and transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _____________ Signature:______________________________
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
4
AMENDED AND RESTATED CREDIT AGREEMENT
BETWEEN
BANK LEUMI USA, AS LENDER
AND
DATA SYSTEMS & SOFTWARE INC., AS BORROWER
Dated: August 30, 1999
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS..................................................1
1.1 Definitions..................................................1
1.2 Accounting Terms.............................................4
SECTION 2. EXTANT FACILITIES............................................5
2.1 March Loans..................................................5
2.2 Outstanding Letter of Credit.................................5
SECTION 3. FINANCING....................................................5
3.1 Term Loan....................................................5
3.2 Letter of Credit.............................................6
3.3 Interest.....................................................6
3.3.1 Calculation of Interest........................6
3.3.2 Interest Rate..................................6
3.3.3 Letter of Credit Commission....................6
3.3.4 Overdue Payments...............................6
3.4 Manner of Payments...........................................7
3.5 Security.....................................................7
3.5.1 Extant Security Agreements.....................7
3.5.2 New Security Agreements........................7
3.5.3 Extant Guarantee...............................8
3.5.4 New Guarantees.................................8
SECTION 4. CONDITIONS PRECEDENT.........................................8
4.1. Evidence of Corporate Action.................................8
4.1.1 Evidence of Corporate Action...................8
4.2. Representations and Warranties...............................8
4.3. Borrower's Obligations.......................................9
4.4. Guarantors' Documents........................................9
4.5. Pledged Shares...............................................9
4.7. Opinions.....................................................9
4.8. Event of Default.............................................9
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<PAGE>
SECTION 5. REPRESENTATIONS AND WARRANTIES...............................9
5.1 Organization................................................10
5.1.1 Borrower's Corporate Existence
and Good Standing...........................10
5.1.2 Organization Chart............................10
5.1.3 Guarantors Corporate Existence
and Good Standing...........................10
5.2 Authority...................................................10
5.2.1 Borrower's Authority..........................10
5.2.2 Guarantors' Authority.........................11
5.3 No Conflicts................................................11
5.4 Compliance and Other Agreements.............................12
5.4.1 Agreements, etc...............................12
5.4.2 Orders, etc...................................12
5.4.3 No Binding Orders.............................12
5.5 ERISA.......................................................12
5.6 Investment Company..........................................13
5.7 Approvals and Consents......................................13
5.8 Regulation U, etc...........................................13
5.9 Financial Statements........................................14
5.10 Taxes.......................................................14
5.11 Title to Properties/Priority of Liens.......................14
5.11.1 Title.........................................14
5.11.2 Security Interest.............................15
5.12 Litigation..................................................15
5.13 Insurance...................................................15
5.14 Disclosure..................................................15
5.15 No Event of Default.........................................16
5.16 Use of Proceeds.............................................16
5.17 Valuation of Warrant........................................16
5.18 Change in Custodian.........................................16
5.19 Cash Flow...................................................16
5.20 Reduction in Loan...........................................17
SECTION 6. AFFIRMATIVE COVENANTS.......................................17
6.1 Preservation of Existence...................................17
6.2 Maintenance of Properties; Insurance........................17
6.2.1 Properties......................................17
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<PAGE>
6.2.2 Insurance.......................................17
6.3 Payment of Taxes............................................18
6.4 Accounting; Financial Statements and
Other Information..........................18
6.4.1 Quarterly Financial Reports...................18
6.4.2 Annual Financial Reports......................19
6.4.3 Reports.......................................19
6.4.4 SEC Filings...................................19
6.4.5 Tower.........................................19
6.4.6 Other Information.............................19
6.5 Compliance .................................................20
6.6 ERISA.......................................................20
6.7 Payment of Indebtedness.....................................20
6.8 Notification to Bank........................................20
6.9 Further Assurances..........................................21
6.10 Inspection..................................................21
6.11 Year 2000...................................................22
6.12 Stock Ownership.............................................22
6.13 Tower Time Deposits.........................................22
6.14 Decision....................................................22
6.15 Perfection of Pledge in Isreal..............................23
6.16 Custodian...................................................23
6.17 Tower Shares................................................23
6.18 Guaranty by Decision........................................23
SECTION 7. NEGATIVE COVENANTS..........................................23
7.1 Limitation on Liens.........................................23
7.2 Mergers and Consolidations..................................24
7.3 Change in Business..........................................24
7.4 Tower Borrowings............................................24
7.5 Transfer of Assets..........................................24
7.6 No Pre-Payments.............................................24
7.7 Guarantees to Others........................................24
7.8 Change in Fiscal Year.......................................25
SECTION 8. EVENTS OF DEFAULT/REMEDIES..................................25
8.1.1 Principal or Interest.........................25
8.1.2 Obligations...................................25
8.1.3 Certain Covenants.............................25
8.1.4 Other Covenant................................25
8.1.5 Representations...............................25
8.1.6 Voluntary Insolvency
Proceedings.................................25
-iii-
<PAGE>
8.1.7 Involuntary Insolvency
Proceedings.................................26
8.1.8 Divestiture of Assets.........................26
8.1.9 Judgments.....................................27
8.1.10 Other Defaults................................27
8.1.11 ERISA.........................................27
8.1.12 Levies........................................28
8.2 Remedies....................................................28
SECTION 9. MISCELLANEOUS...............................................28
9.1 Expenses....................................................28
9.2 Survival of Agreement.......................................29
9.3 No Waiver; Cumulative Remedies..............................29
9.4 Notices.....................................................29
9.5 Amendments and Waivers......................................30
9.6 Applicable Law..............................................30
9.7 Successors..................................................30
9.8 Partial Invalidity..........................................31
9.9 Headings....................................................31
9.10 Waiver of Jury Trial........................................31
9.11 Jurisdiction; Service of Process............................31
9.12 Conflicts...................................................31
EXHIBITS AND SCHEDULES
Exhibit A - Form of Warrant
Exhibit B - Organization Chart
Exhibit C - Confirmation of Security Agreements
Exhibit D - Confirmation of Guaranty
-iv-
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT, dated August 30, 1999, between DATA
SYSTEMS & SOFTWARE INC., a Delaware corporation (the "Borrower"), and BANK LEUMI
USA, a New York banking corporation having an office at 564 Fifth Avenue, New
York, New York 10017 (the "Bank").
R E C I T A L S:
A. Pursuant to a Credit Agreement, dated as of March 24, 1999 (the "March
Agreement"), the Borrower and its Affiliate Databit, Inc., a Delaware
corporation ("Databit") borrowed the principal sum of $2,065,000 from the Bank
on the terms and conditions set forth therein, and in the "Financing Agreements"
therein referred to (the "March Loans").
B. On November 20, 1998, the Bank issued a letter of credit for the benefit
of Databit for an amount not exceeding $52,518, on the terms and conditions set
forth therein.
C. Pursuant to this Agreement, the Bank has agreed to consolidate the March
Loans and the letter of credit referred to in Recital B into a new credit
facility, and subject to the terms and conditions herein set forth, to make
additional financial accommodations to the Borrower, which together with the
March Loans and said letter of credit will be in the aggregate principal amount
of $6,000,000.
NOW, THEREFORE, IT IS AGREED:
SECTION 1. DEFINITIONS.
1.1 Definitions. As used in this Agreement and the Financing Agreements,
the following terms shall have the following meanings unless the context
otherwise requires:
"Affiliate" means and includes any Person (i) which directly or indirectly
controls, or is controlled by, or is under common control with the Borrower;
(ii) which directly or indirectly beneficially owns or holds fifty percent (50%)
or more of any voting stock of either the Borrower or of any Guarantor, or (iii)
fifty percent (50%) or more of the voting stock of which is directly or
indirectly beneficially owned or held by the Borrower or one of its Affiliates.
The term "control" means the possession, directly or indirectly, of the power to
direct
<PAGE>
or cause the direction of the management policies of the Person, whether through
the ownership of voting securities, by contract or otherwise.
"Agreement" means this Credit Agreement, as the same may be amended or
supplemented from time to time.
"Bank" means Bank Leumi USA, a New York banking corporation.
"Borrower" means Data Systems & Software, Inc., a Delaware corporation.
"Collateral" means the property of the Borrower or of any Guarantor, except
for any Pledged Shares, in which the Bank has been, or shall hereafter be,
granted a lien or security interest under a Security Agreement. Such property
shall include, without limitation, all of the Borrower's or Guarantor's now
owned or existing and hereafter arising or acquired tangible and intangible
personal property, wherever located, including without limitation (i) all
accounts (including accounts receivable), contract rights and general
intangibles of the Borrower or Guarantor, and (ii) all goods of the Borrower or
Guarantor, including, without limitation, all inventory, and (iii) all
instruments, documents and chattel paper of such Borrower or Guarantor; and (d)
the proceeds of all of the foregoing.
"Comverge" means Comverge Technologies, Inc., a Delaware corporation.
"Databit" shall have the meaning defined in Recital A.
