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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 ROUTE 17, MAHWAH, NEW JERSEY 07430
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(201) 529-2026
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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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. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the common stock held by non-affiliates of
the registrant at March 22, 2000 was approximately $38.5 million. The aggregate
market value was calculated by using the closing price of the stock on that date
on the Nasdaq National Market.
Number of shares outstanding of the registrant's common stock, as of March
22, 2000: 7,576,794.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain sections of the registrant's Proxy Statement to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of
the end of the registrant's fiscal year are incorporated by reference into Part
III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1 Business........................................................................................ 1
Item 2 Properties...................................................................................... 8
Item 3 Legal Proceedings............................................................................... 8
Item 4 Submission of Matters to a Vote of Security Holders............................................. 8
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters........................... 9
Item 6 Selected Financial Data......................................................................... 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................. 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk...................................... 15
Item 8 Financial Statements and Supplementary Data..................................................... 16
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................... 16
PART III
Item 10 Directors and Executive Officers of the Registrant.............................................. 16
Item 11 Executive Compensation.......................................................................... 16
Item 12 Security Ownership of Certain Beneficial Owners and Management.................................. 16
Item 13 Certain Relationships and Related Transactions.................................................. 16
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K................................ 17
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Certain statements contained in this report are forward-looking in nature.
These statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negatives thereof or comparable terminology, or by discussions of strategy. You
are cautioned that our business and operations are subject to a variety of risks
and uncertainties and, consequently, our actual results may materially differ
from those projected by any forward-looking statements. Certain of such risks
and uncertainties are discussed below under the heading "Item 1.
Business-Factors That May Affect Future Results."
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PART I
ITEM 1. BUSINESS
OVERVIEW
Data Systems & Software Inc. through its subsidiaries in the United States
and Israel is engaged in the following businesses:
o providing consulting and development services for computer software and
systems;
o developing and marketing load control and data communications solutions
for electric utilities; and
o serving as an authorized dealer and a value-added-reseller (VAR) of
computer hardware.
In addition, through the end of 1999, we also maintained an equity investment in
Tower Semiconductor Ltd. ("Tower"), a manufacturer of semiconductors.
CONSULTING AND DEVELOPMENT SERVICES
Services
Through our subsidiaries, International Data Operations (IDO) and Decision
Systems Israel ("DSI Israel"), we provide computer software and systems
consulting, development and integration services, primarily to high technology
customers in Israel and the United States. Our principal area of technological
expertise is state-of-the-art, embedded real-time software systems in a wide
variety of applications, including telecommunications, digital signal
processing, image processing and software testing and validation, electronic
warfare, simulation and electro-optics.
Our software and systems engineers, programmers and technicians are
generally sent to the customer's premises to perform design and development
activities under the customer's direction. In these engagements, our personnel
typically have no specific obligation for product delivery, and the customer
pays us on a time and materials basis for the services provided. During 1997,
1998 and 1999, sales attributable to services provided on a time and materials
basis were $16.8 million, $15.3 million and $15.0 million, respectively,
accounting for approximately 42%, 44% and 38% of our total sales for such years,
respectively.
In addition to performing services on a time and materials basis, we also
undertake to deliver software or hardware/software solutions to a customer's
specifications or requirements for a particular project. We generally commit to
perform these projects at fixed prices, and the profit margins on these projects
are primarily determined by our success in controlling project costs. We account
for these services on the percentage of completion method. Profits derived from
such contracts may vary substantially as a result of various factors, including
underestimating costs, difficulties with new technologies and economic and other
changes that may occur during the term of the contract. During 1997, 1998 and
1999 sales from fixed price contracts were $2.8 million, $3.4 million and
$4.7 million respectively, accounting for approximately 7%, 9% and 12% of total
sales for such years, respectively.
Customers and Markets
We commenced providing consulting and development services in Israel in
1986, and Israel has historically been the primary area of the segment's
operations, with one principal Israeli customer accounting for a majority of our
revenues. We have diversified our customer base so that no single customer
accounted for 10% or more of segment revenues in 1999. Revenues from activities
of the United States subsidiaries accounted for approximately 23% of segment
sales in 1999.
