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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 MARCH 31, 1999 COMMISSION FILE NUMBER 0-19771
-----------------------------------
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
-----------------------------------
Delaware 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 Route 17, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip code)
(201) 529-2026
Registrant's telephone number, including area code
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Number of shares outstanding of the registrant's common stock, as of
April 30, 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
March 31, 1999 .......................................... 1
Consolidated Statements of Operations and Comprehensive
Loss for the three month periods ended March 31, 1998
and 1999 ................................................ 2
Consolidated Statement of Changes in Shareholders' Equity
for the three month period ended March 31, 1999 ......... 3
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1998 and 1999 ................... 4
Notes to Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 8
PART II. Other Information
Item 1. Legal Proceedings ................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders ............... 12
Item 6. Exhibits and Reports on Form 8-K .................................. 12
Signatures ................................................................ 13
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company expects," "the Company anticipates," "the Company believes," "the
Company estimates," and other phrases of similar meaning. Whether such
statements ultimately prove to be accurate depends upon a variety of factors
that may affect the business and operations of the Registrant.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
ASSETS 1998 1999
------------ ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,003 $ 990
Short-term interest bearing bank deposits 1,252 1,007
Marketable equity securities, available for sale 1,383 1,554
Restricted cash 752 2,435
Trade accounts receivable, net 7,244 5,986
Inventory 704 806
Other current assets 960 1,082
-------- --------
Total current assets 13,298 13,860
-------- --------
Investments 56,490 53,936
-------- --------
Property and equipment, net 1,738 1,670
-------- --------
Other assets:
Goodwill and organization costs, net 190 161
License, net 471 442
Other 1,057 975
-------- --------
1,718 1,578
-------- --------
Total assets $ 73,244 $ 71,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 470 $ 2,233
Current maturities of long-term debt 504 630
Trade accounts payable 2,105 2,455
Accrued payroll, payroll taxes and social benefits 2,561 2,404
Other current liabilities 1,939 1,485
-------- --------
Total current liabilities 7,579 9,207
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 102 75
Other 585 549
-------- --------
Total long-term liabilities 687 624
-------- --------
Commitments and contingencies
Minority interests 25,560 24,392
-------- --------
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 35,024
Deferred compensation expense (327) (263)
Retained earnings 6,942 4,064
-------- --------
41,673 38,904
Treasury stock, at cost - 490,262 shares (2,365) (2,365)
Accumulated other comprehensive income 110 282
-------- --------
Total shareholders' equity 39,418 36,821
-------- --------
Total liabilities and shareholders' equity $ 73,244 $ 71,044
======== ========
</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)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1999
-------- --------
<S> <C> <C>
Sales:
Products $ 6,765 $ 2,419
Services 4,952 5,257
-------- --------
11,717 7,676
-------- --------
Cost of sales:
Products 5,797 2,032
Services 3,402 3,878
-------- --------
9,199 5,910
-------- --------
Gross profit 2,518 1,766
-------- --------
Research and development expenses, net 342 309
Selling, general and administrative expenses 4,889 2,790
-------- --------
Operating loss (2,713) (1,333)
Interest income 61 24
Interest expense (92) (40)
Other income, net 45 3
-------- --------
Loss before income taxes (2,699) (1,346)
Provision for income taxes 23 37
-------- --------
Loss after income taxes (2,722) (1,383)
Minority interests 173 18
Loss in affiliates, net of minority interests (349) (1,513)
-------- --------
Net loss (2,898) (2,878)
Other comprehensive income:
Unrealized gain on securities available for sale -- 172
-------- --------
Comprehensive loss $ (2,898) $ (2,706)
======== ========
Basic and diluted net loss per share $ (0.39) $ (0.39)
======== ========
Weighted average number of shares outstanding (in thousands) 7,369 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
restricted stock
award compensation 45 64 109
Unrealized gain on securities
available for sale 172 172
Net loss (2,878) (2,878)
----- ----- ------- ------- ------- ------- ------- -------
Balances as of
March 31, 1999
(unaudited) 7,924 $ 79 $35,024 $ (263) $(2,365) $ 4,064 $ 282 $36,821
===== ===== ======= ======= ======= ======= ======= =======