"Decision" means Decision Systems Israel Ltd., an Israeli corporation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which together with the Borrower would be treated as a single employer under
Section 4001 (b)(1) of ERISA.
"Financing Agreements" means the following agreements and instruments (as
such agreements and instru ments may be hereafter amended or supplemented): (i)
the
2
<PAGE>
Security Agreements,(ii) the Note, (iii) the Guarantees, and (iv) any other
agreements or other collateral documents delivered to the Bank in connection
with the Obligations, whether or not pursuant to this Agreement.
"GAAP" means generally accepted accounting prin ciples as used by the
United States Financial Accounting Standards Board, as in effect from time to
time, consistently applied.
"Guarantor" and "Guarantors" means, respectively, (i) each of Databit,
Comverge and IDO, and (ii) all of the foregoing.
"Guaranty" shall have the meaning set forth in Sections 3.5.3 and 3.5.4 of
this Agreement.
"IDO" means International Data Operations, Inc. a Delaware corporation.
"Knowledge" whether with an initial upper or lower case means the knowledge
of any senior executive of the Borrower or of any of the Guarantors, including,
but not limited to their Chief Financial Officers.
"Letter of Credit" shall have the meaning set forth in Section 2.2.
"March Agreement" shall have the meaning defined in Recital A.
"Multiemployer Plan" means a Plan described in Section 4001(a)(3) of ERISA
which covers employees of the Borrower or any of its ERISA Affiliates.
"Note" shall have the meaning set forth in Section 3.2 of this Agreement.
"Obligations" means collectively the Term Loan and any fees, charges or
other financial obligations of the Borrower, any of the Guarantors or any of
their Affiliates to the Bank pursuant to this Agreement, any of the Financing
Agreements, or any other agreement with the Bank.
"Person" means an individual, partnership, joint venture, firm,
corporation, trust, charitable institution or other business or legal entity.
3
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corpo ration or any entity
succeeding to any or all of its functions under ERISA.
"Plan" means any plan established, maintained or to which contributions
have been made by the Borrower or any of its ERISA Affiliates, and which is
subject to Title IV of ERISA.
"Pledged Shares" means all of the shares of stock pledged to the Bank as
security for the Obligations pursuant to a Security Agreement.
"Prohibited Transaction" means any transaction of the type set forth in
Section 406 of ERISA, and not exempt under Section 408 of ERISA or Section 4975
of the Internal Revenue Code of 1954, as amended from time to time.
"Reference Rate" means the rate of interest designated by the Bank, and in
effect from time to time, as the "Reference Rate."
"Reportable Event" means any of the events set forth in Section 4043 of
ERISA, if such event reasonably may result in a liability of the Borrower to the
Plan or the PBGC.
"Security Agreement" shall have the meaning set forth in Sections 3.5.1 and
3.5.2 of this Agreement.
"Term Loan" shall have the meaning defined in Section 3.1 of this
Agreement.
"Tower" means Tower Semiconductor Ltd., an Israel corporation.
1.2 Accounting Terms. Any accounting terms used in this Agreement which are
not specifically defined herein shall have the meanings customarily given to
such terms in accordance with United States GAAP. In the event that changes in
GAAP shall be mandated by the United States Financing Accounting Standards
Board, and such changes would materially modify the interpretation or
computation of the financial covenants contemplated by this Agreement at the
time of execution hereof, then in such event such changes shall not be followed
in calculating the financial covenants.
4
<PAGE>
SECTION 2. EXTANT FACILITIES
This Agreement amends and restates the March Agreement in its entirety, and
together with the Financing Agreements sets forth the entire agreement between
the Borrower and the Bank with respect to the subject matter hereof.
2.1 March Loans. The Bank and the Borrower hereby acknowledge that the
unpaid principal balance of the March Loans are being repaid out of the proceeds
of the Term Loan, as provided for in Section 3.1 of this Agreement, and will be
evidenced by the Note. Concurrently with the execution and delivery of the Note,
the Bank will mark the "Grid Note" and "Bridge Note" executed and delivered
pursuant to the March Agreement evidencing the March Loans "superceded", and
return same to The Borrower and Databit.
2.2 Outstanding Letter of Credit. The outstanding standby letter of credit
issued by the Bank for the benefit of the Borrower, in an amount not to exceed
$52,518 (the "Letter of Credit"), as referred to in Recital B, is being included
in the credit facility being made available by the Bank to the Borrower, as
provided for in Section 3.2 of this Agreement.
SECTION 3. FINANCING.
3. Subject to and upon the terms and conditions set forth in this Agreement
and the Financing Agreements, the Bank hereby agrees to provide a Credit
Facility to the Borrower as follows:
3.1 Term Loan. Concurrently the Bank is making a term loan to the Borrower
in the principal amount of $5,947,482 (the "Term Loan"). The Term Loan will
mature on August 1, 2000. The principal of the Term Loan may be prepaid in whole
or in part at any time; provided, however that any partial prepayment shall be
in the minimum amount of $100,000, or an integral multiple thereof, upon two (2)
business day's prior written, telegraphic or telephonic notice to the Bank.
Concurrently with the execution and delivery of this Agreement, the Bank is
making a cash advance to the Borrower in the sum of $4,398,776.76, and applying
$1,548,705.24 out of the proceeds of the Term Loan in repayment of the March
Loans and the Borrower's and Databit's other obligations to the Bank.
Concurrently with the execution and delivery of this Agreement, the Borrower is
evidencing its obligation to pay the principal of, and
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interest on, the Term Loan by executing and delivering a term note (the "Note")
to the Bank in the principal sum of $5,947,482.
3.2 Letter of Credit. The Bank heretofore issued the Letter of Credit, and
in connection with the Letter of Credit, the Borrower has executed and delivered
to the Bank the Bank's standard form of Letter of Credit Application. The Letter
of Credit has been issued subject to the Bank's standard fees and charges.
3.3 Interest. The Term Loan shall bear interest determined as follows:
3.3.1 Calculation of Interest. Interest on the Term Loan shall be based on
the Bank's Reference Rate and adjusted when such Reference Rate changes. The
Borrower acknowledges that the Reference Rate may not necessarily represent the
lowest rate of interest charged by the Bank to its customers. Interest on the
Term Loan shall be computed on the basis of a 360-day year over the actual
number of days elapsed. In no event shall the interest charged by the Bank on
the Term Loan exceed the maximum rate permitted by law.
3.3.2 Interest Rate. The outstanding principal balance of the Term Loan
shall bear interest, at the rate of one (1%) percent per annum above the
Reference Rate from the date hereof. The Reference Rate on the date hereof is
eight and one quarter (8-1/4%) percent. The Borrower will pay interest on the
outstanding principal balance on the Term Loan at the foregoing rate monthly on
the first day of each month, and at maturity (whether by acceleration or
otherwise) as provided in the Note.
3.3.3 Letter of Credit Commission. With respect to the Letter of Credit,
the Borrower will pay commissions and all the normal costs and expenses
generally charged by the Bank for letters of credit, as provided in the
application therefor.
3.3.4 Overdue Payments. If any payment of principal (whether due at
maturity, upon acceleration or otherwise), interest or other fees or charges
payable by the Borrower hereunder, or under any of the Financing Agreements,
shall not be paid when due, the Borrower will pay interest on the overdue
payment for the period for which it is overdue, on demand, at the higher of
twelve percent (12%) or three percent (3%) per annum in excess of the
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interest rate specified in the instrument or agreement evidencing the
requirement to make such payment, but in no event in excess of the maximum rate
permitted by applicable law.
3.4 Manner of Payments. All payments required to be made by the Borrower
hereunder on account of principal, interest or fees shall be made in lawful
money of the United States, in immediately available funds, at the office of the
Bank at 564 Fifth Avenue, New York, New York 10017 or at such other place as the
holder of the Note shall specify in writing. Whenever any payment hereunder, or
under any of the Financing Agreements, 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 of the Bank, and such
extension of time shall be included in the computation of interest. The Borrower
authorizes (but shall not require) the Bank to debit any account maintained by
the Borrower with the Bank, on any date on which a payment is due hereunder or
under any of the Financing Agreements, in an amount equal to any unpaid portion
of such payment.
3.5 Security.
3.5.1 Extant Security Agreements. Con currently with or prior to the
execution and delivery of the March Agreement, each of the Borrower, Databit,
and IDO granted a valid, perfected first priority security interest to the Bank
in its Collateral, and in the instance of the Borrower the Pledged Shares, to
secure payment by the Borrower and Databit of all of their obligations to the
Bank pursuant to the March Agreement by executing and delivering to the Bank
security agreements, dated as of even date therewith (each a "Security
Agreement"). Concurrently with the execution and delivery of this Agreement,
each of the Borrower, Databit and IDO is confirming its Security Agreement by
executing the Confirmation of Security Agreement annexed as Exhibit C.