Competition
Our computer consulting and development services segment faces competition
from numerous other competitors, both large and small, operating in the Israeli
and United States markets, some with substantially greater financial and
marketing resources. In addition to competing for customers, we are also
competing with other consulting companies and with our customers to obtain
qualified personnel, due to a shortage of qualified engineers in Israel and the
United States. We believe that our wide range of experience and long-term
relationships with large corporations in the United States and Israel will
enable us to compete successfully and obtain future business.
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Proprietary Rights.
The intellectual property rights resulting from our consulting and
development services, which are provided to customers on a time and materials or
fixed-price basis, are generally owned by the customer for whom the services are
performed.
UTILITY SOLUTIONS
Through our Comverge Technologies subsidiary, we design, develop and market
a variety of load control and data communications solutions for the electric
utility market. The electric utility industry is increasingly adopting
communications and control solutions in response to the need to obtain real-time
usage information and more efficiently and cost-effectively manage peak
electricity demand. Load control solutions allow electric companies to reduce
usage or "load shed" during peak usage times such as the summer air conditioning
season, thereby reducing or eliminating the need to buy costly additional power
on the spot market or invest in new generation capacity. Data communications
solutions allow utilities to gather and transmit real-time usage information
which can be used for automated meter reading and to support time of use
metering as well as theft detection, remote connect/disconnect and other
value-added services.
By building on the technology and expertise developed by our subsidiary in
Israel, combined with our strategic acquisitions of technology, personnel,
contracts and customer base from Lucent and Scientific-Atlanta, we have created
a global company offering data communications and control product solutions
which address the information and control needs of today's energy market. Our
technical expertise includes Internet, broadband, wireless and powerline
communications, home networking and automation, and load control.
History
Since 1992, we have been designing, developing and marketing two-way
interactive communications solutions that provide real-time remote automated
meter reading ("AMR") and data management capabilities to international
utilities. We developed state-of-the-art, high-speed power line carrier
technology and deployed pilot systems in Israel, Mexico, Venezuela, Argentina,
Thailand, and Taiwan.
Shortly after its formation in 1998, Comverge acquired certain assets and
licenses to intellectual property from Lucent Technologies' Utilities Solution
business division. The licensed technology relates to a product which had been
deployed by Lucent at Public Service Electric and Gas using a two-way cable TV
system and at Duke Power using an Internet-based wireless network. A number of
employees involved in developing the product were employed by Comverge.
In August 1999, Comverge purchased the assets and business of
Scientific-Atlanta's Control Systems division, acquiring the division's load
control and gateway product lines. In connection with the acquisition, a number
of employees involved joined the Comverge team.
Comverge's headquarters and its marketing and sales divisions operate out
of New Jersey, its product manufacturing facility is in Atlanta, and its
research center is in Israel.
Products and Services
Comverge currently offers products in three product lines:
o Real-time usage information products;
o Load control products; and
o Gateway products, which combine real-time information and control.
Real-Time Usage Information Products. We are currently marketing the
Comverge Distributed Connection (CDC), a meter-reading device for gathering and
transmitting real-time usage information for industrial and commercial
customers. The CDC uses Internet-based CDPD (cellular digital packet data)
communications to transmit detailed information regarding patterns of energy
consumption and is targeted at industrial and commercial customers users, an
important segment of the user market for energy companies. The use of CDPD for
data communication makes our product easier to install and less expensive to run
than products that require a dedicated telephone line. Our alliances with Bell
Atlantic Mobile, AT&T Wireless and GTE give us a national platform from which to
market this product.
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Load Control Products. Power distribution utilities use load control
products to lessen peak demand on heavily used feeders or substations, avoiding
the cost of buying electricity on the spot market or building new generation
facilities. Generators and energy marketers can use load control products to
free capacity during high cost periods for resale to others. We offer our
customers two major load control products: digital control units (DCUs) and
SuperStats. The DCU is a switch that can be connected to any appliance, such as
an air conditioner or water heater, which permits the utility to turn appliances
on and off from a remote location utilizing wireless communications. The
SuperStat product combines a Honeywell programmable thermostat with a wireless
communication module to provide direct load control of heating and cooling
systems, allowing customers to choose when and how much energy to use, while
giving the utility the ability to control air conditioning systems through the
thermostat on peak usage days.