</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>
Three months ended March 31,
----------------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(2,898) $(2,878)
Adjustments to reconcile net loss to net cash used
in operating activities - see Schedule A 1,782 2,682
------- -------
Net cash used in operating activities (1,116) (196)
------- -------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net (150) 245
Restricted cash 1,456 (1,683)
Proceeds from realization of marketable securities 1,600 -
Acquisitions of property and equipment (630) (117)
Proceeds from sale of property and equipment 115 9
Acquisition of intangible assets (500) --
Decrease (increase) in other assets (23) 4
------- -------
Net cash provided by (used in) investing activities 1,868 (1,542)
------- -------
Cash flows provided by (used in) financing activities:
Short-term debt, net (672) 1,763
Proceeds of long-term debt -- 9
Repayments of long-term debt (104) (47)
------- -------
Net cash provided by (used in) financing activities (776) 1,725
------- -------
Net decrease in cash and cash equivalents (24) (13)
Cash and cash equivalents at beginning of period 1,424 1,003
------- -------
Cash and cash equivalents at end of period $ 1,400 $ 990
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 61 $ 54
======= =======
Income taxes $ 50 $ 35
======= =======
</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>
Three months ended March 31,
----------------------------
1998 1999
------- -------
<S> <C> <C>
A. Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization $ 385 $ 234
Minority interests (450) (1,168)
Earnings on marketable debt securities (6) --
Deferred income taxes 433 --
Increase (decrease) in liability for severance pay 136 (36)
Loss in affiliates 604 2,554
Gain on sale of property, plant and equipment, net (42) (3)
Amortization of restricted stock award compensation 49 109
Other 117 --
Decrease (increase) in accounts receivable and other current assets (1,501) 1,137
Increase in inventory (465) (102)
Decrease (increase) in long-term receivables (41) 82
Increase (decrease) in accounts payable and other current liabilities 2,476 (192)
Increase in liability in respect of customer advances, net 87 67
------- -------
$ 1,782 $ 2,682
======= =======
B. Non-cash activities:
Unrealized gain on securities available for sale -- $ 172
======= =======
</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 month period ended March 31, 1998 have been reclassified to
conform with current presentation. The results of operations for the three
months ended March 31, 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:
Three months ended March 31,
----------------------------
1998 1999
-------- --------
Sales $ 23,187 $ 14,319
Gross profit (loss) 990 (4,248)
Research and development expenses 2,140 2,326
Sales, general and administrative 1,947 2,191
Operating loss (3,097) (8,765)
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
to measure those instruments at fair value, as well as to identify the
conditions for which a derivative may be specifically designed as a hedge. SFAS
133 is effective for fiscal years beginning after June 15, 1999. Management is
currently addressing the financial reporting measures that will be needed in
order to comply with this disclosure.
Note 4: 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>
Three months ended March 31, 1999:
Revenues from external customers ........ $ 5,015 $ 2,281 $ 87 -- $ 17 $ 185 $ 7,585
Intersegment revenues ................... 34 14 -- -- -- -- 48
Segment profit (loss) ................... 13 (98) (638) -- 6 (86) (803)
Three months ended March 31, 1998:
Revenues from external customers ........ $ 4,686 $ 5,861 $ 127 $ 783 $ 32 $ 139 $ 11,627
Intersegment revenues ................... 29 10 -- -- -- -- 39
Segment profit (loss) ................... (126) 774 (661) (1,197) (470) (35) (1,715)
</TABLE>
- -----------
(*) Represents two operating segments below the quantitative thresholds of FAS
131, a VAR software operation in Israel and an Internet database venture.
6
<PAGE>
Reconciliation of Segment Profit to Consolidated Net Loss
Three months ended March 31, 1999:
Total loss for reportable segments $ (717)
Other operational segment loss (86)
Unallocated amounts: Net loss of corporate headquarters* (2,075)
-------
Total consolidated net loss $(2,878)
=======
----------
(*) Includes equity in losses of Tower (net of minority interest) of
$1,489.
Three months ended March 31, 1998:
Total loss for reportable segments $(1,680)
Other operational segment loss (35)
Unallocated amounts: Net loss of corporate headquarters* (1,183)
-------
Total consolidated net loss $(2,898)
=======
----------
(*) Includes equity in losses of Tower (net of minority interest) of
$312.
Note 5: Subsequent Events
In April 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 of approximately $2,700 was capitalized to the Company's investment
in the subsidiary in the second quarter of 1999. The Company financed the offer
primarily by short-term bank credit and cash.