3.5.2 New Security Agreement. Concurrently with the execution and delivery
of this Agreement, Comverge is granting a valid perfected first priority
security interest to the Bank in its Collateral, to secure payment by the
Borrower of all of its Obligations to the Bank, by executing and delivering to
the Bank a Security Agreement, dated as of even date herewith (a "Security
Agreement").
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3.5.3 Extant Guarantee. Concurrently with or prior to the execution and
delivery of the March Agreement, IDO guaranteed payment of all of the
obligations of the Borrower and Databit to the Bank by executing and delivering
to the Bank a guaranty, dated as of even date therewith (a "Guaranty").
Concurrently with the execution and delivery of this Agreement, IDO is
confirming its Guaranty by executing the Confirmation of Guaranty annexed as
Exhibit D.
3.5.4 New Guarantees. Concurrently with the execution and delivery of this
Agreement, each of Databit and Comverge is guaranteeing payment of all of the
Obligations of the Borrower to the Bank by executing and delivering to the Bank
a Guarantee, dated as of even date herewith (each a "Guaranty").
SECTION 4. CONDITIONS PRECEDENT.
4. The obligation of the Bank to execute and deliver this Agreement, and to
make the Term Loan, is subject to the conditions precedent that:
4.1. Evidence of Corporate Action. The Bank shall have received (a)
Certificates of Good Standing from the Secretary of State of Delaware, listing
all charter documents of the Borrower and the Guarantors on file; (b) a
Certificates of an authorized officer of the Borrower and each of the Guarantors
certifying (i) that attached thereto is a true and complete copy of resolutions
adopted by the Board of Directors of the Borrower or such Guarantor, as is
appropriate, authorizing the execution, delivery and performance of this
Agreement and such Financing Agreements as to which it is a party, (ii) the
incumbency and specimen signature of each officer of the Borrower and each of
the Guarantors executing the said documents, and a certification by another
officer thereof as to the incumbency and signature of the authorized officer,
(c) copies of the Certificate of Incorporation and By-Laws of the Borrower and
each of the Guarantors, each as amended to date, certified as complete and
correct by its Secretary, and (d) such other documents as the Bank or its
counsel may reasonably request, in order that all legal matters incident to the
making of the Term Loan, shall be satisfactory to the Bank and its counsel.
4.2. Representations and Warranties. All representations and warranties
contained herein or otherwise made to the Bank pursuant to or in connection with
this
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Agreement or any of the Financing Agreements, shall be correct and complete in
all material respects.
4.3. Borrower's Obligations. The Borrower shall have executed and delivered
to the Bank (i) the Note, (ii) its Security Agreement, (iii) Warrant Agreement
in the form of Exhibit A, and (iv) such other documents as the Bank shall
reasonably require. The Borrower shall concurrently pay the Bank $25,000 as a
commitment fee.
4.4. Guarantors' Documents. Each of the Guarantors shall have executed and
delivered to the Bank (i) a Guaranty or an amended and restated Guaranty, as is
appropriate, and (ii) a Security Agreement or an amended or restated Guaranty as
is appropriate.
4.5. Pledged Shares. The Bank shall have received from the Borrower (i)
6,001 shares of Tower Semiconductor Holdings (1993) Ltd. being all of the shares
of Tower Semiconductor Holdings (1993) Ltd. owned by the Borrower, together with
duly executed stock powers therefor, and (ii) 6,196,439 shares of Decision,
together with duly executed stock powers therefor, and a security interest in
the Borrower's beneficial interest in the 1,600,000 shares of Decision referred
to in Section 6.14 of this Agreement; which 1,600,000 shares shall become
Pledged Shares upon delivery to the Bank.
4.6. Opinions. The Bank shall have received a written opinions from counsel
to the Borrower and the Guarantors, in form and substance satisfactory to the
Bank and its counsel.
4.7. Event of Default. There shall exist no Event of Default and no
condition, event or act which, with notice or lapse of time, or both, would
constitute either an Event of Default or an event of default under the March
Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
5. In order to induce the Bank to enter into this Agreement and to make the
Term Loan hereunder, the Borrower represents and warrants to the Bank as
follows:
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5.1 Organization.
5.1.1 Borrower's Corporate Existence and Good Standing. The Borrower is a
duly organized and validly existing corporation in good standing under the laws
of the State of Delaware with perpetual corporate existence and has all
requisite legal right, power and authority and all necessary licenses and
permits to own and operate its assets and properties and to carry on its
business as now conducted and as presently proposed to be conducted. The
Borrower has qualified and is in good standing as a foreign corporation in each
state or other jurisdiction where the nature of its business or the ownership or
use of its property requires such qualification.
5.1.2 Organization Chart. A correct and complete organization chart is
annexed as Exhibit B hereto, which sets forth (i) the jurisdiction where the
Borrower, each of the Guarantors and each issuer of Pledged Shares is
incorporated, (ii) the authorized and outstanding stock of the Borrower, each of
the Guarantors and each issuer of Pledged Shares, and (iii) the record and
beneficial ownership of the stock of each Guarantor and each issuer of Pledged
Shares.
5.1.3 Guarantors Corporate Existence and Good Standing. Each of the
Guarantors is a duly organized and validly existing corporation in good standing
under the laws of the State or other jurisdiction shown on Exhibit B, with
perpetual corporate existence and has all requisite legal right, power and
authority and all necessary licenses and permits to own and operate its assets
and properties and to carry on its business as now conducted and as presently
proposed to be conducted. Each of the Guarantors has qualified and is in good
standing as a foreign corporation in each other jurisdiction where the nature of
its business or the ownership or use of its property requires such
qualification.
5.2 Authority.
5.2.1 Borrower's Authority. The Borrower has, all requisite legal right,
power and authority to execute, deliver and perform the terms and provisions of
this Agreement, the Financing Agreements executed by it, and all other
instruments or documents delivered by it pursuant hereto and thereto. The
Borrower has taken or caused to be taken all necessary action to authorize the
execution, delivery and performance of this Agreement, the Financing
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Agreements executed by it, and all other instruments or documents delivered or
to be delivered by it pursuant hereto and thereto. This Agreement, the Financing
Agreements executed by the Borrower, and all related instruments or documents
delivered or to be delivered pursuant hereto or thereto constitute and will
constitute legal, valid and binding obligations of the Borrower, enforceable in
accordance with their respective terms, except to the extent that enforcement
thereof may be limited by applicable bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and the
availability of equitable remedies.
5.2.2 Guarantors' Authority. Each of the Guarantors has all requisite legal
right, power and authority to execute, deliver and perform the terms and
provisions of the Guaranty, the other Financing Agreements executed by it, and
all other instruments and documents delivered by it pursuant hereto and thereto.
Each of the Guarantors has taken or caused to be taken all necessary action to
authorize the execution, delivery and performance of the Guaranty, the other
Financing Agreements executed by it and all other instruments or documents
delivered or to be delivered by it pursuant hereto and thereto. The Guaranty and
all other instruments or documents delivered or to be delivered pursuant hereto
and thereto constitute and will constitute a legal, valid and binding obligation
of such Guarantor, enforceable in accordance with their respective terms, except
to the extent that enforcement thereof may be limited by applicable bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and the availability of equitable remedies.
5.3 No Conflicts. Neither the execution and delivery of this Agreement, the
Financing Agreements, or any of the instruments and documents delivered or to be
delivered pursuant hereto or thereto, or the consummation of the transactions
herein or therein contemplated, nor compliance with the provisions hereof or
thereof, will violate any law or regulation, or any order, writ or decree of any
court or governmental instrumentality, or will conflict with, or result in the
breach of, or constitute a default in any respect under, any indenture,
mortgage, deed of trust, agreement or other instrument to which the Borrower or
any of the Guarantors is a party, or by which any of them or any of their
respective properties may be bound or affected, or will result in the creation
or imposition of any lien, charge or encumbrance upon any of the property of
either of them (except as contemplated hereunder
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or under the Financing Agreements) or will violate any provision of the
certificate of incorporation (as amended to date) or by-laws (as currently in
effect) of either of the Borrower or any of the Guarantors.
5.4 Compliance and Other Agreements.
5.4.1 Agreements, etc. Neither the Borrower nor any of the Guarantors is in
default under any indenture, mortgage, deed of trust, agreement or other
instrument to which it is a party, or by which it or any of its properties may
be bound or affected, except for such defaults which, individually or in the
aggregate, will not have a material and adverse effect on the business,
operations, property or assets or in the condition, financial or otherwise, of
the Borrower or such Guarantor.
5.4.2 Orders, etc. Neither the Borrower nor any of the Guarantors is in
default with respect to any order, writ, injunction or decree of any court or of
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or authority, domestic or foreign, or in violation of any
law, statute or regulation, domestic or foreign, to which it is, or any of its
properties are subject, except for such defaults or violations which,
individually or in the aggregate, will not have a material and adverse effect on
the business, operations, property or assets or in the condition, financial or
otherwise, of the Borrower or Guarantor.