Gateway Products. Our gateway products are systems designed around a
communications "gateway" or bridge which permits two-way real-time
communications between a local area network (LAN), such as a "network" of
appliances and other devices within a home, or a network of meters at multiple
users, and a wide area network (WAN), such as cable, telephone, CDPD, paging or
power line carrier. The gateway products provide information and load control to
the electric service company and facilitate significantly reduced electricity
bills to the end customer.
Because of the different needs and configurations of the US and foreign
utility markets, we market two distinct gateway product lines: Maingate, which
is targeted to the domestic US utility markets, and EPSM, which is targeted at
markets outside the United States.
Maingate provides two-way real time metering, time of use pricing, load
control and whole house surge suppression for residential users. In the typical
configuration the central air conditioning system is controlled by a Superstat
thermostat and the water heater and up to one additional appliance within the
home are fitted with DCU's. The DCU's and the Superstat are networked, and
linked via the Maingate gateway to the WAN. Maingate allows direct load control
by the utility, while allowing for customer override. For example, during August
when electricity usage is high due to increased air conditioner use, the utility
may directly control the thermostat in a customer's home or business and raise
the temperature setting. However, the customer may elect to override the direct
control and set the thermostat as desired and pay for the electricity used at
peak load rates. Because of its ability to communicate with devices within the
home, Maingate will also support additional value-added "smart-home" products
and services when they become available. Rollout of Maingate has commenced under
a contract with Gulf Power which contemplates installation of Maingate into
40,000 homes.
EPSM, our international gateway product, uses existing power lines to
transmit the electricity consumption data of each meter through a hub to the
utility's main computer. A comprehensive software package controls the system's
operations and facilitates functions such as real-time load switching, peak
demand control and detection of theft of electrical power. EPSM has been
demonstrated in several pilot projects and we are actively marketing EPSM for
full-scale implementation. We believe the EPSM is a cost-effective solution for
the AMR and data management needs of utilities in international markets.
Customers and Markets
Our utility solutions business has over 400 utility customers in eight
countries and 4,000,000 installations worldwide. The worldwide market for
utility solutions is still emerging, with a virtually untapped potential,
estimated at $29 billion over the next five years. We anticipate growth in this
market to be driven by the following factors:
o Increasing worldwide demand for electricity and volatility of electricity
prices;
o Anticipated market and regulatory incentives to manage peak usage periods
in an economically efficient and environmentally friendly manner; and
o Widespread deregulation of the electric utility industry in the United
States and resulting increased competition among electric service
companies.
Although the final outcome of the current trend toward deregulation in the
United States and globally is unknown, we anticipate that the new more
competitive environment, combined with anticipated government incentives and
mandates, will result in continued growth in the demand for products designed to
gather information and manage electricity usage. Our domestic and international
divisions have at their disposal over
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$60 million invested in the development of utility solutions technology and
products serving a wide array of customer demands.
Domestic. Comverge's United States customers are generally electric
utilities, electric service companies or prime contractors that serve electric
utilities. Our largest United States customer is Gulf Power, which is currently
under contract with Comverge to purchase $22 million of Maingate systems. In
addition, we have significant contracts for our DCU products with other United
States utilities and energy service companies We have proven that our products
work in small-scale deployments. As our track record grows, we expect to expand
our sales to our existing customers to full-scale deployments. In addition to
expanding relationships with existing customers, our strategy is to take
advantage of the relationships with these customers to extend our sales to
affiliates of these customers, many of whom are owned by large utility holding
companies with several owned utilities. We have also formed joint marketing
partnerships with Bell Atlantic Mobile and Honeywell.