In April, 1999, the Company sold all of its marketable securities for
$1,554 and recognized a gain of $282 on this sale in the second quarter of 1999.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Data Systems & Software Inc. through its subsidiaries in the United States
and in Israel (collectively, the "Company"), (i) provides consulting and
development services for computer software and systems, (ii) is an authorized
dealer and a value-added-reseller of computer hardware, and (iii) is a provider
of data communications solutions for utilities. Through its equity investment in
Tower Semiconductor Ltd. ("Tower"), the Company also engages in the manufacture
of semiconductor products. Although the Company has retained effective control
of Tower, the Company does not control more than 50% of Tower's voting shares,
and accordingly accounts for its interest in Tower's results under the equity
investment method.
The Company's future operating results are subject to the outcome of
various other factors and are subject to various other risks and uncertainties.
See "Item 1. Business - Factors Which May Affect Future Results" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the
"1998 10-K").
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the three months ended March 31, 1998
and 1999, including the percentage of total revenues during each period
attributable to selected components of operations statement data and for the
period to period percentage changes in such components.
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------- Change from
1998 1999 1998
-------------------- -------------------- --------
% of % of % of
($,000) sales ($,000) sales 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 11,717 100% $ 7,676 100% (34)%
Cost of sales 9,199 79 5,910 77 (36)
-------- -------- -------- --------
Gross profit 2,518 21 1,766 23 (30)
R&D expenses 342 3 309 4 (10)
SG&A expenses 4,889 41 2,790 37 (43)
-------- -------- -------- --------
Operating loss (2,713) (23) (1,333) (18) (51)
Interest expense, net (31) -- (16) -- (48)
Other income, net 45 -- 3 -- (93)
-------- -------- -------- --------
Loss before income taxes (2,699) (23) (1,346) (18) (50)
Provision for income taxes 23 -- 37 -- 61
-------- -------- -------- --------
Loss after income taxes (2,722) (23) (1,383) (18) (49)
Minority interests 173 1 18 -- (90)
--------
Equity loss, net of
minority interests (349) (3) (1,513) (20) 334
-------- -------- -------- --------
Net loss $ (2,898) (25%) $ 2,878 (38%) (1%)
======== ======== ======== ======== --------
</TABLE>
8
<PAGE>
SALES. The decrease in sales in the three months ended March 31, 1999, as
compared to the same period in 1998, was primarily due to decreased VAR computer
hardware segment sales as well as to the sale of the former help desk segment in
1998. This decrease was partially offset by increased sales in the computer
consulting services segment. The Company believes that the decreased computer
hardware VAR sales resulted from the deferral by principal customers of their
contemplated 1999 purchases into the second half of the year.
GROSS PROFIT. The decrease in gross profit was due to the aforementioned
decrease in sales. The increase in the gross profit margin in the three months
ended March 31, 1999, as compared to the same period in 1998, was primarily due
to (i) the suspension in 1998 of the activities of the Company's former
multimedia entertainment software segment (ii) improved gross profit margins
sales in the computer consulting services segment. These improvements were
partially offset by the sale of the former help desk segment (which had
relatively higher gross profit margins), and by decreased gross profit margins
in the VAR computer hardware segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The decrease in
SG&A in the three months ended March 31, 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 the former multimedia entertainment software segment, also aided
by trimmer marketing activity in the data communications solutions for utilities
segment. In addition, corporate SG&A declined due to the settlement of
litigation in 1998.
OPERATING LOSS. The decrease in the operating loss in the three months
ended March 31, 1999, as compared to the same period in 1998, was primarily
attributable to the aforementioned decrease in SG&A.
SHARE OF AFFILIATED COMPANY'S NET LOSS. The increase in the equity loss,
net of minority interests, resulted from losses in Tower, primarily attributable
to a continued decrease in Tower sales and capacity utilization.
See "Financial Condition."