5.4.3 No Binding Orders. Neither the Borrower nor any of the Guarantors is
a party to or bound by, nor are any of their respective properties bound or
affected by, any agreement, deed, lease or other instrument, or subject to any
charter or other corporate restriction or any judgment, order, writ, injunction,
decree or award, or any law, statute, rule or regulation, any of which
materially and adversely affects or in the future may (so far as the Borrower
should reasonably foresee) materially and adversely affect the business,
operations, prospects, properties or assets, or the condition, financial or
otherwise, of such Borrower or Guarantor, except that the Pledged Shares of
Tower Semiconductor Holdings (1993) Ltd. are subject to a Shareholders Agreement
dated as of February 28, 1993, as amended, a copy of which has been provided to
the Bank.
5.5 ERISA. The Borrower is in compliance in all material respects with all
applicable provisions of ERISA in
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connection with any Plan. Neither a Reportable Event nor a Prohibited
Transaction has occurred and is continuing with respect to any Plan; no notice
of intent to terminate a Plan has been filed nor has any Plan been terminated;
no circumstances exist which constitute grounds under Section 4042 of ERISA
entitling the PBGC to institute proceedings to terminate, or appoint a trustee
to administrate a Plan, nor has the PBGC instituted any such proceedings;
neither the Borrower, nor any ERISA Affiliate of the Borrower has completely or
partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer
Plan; the Borrower, and each of its ERISA Affiliates has met its minimum funding
requirements under ERISA with respect to all of their Plans, and the present
fair market value of all Plan assets exceeds the present value of all vested
benefits under each Plan, as determined on the most recent valuation date of the
Plan, and in accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of the Borrower, or any of
its ERISA Affiliates to PBGC or the Plan under Title IV of ERISA; and neither
the Borrower, nor any of its ERISA Affiliates has incurred any liability to the
PBGC under ERISA.
5.6 Investment Company. Neither the Borrower nor any of the Guarantors is
an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940.
5.7 Approvals and Consents. All authorizations, consents, registrations,
exemptions, approvals and licenses (governmental or otherwise) or the taking of
any other action (including, without limitation, by the shareholders of the
Borrower or any of the Guarantors) which are required as a condition to the
validity or enforceability of this Agreement, the Financing Agreements or any of
the instru ments or documents delivered or to be delivered pursuant hereto or
thereto have been effected or obtained and are in full force and effect.
5.8 Regulation U, etc. Neither the Borrower nor any of the Guarantor is
engaged in the business of extending credit for the purpose of purchasing or
carrying any margin stock (within the meaning of Regulation U or G of the Board
of Governors of the Federal Reserve System). The Term Loan will not be used,
directly or indirectly, for the purpose of purchasing or carrying any margin
stock or for any other purpose which might constitute any of the Loans a
"purpose credit" within the meaning of such Regulation U.
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5.9 Financial Statements. The Borrower has heretofore delivered to the Bank
consolidated financial statements of the Borrower, the Guarantors, Decision and
Tower Semiconductor Holdings (1993) Ltd. for the fiscal years ended December 31,
1997, and December 31, 1998 and for the six months ended June 30, 1998 and June
30, 199 (consisting of a consolidated balance sheet and the related consolidated
statements of operations, retained earnings, stockholders equity and changes in
financial position for the respective periods then ended, including the related
notes thereto). The annual financial statements referred to have been audited
and include an unqualified report and opinion of Deloitte & Touche, LLP,
independent certified public accountants. All such annual and interim financial
statements are correct and complete and were prepared in accordance with GAAP
and present fairly the consolidated financial position and results of operation
of the Borrower, the Guarantors, Decision and Tower Semiconductor Holdings
(1993) Ltd. as of the dates of and for the periods involved. There are no
liabilities, direct or indirect, fixed or contingent, of the Borrower and the
Guarantors as of the date of such financial statements which are required to be
reflected or disclosed therein under GAAP which are not so reflected or
disclosed therein or in the notes thereto.
5.10 Taxes. The Borrower and the Guarantors have filed or caused to be
filed all tax returns required to be filed by each of them. The Borrower and the
Guarantors have paid all taxes (including interest and penalties) as shown on
such returns, or any assessment or notice of tax claim or deficiency received by
them to the extent that such taxes have become due. Neither the Borrower nor any
of the Guarantors knows of any proposed material tax assessment against or
affecting it and is not otherwise obligated by any agreement, instrument or
otherwise to contribute to the payment of taxes owed by any other Person. All
tax liabilities are adequately provided for or reserved against on the books of
the Borrower and the Guarantors (as the case may be) in accordance with GAAP.
5.11 Title to Properties/Priority of Liens.
5.11.1 Title. The Borrower and each of the Guarantors has good and
marketable title to, or valid lease hold interests in, all of the properties and
assets reflected on their latest financial statements referred to in Section 5.9
of this Agreement or acquired by it after the date of such financial statements
and prior to the date hereof, except for those properties and assets which have
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been disposed of since such dates in the ordinary course of business. All such
properties and assets are owned or leased by the Borrower or one of the
Guarantors, as the case may be, free and clear of all mortgages, pledges, liens,
security interests, encumbrances or charges of any kind, except such as are
identified in such Financial Statements.
5.11.2 Security Interest. The security interests granted by the Borrower
and the Guarantors to the Bank under the Security Agreements constitute valid
and perfected first priority security interests in and lien on the Collateral,
and in the instance of the Borrower, a valid and perfected first priority
security interest and lien on the Pledged Shares, as contemplated by the
Security Agreements executed by such Borrower or Guarantor.
5.12 Litigation. There are no actions, suits, investigations or
administrative proceedings of or before any court, arbitrator or governmental
authority, pending or threatened against the Borrower or any of the Guarantors
or any of their respective properties or assets, which (i) either in any case or
in the aggregate, if adversely deter mined, would materially and adversely
affect the business, operations, prospects, properties or assets or the
condition, financial or otherwise, of the Borrower or any of the Guarantors, or
(ii) question the validity or enforce ability of this Agreement, the Financing
Agreements, or any action to be taken in connection with the transactions
contemplated hereby or thereby.
5.13 Insurance. All physical properties and assets of the Borrower and the
Guarantors are covered by fire and other insurance with responsible insurance
companies against casualty and other losses customarily obtained to cover
comparable properties and assets by businesses in the region in which such
properties and assets are located, in amounts, scope and coverage which are
reasonable in light of existing conditions.
5.14 Disclosure. None of the information contained in the representations
and warranties made by the Borrower and the Guarantors set forth in this
Agreement, the Financing Agreements, or in any other agreement, instrument,
document, list, certificate, statement, schedule or exhibit heretofore delivered
or to be delivered to the Bank, as contemplated in this Agreement or in the
Financing Agree ments, contains or will contain any untrue statement of a
material fact or omits or will omit to state a fact necessary
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in order to make the statements contained herein or therein not materially
misleading.
5.15 No Event of Default. After giving effect to the transactions
contemplated by this Agreement, the Financing Agreements, and the other
instruments or documents delivered in connection herewith and therewith, there
does not exist any condition, event or act which constitutes an Event of Default
hereunder or which, after notice or lapse of time, or both, would constitute an
Event of Default hereunder.
5.16 Use of Proceeds. The proceeds of the Term Loan will be used (i) to
repay the March Loans and the other outstanding obligations of the Borrower and
Databit to the Bank, and all interest accrued thereon, (ii) to finance the
acquisition by Comverge of substantially all of the assets of the Control
Systems Division of Scientific-Atlanta Corporation, as provided in their
contract dated June 11, 1999, a true and complete copy of which, as amended to
date, has been provided by the Borrower to the Bank, and (iii) for working
capital for the Borrower and the Guarantors.
5.17 Valuation of Warrant. The Borrower has valued the warrants to be
delivered concurrently herewith, as provided in Section 4.3, at $25,000, and
represents that for income tax purposes it will value the warrant at said
amount.
5.18 Change in Custodian. Compliance with the covenant set forth in Section
6.16 has been approved by the Board of Directors of the Borrower.
5.19 Cash Flow. After Closing under this Agreement and the acquisition by
Comverge of substantially all of the assets of the Control Systems Division of
Scientific-Atlanta Corporation, the Borrower and those of its subsidiaries which
are included in its consolidated financial statements shall have sufficient
available cash to meet the financial obligations of their businesses, in the
ordinary course, on a current basis. Effective as of November 1 and through
December 31, 2000, the Borrower and those of its subsidiaries which are included
in its consolidated financial statement shall have sufficient available cash
from their business operations, and from possible sales by the Borrower of
shares of Tower to meet the financial obligations of their businesses, in the
ordinary course, on a current basis.
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5.20 Reduction in Loan. If Tower Semiconductor Holdings (1993) Ltd. or the
Borrower should sell any shares of Tower, the Borrower shall give the Bank
notice thereof within five (5) days of the completion of such sale, which notice
shall include the number of shares sold and the net proceeds of such sale.
Concurrently, the Borrower shall prepay the Term Loan in an amount equal to such
net proceeds.
SECTION 6 AFFIRMATIVE COVENANTS.