International. We expect to begin to deploy full-scale EPSM systems,
building on our pilot deployments in Venezuela, Thailand and Taiwan. Discussions
are already underway regarding expansion of certain of these programs. In some
instances we have formed alliances in which we function as a subcontractor to a
prime contractor, integrating our data communications or load control and
management systems into a larger utility system purchased by a utility. One such
alliance is with Advanced Control Systems for a project in Taiwan. Although our
primary international focus has been on EPSM, we also plan to expand our sales
of load control products to the international market.
Competition
Within the emerging utility solutions market, we face competition from a
variety of companies and products, each of which is trying garner a share the
market. Key competitors include Itron, ABB and Mainstreet Networks for our
gateway products, CEPG for the commercial and industrial AMR products, and
Cannon and Itron in the load control area. In addition to these companies ,
there are many other competitors and potential competitors vying for a piece of
this as yet undefined market. We believe that our products offer significant
competitive advantages because they
o have been proven in the field;
o offer significant technological advantages over competing products;
and/or
o often cost less than our competitors' products.
However, some of our competitors have more resources, better market recognition,
a larger sales force or can offer features not offered by our products. We
cannot be certain that our products will win market acceptance or that we will
be able to capture a significant segment of the market.
Proprietary Rights
Comverge holds 14 patents and has approximately ten patents pending. We try
to take all action necessary to protect our proprietary rights. Certain products
that we have developed and are developing incorporate or are derived from
intellectual property owned by third parties under license to us.
In our product development activities, we rely on a combination of
nondisclosure agreements and technical measures to establish and protect our
proprietary rights, if any, in our products. We believe that, as a result of the
rapid pace of technological change in the software and real-time system
industries, legal protection for our products, if any, will be less significant
our prospects than the knowledge, ability and expertise of our management and
technical personnel.
COMPUTER HARDWARE SALES
Products and Services
Through our Databit subsidiary, we sell and service PC-based computer
hardware, software, data storage, client/server and networking solutions.
Databit is an authorized direct seller, value-added-reseller and an authorized
service provider for equipment and software from such well-known industry
leaders as Compaq, IBM, Microsoft, Hewlett-Packard, AST, Acer, Apple and Dell.
We offer our customers a full range of systems integration services, including
design, implementation, hardware and software selection, and implementation of
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local and wide area networks. In addition, we provide maintenance and service to
customers under extended service agreements.
Customers and Markets.
During the last year our computer hardware sales segment succeeded in
diversifying its customer base, so that other than Montefiore Medical Center
(which accounted for approximately 14% of segment sales), no other customer
accounted for more than 5% of segment sales.
Competition
The market for personal computer and related peripheral hardware sales in
which we operate is characterized by severe competition in price-performance,
breadth of product line, financing capabilities, technical expertise, service
and overall reputation. Manufacturers have been increasingly reducing prices to
end-users, which reduces profit margins for distributors and value added
resellers such as our Databit subsidiary. Our competitors include manufacturers,
other VAR's, large equipment aggregators (some of whom sell to us) and systems
integrators. Many of our competitors have longer operating histories, greater
financial resources and buying power and larger, established customer bases. We
compete by offering attractive prices and payment terms and by helping our
customers evaluate their needs and tailoring solutions to their requirements.
SALES BY ACTIVITY
The following table shows, for the years indicated, the dollar amount and
the percentage of the sales attributable to each of the activities of our
operations. Sales attributable to the multimedia entertainment activity (which
has suspended operations) and certain miscellaneous computer related activities
have been included within the total sales amounts shown for consulting and
development services. We sold our help desk software operation in April 1998.
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YEAR ENDED DECEMBER 31,
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1997 1998 1999
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AMOUNT % AMOUNT % AMOUNT %
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(DOLLARS IN THOUSANDS)
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Consulting and development services....................... $20,573 52% $19,764 53% $18,784 48%
Computer hardware sales................................... 15,170 38% 16,374 44% 15,218 39%
Utility solutions......................................... -- -- 212 1% 5,061 13%
Help desk software........................................ 3,842 10% 785 2% -- --
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Total sales............................................... $39,585 100% $37,135 100% $39,063 100%
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BACKLOG
As of January 1, 2000, our backlog of work to be completed was
approximately $31.0 million, compared to $2.1 million as of January 1, 1999. We
estimate that we will perform $8.4 of the backlog in 2000. Almost the entire
increase in backlog relates to the utility solutions segment, including
approximately $26.0 million related to Comverge's contract with Gulf Power which
contemplates delivery over the next seven years.