NET LOSS. Despite decreased sales and gross profits and despite increased
equity losses from Tower, net loss for the three months ended March 31, 1999, as
compared to the same period in 1998, did not increase, due to the decrease in
operating losses described above.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 1999, the Company had working capital of $4.7 million,
including cash and cash equivalents, short term deposits and marketable
securities of $3.5 million. The Company also had restricted cash of
approximately $2.6 million, approximately $2.1 million of which represented the
proceeds of a bridge loan from a US bank which was utilized in April 1999 to
fund in part the purchase by the Company of the publicly held shares of DSI
Israel at a cost of approximately $2.7 million. The bridge loan is repayable
$1.0 million in June 1999 and $1.1 million in September 1999 and is secured by a
security interest in substantially all the assets of the Company. DSSI has a
credit line from the same bank which provided the bridge loan of up to $2.2
million which is secured by accounts receivable and inventory of its US
subsidiaries; however, the Company's total indebtedness to the bank cannot
exceed $2.2 million.
The Company intends to finance 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 additional financing for its data
communications for utilities segment. The Company may finance its activities
from the proceeds of the sale of some of its shares in its equity investment in
Tower. To the extent that these resources are unavailable or insufficient, the
Company may have to discontinue or curtail the activities of its data
communications solutions segment.
The decrease in trade accounts receivable during the first quarter of
1999, reflected both improved collections and the lower level of hardware sales
during the quarter. The increase in short term debt was attributable to the
bridge loan discussed above.
9
<PAGE>
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 time-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 included 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) remediating 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 to Tower's remediation efforts, Tower expects to incur staff costs as
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 $800,000 has been expended to date. Tower has financed its year
2000 related costs from its working capital and has experted them as incurred.
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 the 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 midst of
replacing them. As of March 31, 1999, the Company's Year 2000 remediation
efforts were approximately 75% completed. The Company expects to complete the
remediation by the end of the second quarter of 1999.
Tower believes that it has or will have addressed all Year 2000 issues
before the end of 1999; 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 in 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
10
<PAGE>
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 three-months period ended March
31 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 $310,000 as of March 31, 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 March 31, 1999
was approximately $21.1 million, significantly below the carrying value of the
equity investment (after minority interest )as of March 31, 1999 of $29.4
million. The Company believes that the above described decline in the market
price of Tower is temporary.
Marketable equity securities consisted solely of approximately 3,000,000
shares (approximately 4% ownership) of the Mofet Fund. For the three months
ended March 31, 1998, the ownership of the Mofet Fund shares was presented as a
long-term cost investment and, for the three months ended March 31, 1999, this
ownership has been presented at fair market value to reflect the Company's sale
of these shares in April 1999. In April 1999, the Company realized a gain of
approximately $282,000 on the sale of these shares.
Concentrations of Credit Risk
The Company is subject to credit risk through its trade receivables. As of
March 31, 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 18% 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.
11
<PAGE>
PART II - Other information
Item 1: Legal Proceedings
See Part I, Item 3 of the Company's 1998 10-K for a discussion of material
litigation to which the Company is a party.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Letter Agreement between the Registrant, Databit Inc. and
Bank Leumi USA dated as of March 24, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: May 17, 1999
By: /s/ Yacov Kaufman
------------------------------------------
Yacov Kaufman
Chief Financial Officer
13
EXHIBIT 10.1
[LETTERHEAD OF BANK LEUMI USA]
As of March 24, 1999
Data Systems & Software Inc.
and Databit, Inc.
200 Route 17
Mahwah, New Jersey 07430
Gentlemen:
This letter agreement (the "Agreement") sets forth the terms and
conditions pursuant to which Bank Leumi USA (the "Bank") is making a Bridge Loan
in the principal amount of $2,065,000 (the "Loan") to you, Data Systems &
Software Inc. ("DSSI") and Databit, Inc. ("Databit"), jointly and severally as
co-borrowers. DSSI and Databit are individually sometimes referred to herein as
a "Borrower" and collectively, as "Borrowers". The Bank and the Borrowers agree
as follows:
A. The Loan
A.1 Subject to and upon the terms and conditions set forth in this
Agreement, and the "Financing Agreements" (as herein defined), the Bank
concurrently is making the Loan to the Borrowers, which Loan, subject to earlier
repayment as provided for in this Agreement and the Note (as hereinafter
defined), shall be repaid as follows: (i) $1,000,000 on June 22, 1999, and (ii)
$1,065,000 on September 20, 1999. Concurrently with the execution of this
Agreement, the Borrowers are evidencing their obligation to pay the principal of
and interest on the Loan by executing and delivering a Floating Rate Promissory
Note to the Bank in the principal amount of $2,065,000, in the form annexed as
Exhibit A (the "Note"). The Loan shall bear interest as is provided in the Note.