6. The Borrower covenants and agrees that, until the Term Loan has been
paid in full and all other Obligations discharged in full, and all fees and
charges payable hereunder or under any the Financing Agreements have been paid,
it shall comply or cause compliance with the following covenants:
6.1 Preservation of Existence. The Borrower and each of the Guarantors will
(i) preserve and maintain its corporate existence and its rights, franchises and
privil eges in the jurisdiction of its incorporation, and (ii) qualify and
remain qualified as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable in view of its business and operations
or in view of the ownership of its properties.
6.2 Maintenance of Properties; Insurance.
6.2.1 Properties. The Borrower and each of the Guarantors will maintain in
good repair, working order and condition all properties used in its respective
business (ordinary wear and tear excepted), and from time to time will make or
cause to be made all appropriate repairs, renewals and replacements, additions
and improvements thereto.
6.2.2 Insurance. The Borrower and each of the Guarantors will maintain, at
their expense, with financially sound and reputable insurers reasonably
acceptable to the Bank, insurance, with respect to its properties and business,
against loss or damage of the kinds and in amounts reasonably acceptable to the
Bank. All insurance of the Borrower and each of the Guarantors shall name the
Bank as loss payee with respect to its Collateral, and shall contain such other
provisions as the Bank may reasonably require to fully protect its interest in
the Collateral, and in payments to be made under such insurance policies; which
policies shall provide for not less than
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thirty (30) days' prior written notice to the Bank of the exercise of any right
of cancellation or material modification of the policy. Correct and complete
copies of all certificates of renewal of such insurance policies shall be
delivered to the Bank within fifteen (15) days after the execution of any such
renewal, but in any event prior to the expiration of the policies (and as soon
as available, and in any event within thirty (30) days after the execution
thereof, correct and complete copies of all the policies as so renewed).
6.3 Payment of Taxes. The Borrower and each of the Guarantors will pay and
discharge promptly all taxes (including, without limitation, all payroll
withholdings), assessments and governmental charges or levies imposed upon it or
upon its income or profits or upon any of its property, real, personal or mixed,
or upon any part thereof, before the same shall become in default; provided,
however, that neither the Borrower nor any Guarantor shall be required to pay
any such tax, assessment, charge, levy or claim if the validity or amount
thereof shall be contested in good faith by proper proceedings and if the
Borrower or such Guarantor, as the case may be, shall have set aside appropriate
and proper reserves which are reflected on its books.
6.4 Accounting; Financial Statements and Other Information. The Borrower
and each of the Guarantors will maintain a system of accounting established and
administered in accordance with GAAP and will set aside on its books all such
proper reserves for each fiscal year as shall be required by GAAP. The Borrower
will deliver, or cause to be delivered, to the Bank:
6.4.1 Quarterly Financial Reports. As soon as practicable after the end of
each of the first three (3) quarter annual periods in each fiscal year of the
Borrower, and in any event within sixty (60) days thereafter, a consolidated
balance sheet of the Borrower, the Guarantors, Decision and Tower Semiconductor
Holdings (1993) Ltd. as at the end of such period, and the related consolidated
state ments of operations, retained earnings, stockholders equity and changes in
the financial position of the Borrower, the Guarantors, Decision and Tower
Semiconductor Holdings (1993) Ltd. for each such period and for that part of the
fiscal year of the Borrower and the Guarantors then ended, all in the form filed
by the Borrower with the Securities and Exchange Commission, setting forth in
each case in compara tive form the corresponding figures for the corresponding
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periods of the preceding fiscal year, each of which statements shall be prepared
in accordance with GAAP, and subject to normal year-end audit adjustments, shall
fairly present the consolidated financial position of the Borrower, the
Guarantors, Decision and Tower Semiconductor Holdings (1993) Ltd. as at the end
of and results of operations for the periods reported.
6.4.2 Annual Financial Reports. As soon as practicable after the end of
each fiscal year of the Borrower, and in any event within ninety (90) days
thereafter, an certified consolidated balance sheet of the Borrower, the
Guarantors, Decision and Tower Semiconductor Holdings (1993) Ltd. as at the end
of such year and the related certified consolidated statements of income,
retained earnings, stockholders equity and changes in financial position of the
Borrower, the Guarantors, Decision and Tower Semiconductor Holdings (1993) Ltd.
for such year, setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, which statements shall be prepared in
accordance with GAAP, and shall include an unqualified report and opinion of
Deloitte & Touche, LLP or another independent certified public accountant of
recognized standing selected by the Borrower and reasonably acceptable to the
Bank.
6.4.3 Reports. Promptly upon receipt thereof, copies of any reports
(including, without limitation, any management letters) submitted to the
Borrower or any of the Guarantors by any independent certified public accountant
in connection with the examination of the annual or interim financial statements
of the Borrower and the Guarantors by such accountant.
6.4.4 SEC Filings. Within ten (10) days after filing with the United States
Securities and Exchange Commission, copies of all Forms 10Q and 10K and any
other forms so filed by the Borrower.
6.4.5 Tower. Within ten (10) days of general distribution, copies of all
reports provided by Tower to its shareholders.
6.4.6 Other Information. With reasonable promptness, such other data and
information as from time to time may be reasonably requested by the Bank with
respect to the Borrower or any of the Guarantors.
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6.5 Compliance. The Borrower and the Guarantors will comply with the
requirements of all applicable laws, rules, regulations or orders of any
applicable governmental or administrative authority, and all agreements to which
the Borrower or any of the Guarantors (as the case may be) is a party, the
noncompliance with which laws, rules, regula tions, orders and agreements would
materially adversely affect the business, operations, property or assets, or the
condition, financial or otherwise, of the Borrower or the Guarantor (as the case
may be).
6.6 ERISA. The Borrower shall maintain compliance in all material respects
with any applicable provisions of ERISA in connection with each Plan. The
Borrower will deliver to the Bank, promptly after the filing or receipt thereof,
copies of all reports, including annual reports and notices, which the Borrower
files with or receives from the PBGC or the U.S. Department of Labor under ERISA
with respect to any Plan; and as soon as possible and in any event within thirty
(30) days after either of the Borrower knows or has reason to know that any
Reportable Event or Prohibited Transaction has occurred with respect to any Plan
or that the PBGC or the Borrower has instituted or will institute proceedings
under Title IV of ERISA to terminate any Plan, the Borrower will deliver to the
Bank a certificate of its Chief Financial Officer setting forth the details as
to such Reportable Event or Prohibited Transaction or Plan termination and the
action the Borrower proposes to take with respect thereto.
6.7 Payment of Indebtedness. The Borrower and the Guarantors, in accord
with their past practices, shall promptly pay, discharge, or satisfy before they
become delinquent all of their material indebtedness; provided, however, that
neither the Borrower nor any Guarantor shall be required to pay any such
indebtedness if the validity or amount thereof shall be contested in good faith
by proper proceedings, and the Borrower or such Guarantor, as the case may be,
shall have set aside appropriate and proper reserves which are reflected on its
books.
6.8 Notification to Bank. The Borrower shall promptly notify the Bank of
(i) any Event of Default hereunder, (ii) any event, condition or act which with
the giving of notice or the lapse of time, or both, would constitute an Event of
Default hereunder, (iii) any material litigation or proceedings that are
instituted or threatened (to the knowledge of the Borrower or any of the
Guarantors as the case may be) against the Borrower or any of the
20
<PAGE>
Guarantors or any of their respective assets, except when the relief sought is
monetary damages which in any one litigation or proceeding in the aggregate do
not exceed $100,000 and the litigation or proceeding resulted from or arose out
of transactions in the regular course of the Borrower's or such Guarantor's
business, (iv) each and every default by the Borrower or any of the Guarantors
under any obligation for borrowed money which would permit the holder of such
obligation to accelerate its maturity, including the names and addresses of the
holders of such obligation and the amount thereof, (v) any change in the
location of the chief executive offices of the Borrower or any of the Guarantors
as identified in its Security Agreement, and (vi) the relocation of any of its
Collateral, or the location of any such Collateral at a new address.
6.9 Further Assurances. The Borrower will duly execute and deliver, or will
cause to be duly executed and delivered, such further instruments and documents,
including, without limitation, additional security agreements, Uniform
Commercial Code financing statements or amendments or continuations thereof, and
will do or use its best efforts to cause to be done such further acts as may be
necessary or proper in the Bank's opinion to effectuate the provisions or
purposes of this Agreement or the Financing Agreements.