DISCONTINUED AND DIVESTED ACTIVITIES
In recent years we have been increasing our focus on our core businesses
and have discontinued or divested a number of activities. The multimedia
entertainment software segment suspended operating activity in the first quarter
of 1998, and in the second quarter of 1998 we sold the assets of our PHD help
desk software segment.
From the time of the organization of Tower in 1993 through December 1996,
we maintained legal voting control of more than 50% of Tower's shares through
our ownership of 60% of Tower Semiconductor Holdings 1993 Ltd., which owned
41.0%, 44.8% and 45.3% of Tower at December 31, 1997, 1998 and 1999,
respectively, and through a voting agreement with another Tower shareholder. As
of the end of 1996 we no longer maintained legal voting control of Tower and
therefore, beginning in 1997, we stopped fully consolidating Tower's financial
statements and began accounting for Tower's results on the equity basis. In
December 1999, we entered an agreement to sell all of our interest in Tower to
Israel Corp. Ltd., a publicly-held Israeli holding company, for approximately
$30,889,000. The transaction closed on January 25, 2000. See Notes 2 and 8 to
the consolidated
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financial statements included in this report for additional information
regarding Tower and the sale of our interest in Tower.
In 1992, together with other investors, we established Mofet Israel
Technology Fund ("Mofet Fund"), an Israeli public investment company formed for
the purpose of investing in the securities of high technology companies and
projects in Israel. As of December 31, 1998, we owned approximately 4% of the
equity of Mofet Fund, which we sold in the first quarter of 1999. Until January
2000, Mofet Risk Capital Fund Management (1992) Ltd., a management company of
which we were a 50% owner, managed the Mofet Fund. Under the management
agreement with the Mofet Fund, the management company received a management fee
equal to 4% per annum of the amounts invested in the Fund (excluding profits).
The management agreement was not renewed in January 2000 and the management
company is therefore no longer active.
EMPLOYEES
At December 31, 1999, we employed a total of 295 people, including 220
persons in engineering and technical support (approximately one-half with
advanced degrees in computer and electronic engineering), 23 in marketing and
sales, and 52 in management, administration and finance.
We consider our relationship with our employees to be satisfactory.
We have are no collective bargaining agreements with any of our employees.
However, certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists Association) are applicable
to our Israeli employees by order of the Israeli Ministry of Labor. These
provisions concern mainly the length of the work day, minimum daily wages,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. We generally provide our Israeli employees with
benefits and working conditions beyond the required minimums. Israeli law
generally requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Furthermore, Israeli employees and
employers are required to pay specified amounts to the National Insurance
Institute, which administers Israel's social security programs. The payments to
the National Insurance Institute include health tax and are approximately 17% of
wages (up to a specified amount), of which the employee contributes
approximately 60% and the employer approximately 40%.
RESEARCH AND DEVELOPMENT (R&D)
For information on products being developed and their costs, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to our consolidated financial statements appearing in
this Report.
SEGMENT INFORMATION
For additional financial information regarding our operating segments,
foreign and domestic operations and export sales, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 19 to the Consolidated Financial Statements appearing elsewhere in this
Report.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
We may from time to time make written or oral statements that contain
forward-looking information. However, our actual results may differ materially
from our expectations, statements or projections. The following risks and
uncertainties could cause actual results to differ from our expectations,
statements or projections.
GENERAL FACTORS
Our Markets are Subject to Rapid Technological Change; If We Fail to Keep
Pace, We Will Have Difficulty Developing and Maintaining a Market for Our
Products and Services
The markets for our products and services are characterized by rapid
technological change. We will need to invest in continued product and/or process
development in order to keep pace with changing technologies. We may not have
adequate resources to invest in development, and our development efforts may not
be successful.