"Financing Agreements" as used herein means and includes the Note, each
Guaranty, each Security Agreement, and each other instrument or document
executed and delivered, or required to be executed and delivered pursuant to
this Agreement.
<PAGE>
A.2 The proceeds of the Loan shall be used by DSSI to make a tender
offer (the "Tender Offer") to purchase 1,806,244 issued and outstanding publicly
traded shares (the "Shares") of Decision Systems Israel, Ltd., an Israeli
corporation ("Decision") at an initial offer price of 5.4 NI Shekels per share.
Until used for the purpose of purchasing the Shares pursuant to the Tender
Offer, the proceeds of the Loan shall remain on deposit in a specially
designated account for such purpose at the Bank. Until the proceeds of the Loan
are disbursed to effect the Tender Offer, the Account shall collateralize the
Loan. DSSI shall commence the Tender Offer as soon as is practical, but in any
event within five (5) business days of the date of this Agreement. DSSI hereby
directs the Bank (i) to notify Bank Leumi Le Israel, the underwriter with
respect to the Tender Offer, that the Bank currently has on deposit in the
Account US$1,000,000 (exclusive of the proceeds of the Loan), and (ii) as
provided in the form of the notice annexed as Exhibit B, that for the purpose of
consummating the Tender Offer, it will transfer to Bank Leumi Le Israel
$2,750,000.
B. Conditions Precedent. The obligation of the Bank to execute and deliver
this Agreement, and to make the Loan is subject to the conditions precedent
that:
B.1 The Bank shall have received (a) Certificates of an authorized
officer of each of the Borrowers certifying (i) that attached thereto is a true
and complete copy of resolutions adopted by the Board of Directors of such
Borrower authorizing the execution, delivery and performance of this Agreement,
and such Financing Agreements as to which such Borrower is a party, (ii) the
incumbency and specimen signature of each officer of such Borrower, and a
certification by another officer thereof as to the incumbency and signature of
the authorized officer, and (iii) copies of its Certificate of Incorporation and
By-laws of such Borrower, each as amended to the date of this Agreement, and (b)
such other documents as the Bank or its counsel may reasonably request, in order
that all legal matters incident to the execution and delivery of the Agreement,
shall be satisfactory to the Bank and its counsel.
B.2 Representations and Warranties. All of the representations and
warranties contained in this Agreement, or otherwise made to the Bank pursuant
to or in connection with any of the Financing Agreements, shall be correct and
complete in all material respects.
2
<PAGE>
B.3 Pledge. DSSI shall have pledged to the Bank all of its shares of
Tower Semiconductor Holdings, (1993) Ltd., an Israeli corporation ("Tower
Holdings") pursuant to a pledge agreement in form and substance satisfactory to
the Bank; such pledge to include delivery of the certificates evidencing such
shares to the Bank, together with duly executed stock powers therefor.
B.4 Opinion. The Borrowers shall have delivered to the Bank the
opinion of Ehrenreich Eilenberg Krause & Zivian LLP, counsel to the Borrowers;
such opinion to be in substantially the form of Exhibit C annexed.
B.5 Fees. The Borrowers shall have paid (i) the reasonable attorneys
fees of counsel for the Bank, and all other charges and disbursements incurred
in connection with the transactions contemplated by this Agreement, and (ii) all
required Bank fees and charges.
C. Representations and Warranties. To induce the Bank to enter into this
Agreement and to make the Loan, the Borrowers jointly and severally represent
and warrant to the Bank that:
C.1 Authority, Enforceability. Each of the Borrowers has all
requisite legal right, power and authority to execute, deliver and perform this
Agreement, and each of the Financing Agreements to which it is a party. This
Agreement and the Financing Agreements are legal, valid and binding obligations
of such of the Borrowers and the Guarantors (as identified in Sections D.1 and
D.5 of this Agreement) as are parties thereto, and are enforceable in accordance
with their terms, except as such enforcement may be limited by bankruptcy,
insolvency, moratorium or other similar laws presently or hereafter in effect
affecting the enforcement of creditors' rights generally or the availability of
equitable remedies.