6.10 Inspection. The Bank, or any Person designated by the Bank, shall have
the right, from time to time, to visit the Borrower's and any of the Guarantors'
place or places of business (or any other place where the Collateral or any
information relating thereto is kept or located) during reasonable business
hours, and absent an Event of Default upon reasonable notice, without hindrance
or delay, (i) to inspect, audit, check and make copies of and extracts from the
Borrower's or any of the Guarantors' books, records, journals, orders, receipts,
correspondence and other data relating to the Borrower's and/or any of the
Guarantors' business, (ii) to verify such matters concerning the Collateral
and/or the Pledged Shares, as the Bank (in its sole and absolute discretion) may
consider appropriate, and (iii) to discuss the affairs, finances and business of
the Borrower and any of the Guarantors with their officers and directors. Upon
request, the Borrower and the Guarantors will provide the Bank with copies of
such documents as the Bank may reasonably request. The Bank shall have the
right, at any time or times hereafter after an Event of Default has occurred, to
verify by mail, telephone, telegraph or other communication with any account
21
<PAGE>
debtor, under any name and in any form, the validity, amount or any other matter
relating to any or all of the accounts receivable. The Borrower shall pay on
demand all expenses reasonably incurred by the Bank in acquiring information
pursuant to this Section 6.10, including but not limited to appraisers and asset
based lender review auditors.
6.11 Year 2000. The Borrower and each of the Guarantors has (i) undertaken
a sufficient inventory review and assessment of all of the Borrower's and each
Guarantors' areas within their businesses and operations that could be adversely
affected by the failure to be Year 2000 Compliant on a timely basis, (ii)
developed a plan and timeline for becoming Year 2000 Compliant on a timely
basis, (iii) to date, implemented that plan in accordance with that timberline
in all material respects, and (iv) made inquiry of its key suppliers, vendors
and customers as to whether such person(s) will, on a timely basis, be Year 2000
Compliant in all material respects and on the basis of such inquiry reasonably
believes that all such Person(s) will be Year 2000 Compliant. "Year 2000
Compliant" shall mean that, in all material respects, all computer and software
related applications shall be able to recognize and perform properly, date
sensitive functions involving dates prior to and after December 31, 1999. The
Borrower shall take all action necessary to ensure that the Borrower and all of
the Guarantors shall be Year 2000 Compliant, and that no material adverse change
will arise in their financial conditions as a result of its efforts or failure
to be Year 2000 Compliant.
6.12 Stock Ownership. The Borrower, at all times, shall own not less than
seventy (70%) percent of all of the issued and outstanding stock of each class
of Comverge.
6.13 Tower Time Deposits. Tower, at all times prior to September 15, 1999,
shall maintain time deposits with the Bank in a principal amount which shall not
be less than $10,000,000, and at all times thereafter maintain time deposits
with the Bank in a principal amount which shall not be less than $20,000,000.
6.14 Decision. The Borrower shall (i) deliver to the Bank as part of the
Pledged Shares, the 1,600,000 shares of Decision currently held of record by the
Registry Company of Bank Discount, Ltd., upon the Borrower acquiring possession
thereof, and (ii) use all reasonable efforts to obtain possession and record
ownership of such shares of Decision free and clear of liens and encumbrances.
22
<PAGE>
6.15 Perfection of Pledge in Israel. The pledge by the Borrower of its
shares in Tower Semiconductor Holdings (1993) Ltd. has been perfected in Israel
by a filing of a notification with the Pledge Registry. The Borrower, as soon as
is practicable, but in any event within ten (10) days, shall cause its pledge to
the Bank of its shares in Decision to be perfected in Israel by a notification
with the Pledge Registry in Israel, and shall give the Bank notice thereof.
6.16 Custodian. The Bank, or Bank Leumi le Israel BM, within thirty (30)
days of the date of this Agreement, shall become custodian of the certificates
evidencing the issued and outstanding shares of Tower owned of record by Tower
Semiconductor Holdings (1993), Ltd.
6.17 Tower Shares. Prior to December 31, 1999, record and beneficial
ownership of 60% of the shares of Tower owned of record by Tower Semiconductor
Holdings (1993) Ltd., as of the date of this Agreement, will be transferred to
the Borrower free and clear of all liens and encumbrances, and the Borrower
shall have given the Bank notice of such transfer.
6.18 Guaranty by Decision. The Borrower shall use its best efforts to
obtain all consents necessary in order for Decision to become a guarantor of the
Borrower's Obligations, and upon obtaining such consents shall cause Decision to
execute and deliver to the Bank its guaranty in the same form executed by the
Guarantors, together with the Bank's form of Certificate of Authority and
Shareholders Consent.
SECTION 7. NEGATIVE COVENANTS
7. The Borrower covenants and agrees that, until the Term Loan has been
paid in full and all of its Obligations hereunder or under the Financing
Agreements have been paid in full, it shall comply or cause compliance with the
following covenants:
7.1 Limitation on Liens. The Borrower and the Guarantors will not create,
assume or suffer to exist any lien, mortgage, or other encumbrance of any kind
with respect to the Collateral or the Pledged Shares, except for: (i) liens in
favor of the Bank, (ii) liens for taxes or assessments or other government
charges or levies not yet due and payable; (iii) judgments and other similar
liens arising in connection with court proceedings, provided the
23
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execution or other enforcement of such liens is effectively stayed within twenty
(20) days after docketing and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings, and (iv) liens incurred
in the normal course of business, including, but not limited to liens arising
out of purchase money financing provided, however, that thirty (30) days written
notice thereof shall have been given to the Bank. The failure to give such
notice shall be deemed to be a material breach of this Covenant.
7.2 Mergers and Consolidations. Neither the Borrower nor any of the
Guarantors shall merge or consolidate with any Person, or acquire the assets of
any Person except with the Bank's prior written consent; except that any
Guarantor may merge with or acquire the assets of the Borrower or any other
Guarantor provided the Bank is given concurrent notice thereof.
7.3 Change in Business. Neither the Borrower nor any of the Guarantors will
make any material change in the character of its business, as carried on at the
date hereof.
7.4 Tower Borrowings. Tower shall not draw against its existing line of
credit with Bank Leumi Le- Israel BM.
7.5 Transfer of Assets. Neither the Borrower nor any of the Guarantors will
sell, lease, assign, transfer or otherwise dispose of, or permit any of the
Guarantors to sell, lease, assign, transfer or otherwise dispose of, any of its
now owned or hereafter acquired assets other than in the ordinary course of its
business, without the prior consent of the Bank.
7.6 No Pre-Payments. Neither the Borrower nor any of the Guarantors shall
pre-pay any indebtedness other than (i) indebtedness to the Bank, and (ii) trade
indebtedness incurred in the ordinary course of the businesses where by the
terms of sale, a discount is allowed for a payment made within a limited period
after the invoice date.
7.7 Guarantees to Others. Neither the Borrower nor any of the Guarantors
shall guarantee, endorse, stand as surety for or otherwise be contingently
liable for any indebtedness, or the obligations of any other Person, except the
Borrower may guarantee the obligations of any
24
<PAGE>
Guarantor and any Guarantor may guarantee any obligations of the Borrower or any
other Guarantor.
7.8 Change in Fiscal Year. Neither of the Borrower nor any of the
Guarantors shall not change its fiscal year without the prior consent of the
Bank, which consent shall not be unreasonably withheld.
SECTION 8. EVENTS OF DEFAULT/REMEDIES.