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Exchange Rate Fluctuations Could Increase the Cost of our Israeli Operations.
A significant portion of our sales and expenses are in New Israeli Shekels
("NIS"). The dollar cost of our operations in Israel will be increased if the
rate of inflation in Israel is not offset (or is offset on a lagging basis) by
the devaluation of the NIS in relation to the dollar.
Loss of the Services of a Few Key Employees Could Harm Our Operations.
We depend on our key management and technical employees. The loss of
certain managers could diminish our ability to develop and maintain
relationships with customers and potential customers. The loss of technical
personnel could harm our ability meet development and implementation schedules.
We have employment contracts with our key managerial employees, and most of our
significant employees are bound by confidentiality and non-competition
agreements. We do not maintain a "key man" life insurance policy on any of our
executives or employees. Our future success also depends on our continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense. If we fail to
attract or retain highly qualified technical and managerial personnel in the
future, our business could be disrupted.
Year 2000 Problems May Harm Our Business.
While we have not experienced any significant disruption in our operations
due to "Year 2000 Problems," we cannot be certain that we will not experience
such disruptions--due to internal failures or failures of our customers and or
vendors. Our year 2000 compliance costs to date have not been material and we do
not expect them to be material. However, it is possible that we have not
identified or will not be able to correct all potential year 2000 problems, or
that our key suppliers and customers have not done so. If we or our key
suppliers or customers fail to cure any year 2000 compliance problems, our
business could be seriously harmed.
RISKS RELATED TO THE UTILITY SOLUTIONS SEGMENT
We have made a significant investment into our utility solutions segment,
which develops and markets load control products and systems offering two-way
automated meter reading and related data management capability to utilities.
Although the revenue base of the segment has improved, to date this segment has
operated at a loss. The activities of this segment are subject to many risks,
including the following.
The Pace of Utility Deregulation Has Been Slow; The Ultimate Regulatory
Structure of the Utility Industry May Not Provide Mandates or Incentives to
Purchase Our Products.
The electric utility industry is undergoing significant deregulation.
Market observers expect deregulation to include energy choice and time-of-use
pricing requirements which will mandate or favor implementation by utilities of
load control programs and the use of automated meter reading and data
distribution. However, the pace of deregulation has not been as rapid as
expected and to date only a limited number of utilities have made purchase
commitments for automated meter reading and data distribution systems. Many
utilities have also deferred the purchase of load control systems pending
resolution of broader industry and regulatory developments. The results of
deregulation are uncertain and may not result in the mandates or incentives for
the types of services which require AMR systems. If the state and federal
regulation does not provide these requirements or incentives, the market for our
products may not develop as we expect.
We Must Compete With Other Utility Solutions Companies for Market Acceptance
and Customers.
While we believe that the systems offered by our utility solutions segment
offer advantages over competing load control and data communications solutions,
there are alternative solutions and we cannot predict what share of the market
we will obtain. In addition, some of our competitors have more sales and
marketing resources, better brand recognition and/or technologies that offer
alternative advantages. If our potential customers do not adopt our solutions or
do so less rapidly than we expect, our future financial results and our ability
to achieve positive cash flow or profitability, will be harmed.
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We May Encounter Difficulties in Implementing our Technology, Products and
Services.
Problems may occur in the implementation of our technology, products or
services, and we may not successfully complete the commercial implementation of
our technology on a wide scale. Future advances may render our technology
obsolete or less cost effective than competitive systems. Consequently, we may
be unable to offer competitive services or offer appropriate new technologies on
a timely basis or on satisfactory terms.
Delays, Quality Control and Price Problems Could Arise Due to Our Reliance on
Third-Party Manufacturers of Certain Components.
We use outside parties to manufacture components of some of our products.