C.2 Execution. The execution, delivery and performance by the
Borrowers of this Agreement, and by the Borrowers and the Guarantors of such
Financing Agreements as to which they are parties (i) has been (or in the
instance of the Financing Documents to be delivered at a later date, will be)
authorized by all requisite corporate action, (ii) will not violate the
Certificate of Incorporation or By-laws of the Borrowers or such Guarantors, any
agreement or contract to which either of the Borrowers or any of the Guarantors
is a party, or by which any of them or any of their property is bound, or any
order, decree or judgment,
3
<PAGE>
or the provisions of any statute, rule or regulation, domestic or foreign, or
(iii) result in the creation of any lien, charge or encumbrance of any nature
whatsoever upon any property or assets of either of the Borrowers or either
Guarantor, except as contemplated by the Financing Agreements.
C.3 Security Interest. The Bank has a duly perfected, first priority
security interest in all of the assets of Databit pursuant to a Security
Agreement, and UCC- 1 Financing Statements filed in connection therewith.
C.4 Shares. DSSI owns (i) seventy-six (76%) percent of the issued
and outstanding shares of Decision, and (ii) sixty (60%) percent of the issued
and outstanding shares of Tower Holdings.
D. Affirmative Covenants. The Borrowers jointly and severally covenant and
agree that they shall comply or cause compliance with the following covenants:
D.1 Collateral. As soon as is practical, but in any event on or
before April 4, 1999 (i) International Data Operations, Inc. (a "Guarantor")
shall have executed and delivered to the Bank (a) its Unlimited Guaranty of
Payment of the Loan, (b) a Security Agreement, in form and substance
satisfactory to the Bank and its counsel, sufficient to grant to the Bank a
first priority security interest in all of the assets of International Data
Operations, Inc., and (c) such other documents or instruments as the Bank
reasonably shall require, (ii) DSSI shall have executed and delivered to the
Bank (a) a Pledge Agreement in form and substance satisfactory to Bank and its
counsel sufficient to grant to the Bank a first priority security interest in
all of the issued and outstanding shares of Decision owned by DSSI, and (b)
certificates evidencing such shares of Decision (other than certificates for
1,600,000 shares of Decision, which DSSI will endeavor to deliver as soon as it
obtains physical possession thereof), together with duly executed stock powers
sufficient to allow the Bank to transfer such shares, or such other documents as
shall be satisfactory to the Bank and its counsel to perfect a first priority
security interest in such shares in favor of the Bank. If the Tender Offer is
completed, DSSI, as soon as is practical, shall deliver to the Bank in pledge,
the certificates evidencing the Shares, together with duly executed stock powers
sufficient to allow the Bank to transfer the Shares, or such other documents as
shall be satisfactory to the Bank and its counsel to perfect a first
4
<PAGE>
priority security interest in the Shares in favor of the Bank.
D.2 DSSI Financial Statement. As soon as is practical, but in any
event prior to April 23, 1999, DSSI shall deliver to the Bank a certified
consolidated financial statement of DSSI for its fiscal year ended December 31,
1998 (including a balance sheet and related statements of income, retained
earnings, stockholders equity and changes in financial position, including the
related schedules and notes thereto), which financial statement shall include an
unqualified report and opinion of the independent certified public accountants
preparing same, which shall be a nationally recognized accounting firm
acceptable to the Bank.
D.3 Tender Offer Notice. As soon as is practical, but in any event
within one (1) business day after either Borrower learns that the Tender Offer
has been accepted or rejected, such Borrower shall give written notice to the
Bank with respect thereto.
D.4 Rejected Tender Offer. In the event that the Tender Offer either
(i) has not been completed by April 15, 1999, or (ii) is rejected; then in
either of such events the Borrowers, within one (1) business day of such date or
notice of rejection as is applicable, shall repay the Loan with accrued interest
thereon.
D.5 Additional Documents. As soon as is practical, but in any event
prior to April 1, 1999, each Borrower shall deliver to the Bank a certificate,
issued by the Secretary of State in the State of its incorporation, certifying
its subsistence and good standing in such State. As soon as practical but in any
event prior to May 1, 1999, the Borrowers shall deliver to the Bank, (i) an
Unlimited Guaranty of Payment of the Loan, duly executed by Converge
Technologies, Inc. (a "Guarantor") and (ii) duly executed Certificates of
Authority, Shareholders Consents and "benefits letters" for such Guarantor, and
an opinion of counsel, satisfactory in form and substance to the Bank.
D.6 Field Audit. The Borrowers will cooperate, and cause
International Data Operations, Inc. to cooperate, with the Bank in conducting a
field audit of the collateral provided to the Bank pursuant to the Financing
Agreements.