8.1 The occurrence of any one or more of the fol lowing events shall
constitute an "Event of Default ":
8.1.1 Principal or Interest. If the Borrower shall fail to pay any
installment of principal or interest on the Note when due and payable; or
8.1.2 Obligations. If the Borrower shall fail to pay and satisfy any
Obligation when due and payable; or
8.1.3 Certain Covenants. If there shall be a default in the observance or
performance of any covenant, condition or agreement set forth in Sections 6.1,
6.12 or 6.13 or Section 7 (other than with respect to an involuntary lien or
encumbrance as prohibited in Section 7.1 of this Agreement); or
8.1.4 Other Covenant. If there shall be a default in the observance or
performance of any other covenant, condition or agreement contained in this
Agreement, in any of the Financing Agreements or in any other document or
instrument referred to herein or therein, which default shall continue
unremedied or uncured for a period of fifteen (15) days after notice thereof has
been given to the Borrower; or
8.1.5 Representations. If any material representation or warranty made by
or on behalf of the Borrower or any of the Guarantors, whether contained in this
Agreement, in any of the Financing Agreements, or in any other document or
instrument referred to herein or therein or delivered in connection with any of
the transactions contemplated herein or therein, shall prove to have been false
or incorrect in any material respect when made; or
8.1.6 Voluntary Insolvency Proceedings. If the Borrower or any of the
Guarantors or any of their Affiliates shall (i) apply for or consent to or
acquiesce in
25
<PAGE>
the appointment of or the taking of possession by a receiver, liquidator,
custodian or trustee of itself or of all or a substantial part of its property,
(ii) admit in writing its inability, or be generally unable, to pay its debts as
such debts become due, (iii) make a general assignment for the benefit of its
creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as
now or hereafter in effect) or any similar foreign law, (v) file a petition
seeking to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, (vi) fail to
controvert in a timely or appropriate manner, or acquiesce in writing to, any
petition filed against itself in an involuntary case under such Bankruptcy Code,
or any similar foreign law, or (vii) take any action for the purpose of
effecting any of the foregoing; or
8.1.7 Involuntary Insolvency Proceedings. A proceeding or case shall be
commenced, without the application or consent of the Borrower or any of the
Guarantors in any court of competent jurisdiction, seeking (i) liquidation,
reorganization, dissolution, winding-up or composition or adjustment of debts of
the Borrower or such Guarantor, (ii) the appointment of a trustee, receiver,
liquidator, custodian or the like of the Borrower, or any Guarantor or of all or
any substantial part of any of their assets, or (iii) similar relief under any
law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgement or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect, for a period of
thirty (30) days; or any order for relief against the Borrower or any of the
Guarantors, shall be entered in an involuntary case under the Bankruptcy Code,
or any similar foreign law, and shall continue unstayed and in effect for a
period of thirty (30) days; or
8.1.8 Divestiture of Assets. If any order, judgment, or decree shall be
entered in any proceeding requiring the Borrower, or any of the Guarantors, to
divest itself of a substantial part of its assets, and if, within sixty (60)
days after entry thereof (unless or until enforcement is sooner commenced), such
order, judgment or decree shall not have been discharged or execution thereof
stayed pending appeal; or if, within thirty (30) days after the expiration of
any such stay (unless or until enforcement is sooner commenced), such judgment,
order or decree shall not have been discharged; or
26
<PAGE>
8.1.9 Judgments. If one or more judgments exceeding $100,000 in the
aggregate, against the Borrower or any of the Guarantors or attachments to
recover more than $100,000 against any Borrower's or Guarantor's property remain
unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period
of thirty (30) days, or enforcement proceedings are commenced with respect to
any judgment against the Borrower or any of the Guarantors; or
8.1.10 Other Defaults. If the Borrower or any of the Guarantors or any of
their Affiliates shall (i) fail to pay any indebtedness for borrowed money or
any interest or premium thereon, when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise); or (ii) fail to perform
or observe any term, covenant or condition on its part to be performed or
observed under any agreement or instrument relating to any indebtedness for
borrowed money, when required to be performed or observed, if the effect of such
failure to perform or observe is to accelerate, or to permit the acceleration
after the giving of notice or passage of time, or both, of the maturity of such
indebtedness, or any such indebtedness shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; or (iii) allow any account
maintained by them at the Bank to be overdrawn for a period which exceeds five
(5) days after notice from the Bank; or
8.1.11 ERISA. Any of the following events occur or exist with respect to
the Borrower or any of its ERISA Affiliates: (i) any Prohibited Transaction
involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii)
the filing under Section 4041 of ERISA of a notice of intent to terminate any
Plan or the termination of any Plan; (iv) any event or circumstance that might
constitute grounds entitling the PBGC to institute proceedings under Section
4042 of ERISA for the termination of, or for the appointment of a trustee to
administer, any Plan, or the institution by the PBGC of any such proceedings;
(v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a
Multiemployer Plan or the reorganization, insolvency or termination of any Multi
employer Plan; and in each case above, such event or con dition, together with
all other events or conditions, if any, could in the reasonable opinion of the
Bank subject either the Borrower or any ERISA Affiliate to any material tax,
penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or
otherwise (or any combination thereof); or
27
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8.1.12 Levies. Any material portion of the Collateral or the Pledged Shares
is attached, seized, becomes subject to a writ or distress or a warrant, or is
levied upon.
8.2 Remedies. Upon the occurrence and continuance beyond any applicable
cure period of any one or more of such Events of Default, the Bank may, at its
option, without presentment for payment, demand, notice of dishonor or notice of
protest or any other notice, all of which are hereby expressly waived by the
Borrower, declare any and all of the liabilities of the Borrower to the Bank
(including, without limitation, the Term Loan) to be due and payable together
with interest at the rate specified in this Agreement until fully paid. The Bank
shall have all of the rights and remedies of a secured party under the Uniform
Commercial Code of the State of New York and under the Uniform Commercial Code
of any other state in which any of the Collateral may be situated, and,
additionally, all of the rights and remedies set forth in this Agreement and the
Financing Agreements, and in any instrument or document referred to herein or
therein, and under any other applicable law relating to this Agreement or the
Financing Agreements. The Bank may, at its option, cure any default by the
Borrower or any of the Guarantors under any agreement with a third party which
constitutes, or would with notice or lapse of time or both constitute, an Event
of Default hereunder, and may add the reasonable amount expended in such cure to
the liabilities of the Borrower or such Guarantor hereunder and charge the
Borrower's account therefor, such amounts to be repayable by Borrower on demand;
the Bank shall be under no obligation to effect such cure and shall not by
making any payment for the Borrower's account be deemed to have assumed any
obligation or lia bility of the Borrower or any Guarantor.
SECTION 9. MISCELLANEOUS.
9.1 Expenses. The Borrower, whether or not the transactions contemplated
hereby are consummated, shall pay to the Bank, or reimburse the Bank for, all
out-of-pocket expenses incurred by the Bank in connection with the preparation
and enforcement of this Agreement, the Financing Agreements, all other
agreements, instruments and documents executed in connection herewith and
therewith and the transactions contemplated hereunder and thereunder, together
with any amendments, supplements, consents or modifications which may be
hereafter made or entered into in respect
28
<PAGE>
thereof, including, but not limited to, filing fees, expenses for searches, and
the reasonable fees and disbursements of counsel to the Bank. The Bank shall
invoice the Borrower for the amounts to be reimbursed by the Borrower to the
Bank as is provided in this Section, and if same are not paid by the Borrower
within ten (10) days of the date of such invoice, the Bank is hereby authorized
to charge any amounts payable hereunder directly to the account(s) of the
Borrower maintained with the Bank.
9.2 Survival of Agreement. All agreements, representations and warranties
contained herein or made in writing by the parties hereto in connection with the
transactions contemplated hereby shall survive the execution and delivery of
this Agreement, the Financing Agreements and the consummation of the
transactions contemplated herein or therein regardless of any investigation made
by or on behalf of the Bank.
9.3 No Waiver; Cumulative Remedies. No failure to exercise, and no delay in
exercising on the part of the Bank, any right, power or privilege under this
Agreement or under any of the Financing Agreements or other documents referred
to herein or therein shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power and privilege. The rights and remedies of the Bank hereunder and
under the Financing Agreements and under any other present and future agreements
between the Bank and the Borrower are cumulative and not exclusive of any rights
or remedies provided by law, or under any of said Financing Agreements or
agreements and all such rights and remedies may be exercised successively or
concurrently.
9.4 Notices. All notices, approvals, consents, requests, demands or other
communications (collectively, "Communications") to or upon the respective
parties hereto shall be made in writing in one of the following ways and shall
be deemed to have been given, received and dated: if by hand, immediately upon
delivery; if by telegram, express mail or any other overnight delivery service,
one (1) day after dispatch; and if by certified mail, return receipt requested,
or first class mail, three (3) business days after mailing. All Communications
are to be given to the following addresses (or to such other address as any
party may designate by Communication in accordance with this Section):
29
<PAGE>
If to the Bank: Bank Leumi USA
562 Fifth Avenue
New York, New York 10036
Attn: Mr. Steven Laufer
Assistant Vice President
with a copy to: Warshaw Burstein Cohen
Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attn: Allen N. Ross, Esq.
If to the
Borrower: Data Systems & Software Inc.
200 Route 17
Mahwah, New Jersey 07430
Attn: Mr. George Morgenstern,
President
With a copy to: Ehrenreich Eilenberg Krause
& Zivian, LLP
11 East 44th Street
New York, New York 10017
Attn: Sheldon Krause, Esq.
9.5 Amendments and Waivers. Neither this Agreement, nor any of the
Financing Agreements or any other instrument or document referred to herein or
therein may be changed, waived, discharged or terminated orally, except by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
9.6 Applicable Law. This Agreement and the Financing Agreements and any
other document referred to herein or therein and the obligations of the parties
hereunder or thereunder are being executed and delivered in New York, New York
and shall be construed and interpreted in accordance with the laws of the State
of New York applied to agreements entered into and performed therein.
9.7 Successors. This Agreement, the Financing Agreements and any other
document referred to herein or therein shall be binding upon and inure to the
benefit of and be enforceable by the parties and their respective heirs, legal
representatives, successors and assigns, except that the Borrower may not assign
its rights under this Agreement, the Financing Agreements and any other document
30
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referred to herein or therein without the prior written
consent of the Bank.
9.8 Partial Invalidity. If any provision of this Agreement or the Financing
Agreements is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this Agreement or the Financing Agreements
as a whole but this Agreement or the particular Financing Agreement, as the case
may be, shall be construed as though it did not contain the particular provision
or provisions held to be invalid or unenforceable and the rights and obligations
of the parties shall be construed and enforced only to such extent as shall be
permitted by law.
9.9 Headings. The headings used herein are for convenience only and do not
constitute matters to be considered in interpreting this Agreement.