5
<PAGE>
E. Negative Covenants. The Borrowers covenant and agree that they shall
comply or cause compliance with the following covenants.
E.1 Use of Proceeds. The Borrowers will not use the proceeds of the
Loan for any purpose other than the Tender Offer, and shall not remove, withdraw
or encumber (except to the Bank) such proceeds until notice has been given to
the Bank pursuant to Section D.3 hereof that the Tender Offer has been accepted.
E.2 Line of Credit. Databit, as the beneficiary of a line of credit
from the Bank, evidenced by a Promissory Note (Grid), shall not draw against
such line of credit until the Loan has been repaid in full; provided, however,
that Databit may draw against such line of credit, subject to the terms and
conditions thereof, if the proceeds of such draw are used and applied to repay
the Loan, and all accrued interest thereon.
E.3 Transfer of Assets. Neither of the Borrowers will (i) sell,
lease, assign, transfer or otherwise dispose of or permit the sale, lease,
assignment, transfer or otherwise dispose of any of their shares of Decision, or
Tower Holdings, or any of their other assets, except in the ordinary course of
their business, or (ii) except as permitted by the following sentence, permit
any of their subsidiaries to sell, lease, assign, transfer or otherwise dispose
any of their assets (including without limitation shares of stock) except in the
ordinary course of their businesses. DSSI may permit Decision to sell shares of
Mofet Venture Capital Fund Ltd. ("Mofet"), and to repay (or deposit as security
for the payment of) certain obligations of Decision relating to such shares to
First International Bank and/or Bank Hapoalim; provided, however, that no such
repayment (or deposit) may be made unless the fair market value of Mofet shares
retained by Decision plus the proceeds of sales of Mofet shares not so repaid
(or deposited) is equal to or exceeds $950,000. Any proceeds of Mofet shares
retained by Decision shall be placed in a bank account, certificate of deposit,
treasury instrument or similar liquid deposit and DSSI shall not permit such
funds to be used for general corporate purpose of Decision.
F. Events of Default. The occurrence or any one or more of the following
events shall constitute an "Event of Default":
6
<PAGE>
F.1 The Borrowers shall fail to pay principal or interest on the
Note, when due and payable; or
F.2 There shall be a default in the observance or performance of any
covenant, condition or agreement set forth in Sections D or E of this Agreement;
or
F.3 Any representation or warranty made by or on behalf of the
Borrowers, whether contained in this Agreement, any Financing Agreement 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
F.4 The Financial Statement delivered pursuant to Section D.2 shall
be materially different from the audit draft thereof.
G. Miscellaneous
G.1 Entire Agreement. This Agreement and the Financing Agreements
are intended by the parties as the final expression of their agreement, and
incorporate all negotiations of the parties hereto, and set forth the entire
agreement of the parties hereto.
G.2 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which taken
together shall constitute one and the same instrument.
G.3 Choice of Law. This Agreement is made in the State of New York
and shall be governed by the laws of the State of New York without giving effect
to its choice of law provisions.
If the foregoing correctly sets forth your understanding and agreement,
kindly indicate your acceptance thereof by signing below.
Very truly yours,
BANK LEUMI USA
By:
-------------------------
7
<PAGE>
-------------------------
Assistant Vice President
Agreed to and Accepted:
DATA SYSTEMS & SOFTWARE INC.
By:
-----------------------------
George Morgenstern
President and Chief
Executive Officer
DATABIT, INC.
By:
-----------------------------
George Morgenstern
Chairman
8
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,432
<SECURITIES> 1,554
<RECEIVABLES> 6,075
<ALLOWANCES> 89
<INVENTORY> 806
<CURRENT-ASSETS> 13,860
<PP&E> 4,948
<DEPRECIATION> 3,278
<TOTAL-ASSETS> 71,044
<CURRENT-LIABILITIES> 9,207
<BONDS> 75
0
0
<COMMON> 79
<OTHER-SE> 36,742
<TOTAL-LIABILITY-AND-EQUITY> 71,044
<SALES> 2,419
<TOTAL-REVENUES> 7,676
<CGS> 2,032
<TOTAL-COSTS> 5,910
<OTHER-EXPENSES> 3,099
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (1,346)
<INCOME-TAX> 37
<INCOME-CONTINUING> (1,383)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,878)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