9.10 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN
ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT
OF THIS AGREEMENT, THE FINANCING AGREEMENTS OR ANY INSTRUMENT, DOCUMENT OR
GUARANTY DELIVERED PURSUANT HERETO OR THERETO, OR THE VALIDITY, PROTECTION,
INTERPRETATION, ADMINISTRATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF, OR
ANY OTHER CLAIM OR DISPUTE HEREUNDER OR THEREUNDER.
9.11 JURISDICTION; SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY
CONSENTS TO THE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK FOR
THE COUNTY OF NEW YORK, AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT, THE FINANCING AGREEMENTS OR ANY DOCUMENT,
INSTRUMENT OR GUARANTY DELIVERED PURSUANT HERETO OR THERETO. IN ANY SUCH
LITIGATION THE BORROWER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR
OTHER PROCESS AND AGREES THAT THE SERVICE THEREOF MAY BE MADE IN ANY OTHER
MANNER PERMITTED BY THE RULES OF EITHER OF SAID COURTS.
9.12 Conflicts. In the event that any provision of this Agreement conflicts
with the Financing Agreements, or with any document or instrument delivered in
connection herewith or therewith, the terms of this Agreement shall control,
notwithstanding such conflict.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
DATA SYSTEMS & SOFTWARE INC.
By: /s/ George Morgenstern
--------------------------
George Morgenstern
President and Chief
Executive Officer
BANK LEUMI USA
By: /s/ Sarit Brosh
-------------------------
Sarit Brosh
First Vice President
By: /s/ Steven Laufer
-------------------------
Steven Laufer
Assistant Vice President
32
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EXHIBIT C
CONFIRMATION OF SECURITY AGREEMENTS
-----------------------------------
Each of the undersigned hereby confirms that:
It has executed and delivered a Security Agreement wherein and whereby it
has granted the Bank a security interest in certain Collateral, as therein
described, to secure to the Bank any and all Obligations of the Borrower to the
Bank, including interest and attorneys' fees, costs and expenses of collection
incurred by the Bank in enforcing any of the Obligations. Each of the
undersigned acknowledges that concurrently the Borrower's Obligations to the
Bank are being increased by reason of the Bank's making the Term Loan provided
in the annexed Amended and Restated Credit Agreement, and that the Obligations
include, without limitation, the Term Loan and the Letter of Credit as therein
provided.
The Security Agreement of each of the undersigned is in full force and
effect, has not been terminated, rescinded, amended or modified, and each of the
undersigned has no defenses or assets with respect to its Obligations to the
Bank under the Security Agreement.
INTERNATIONAL DATA
OPERATIONS, INC.
By:_______________________
DATA SYSTEMS & SOFTWARE, INC.
By:_______________________
George Morgenstern
President
DATABIT, INC.
By:_______________________
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EXHIBIT D
CONFIRMATION OF GUARANTY AGREEMENTS
-----------------------------------
The undersigned hereby confirms that:
It has executed and delivered an Unlimited Guaranty in favor of the Bank,
wherein and whereby the undersigned, among other things, unconditionally
guaranteed to the Bank payment when due, whether by acceleration or otherwise of
any and all Obligations of the Borrower to the Bank, including interest and
attorneys' fees, costs and expenses of collection incurred by the Bank in
enforcing any of the Obligations. The undersigned acknowledges that concurrently
the Borrower's Obligations to the Bank are being increased by reason of the
Bank's making the Term Loan provided in the annexed Amended and Restated Credit
Agreement, and that the Obligations include, without limitation, the Term Loan
and the Letter of Credit as therein provided.
The Guaranty of the undersigned is in full force and effect, has not been
terminated, rescinded, amended or modified, and the undersigned has no defenses
or assets with respect to its Obligations to the Bank under the Guaranty.
INTERNATIONAL DATA
OPERATIONS, INC.
By:_______________________
34
TERM NOTE
$5,947,482 New York, New York
As of August 30, 1999
A. GENERAL; TERMS OF PAYMENT
1. DATA SYSTEMS & SOFTWARE INC., a Delaware corporation (the"Borrower"),
promises to pay to the order of BANK LEUMI USA (the "Bank"), at its offices at
564 Fifth Avenue, New York, New York 10017, or at such other place as may be
designated by the holder hereof in writing, in immediately available funds, the
principal sum of Five Million Nine Hundred Forty-Seven Thousand Four Hundred
Eighty-Two ($5,947,482) Dollars on August 1, 2000, or sooner as provided in the
Credit Agreement (as hereinafter defined).
This note is the Note referred to in that certain Amended and Restated
Credit Agreement between the Borrower and the Bank, dated as of even date
herewith, as such agreement may be further amended from time to time (the
"Credit Agreement"), and is subject to prepayment and its maturity is subject to
acceleration upon the terms contained in the Credit Agreement. Capitalized terms
used herein shall be defined as in the Credit Agreement.
The Borrower will pay interest on the unpaid principal amount of the Term
Loan 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 actual
number of days in the year. Interest shall be at a rate per annum which shall be
equal to one percent (1%) 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, but in no event in excess of the maximum rate permitted
by law. In no event shall interest exceed the maximum legal rate permitted for
the Borrower. The Borrower acknowledges that the Reference Rate may not
necessarily represent the lowest rate of interest charged by the Bank to its
customers. Interest on the unpaid principal amount of the Term Loan shall be
payable the first day of each month in each year, commencing on the first day of
the first full calendar month after the date of this Note, at maturity (whether
by acceleration or otherwise) and upon the making of any prepayment. In
addition, the Borrower will pay interest on any overdue installment of principal
for the
<PAGE>
period for which overdue, on demand, at a rate equal to three (3%) percent per
annum above the rate of interest hereinabove indicated.
2. 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
other wise), 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. DEFAULT
Upon the occurrence of an Event of Default, as defined in the Credit
Agreement, 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, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived by the Borrower.
C. MISCELLANEOUS
1. No Wavier: Rights and 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 rights and remedies herein provided are cumulative and
not exclusive of any remedies or rights provided by law or by any other
agreement between the Borrower and the Bank.
2. 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 the enforcement of the Bank's rights
hereunder.
3. 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
2
<PAGE>
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
4. Construction. This Note shall be governed by the laws of the State of
New York, without giving effect to its choice of law principles.
5. Successors and Assigns. This Note shall be binding upon the Borrower and
its successors and assigns, and the terms hereof shall inure to the benefit of
the Bank and its successors and assigns, including subsequent holders hereof.
6. 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.
7. Waiver of Notice; Set-off. The Borrower hereby waives presentment,
demand for payment, notice of protest and all other demands in connection with
the delivery, acceptance, performance, default or enforcement of this Note. 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 of the Borrower to the
Bank, including those hereunder.
8. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY
LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY AGREEMENT, INSTRUMENT, DOCUMENT OR GUARANTEE DELIVERED PURSUANT
HERETO OR PURSUANT TO THE CREDIT AGREEMENT, OR THE VALIDITY, PROTECTION,
INTERPRETATION, ADMINISTRATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF OR
ANY OTHER CLAIM OR DISPUTE HEREUNDER OR THEREUNDER.
9. JURISDICTION, SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY
CONSENTS TO THE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK FOR
THE COUNTY OF NEW YORK AND THE UNITED STATE DISTRICT FOR THE SOUTHERN DISTRICT
OF NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS NOTE OR ANY DOCUMENT, INSTRUMENT OR GUARANTEE DELIVERED
PURSUANT HERETO OR PURSUANT TO THE AGREEMENT. IN ANY SUCH LITIGATION, THE
BORROWER WAIVES PERSONAL SERVICE OF A SUMMONS, COMPLAINT OR OTHER PROCESS AND
AGREES THAT THE SERVICE THEREOF MAY BE MADE IN ANY OTHER MANNER PERMITTED BY THE
RULES OF EITHER OF SAID COURTS.
3
<PAGE>
10. EXTANT NOTE. This Note amends, restates and supercedes the Floating
Rate Promissory Note, dated March 24, 1999, made by the Borrower and Databit,
Inc. to the order of the Bank.
DATA SYSTEMS & SOFTWARE, INC.
By:/s/ George Morgenstern
--------------------------
200 Route 17
Mahwah, New Jersey 07430
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 919
<SECURITIES> 0
<RECEIVABLES> 8,699
<ALLOWANCES> 85
<INVENTORY> 2,399
<CURRENT-ASSETS> 12,873
<PP&E> 6,584
<DEPRECIATION> 3,463
<TOTAL-ASSETS> 68,687
<CURRENT-LIABILITIES> 16,071
<BONDS> 609
0
0
<COMMON> 79
<OTHER-SE> 30,600
<TOTAL-LIABILITY-AND-EQUITY> 68,687
<SALES> 10,632
<TOTAL-REVENUES> 25,158
<CGS> 9,007
<TOTAL-COSTS> 19,944
<OTHER-EXPENSES> 9,619
<LOSS-PROVISION> 74
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> (4,650)
<INCOME-TAX> 32
<INCOME-CONTINUING> (4,682)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,892)
<EPS-BASIC> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