These manufacturers may not be able to meet our manufacturing needs in a
satisfactory and timely manner. Delays or quality control problems at our
third-party manufacturers could harm our relationships with our customers, our
operating results and cash flow. We have not experienced material delays or
quality control problems from third-party manufacturers. However, our reliance
on third party manufacturers exposes us to risks that are out of our control
relating to quality control and pricing. An increase in the price or reduction
in the quality of the components produced by third party manufacturers could
harm our business.
ITEM 2. PROPERTIES
Our corporate headquarters and the principal offices for our US computer
consulting and development services and hardware sales segments are located in
Mahwah, New Jersey in approximately 5,000 square feet of office space, under a
lease which expires in September 2000. The rent for these premises currently is
$74,000 per annum. We also rent offices in New York City of approximately 3,500
square feet, under a lease which expires in August 2000, at a current rent of
$75,000 per annum. We are currently evaluating suitable space to house our
headquarters and the activities based in our Mahwah and New York offices at the
expiration of the respective leases. In addition, our Comverge subsidiary rents
approximately 8,300 square feet in Florham Park, New Jersey, at an annual rent
of $126,000 under a lease which expires January 2003, and approximately 6,500
square feet in Duluth, Georgia under a lease which expires in December 2004.
Our Israeli activities are conducted in approximately 18,000 square feet of
office space in the Tel Aviv metropolitan area under a lease, which expires in
April 2010. The annual rent is currently approximately $242,000. These
facilities are used for the Israeli operations of the computer consulting and
development services segment and the utility solutions segment.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that we believe, individually
or in the aggregate, will have a material adverse effect our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market System
(NASDAQ/NNM) under the symbol "DSSI." The following table sets forth, for the
periods indicated, the high and low reported sales prices per share of our
Common Stock on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1998:
First Quarter.................................................................................... 5.875 3.938
Second Quarter................................................................................... 6.500 4.063
Third Quarter.................................................................................... 5.063 2.250
Fourth Quarter................................................................................... 3.219 1.688
1999:
First Quarter.................................................................................... 3.000 1.750
Second Quarter................................................................................... 4.250 1.750
Third Quarter.................................................................................... 4.750 2.438
Fourth Quarter................................................................................... 3.750 2.188
</TABLE>
As of March 7, 2000 there were approximately 82 record holders of our
Common Stock. We estimate that there are approximately 2,100 beneficial owners
of our Common Stock.
We paid no dividends in 1998 or 1999 and we do not intend to pay dividends
in 2000. There are currently no restrictions on our declaration and payment of
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December 31,
1997, 1998 and 1999 and balance sheet data as of December 31, 1998 and 1999 has
been derived from our consolidated financial statements included in this Annual
Report, which have been audited by Deloitte & Touche LLP, independent auditors.
The selected statement of operations data for the years ended December 31, 1995
and 1996 and balance sheet data as of December 31, 1995, 1996 and 1997 has been
derived from audited financial statements not included herein.
This data should be read in conjunction with our consolidated financial
statements and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The statement of operations data for the years ended December 31, 1995 and
1996 and the balance sheet data as of December 31, 1995 includes the results and
balances of Tower on a fully consolidated basis. The corresponding data for the
years ended December 31, 1997, 1998 and 1999 and as of December 31, 1997 and
1998 account for our interest on the equity method. Our interest in Tower as of
December 31, 1999 was classified as a current asset. Because of these changes in
accounting for our interest in Tower, the data for all these periods may not be
directly comparable.
9
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ $129,823 $131,755 $ 39,996 $ 37,495 $ 39,708
Cost of sales........................................ 90,839 102,094 32,437 29,175 31,354
-------- -------- -------- -------- --------
Gross profit....................................... 38,984 29,661 7,559 8,320 8,354
Research & development expenses, net................. 4,375 5,611 1,335 1,605 1,269
Selling, general and administrative expenses......... 15,926 18,635 18,859 14,303 12,732
Gain on sale of division............................. -- -- -- 5,998 (1) --
-------- -------- -------- -------- --------
Operating income (loss)............................ 18,683 5,415 (12,635) (1,590) (5,647)
Interest income...................................... 5,188 5,321 478 147 61
Interest expense..................................... (2,434) (2,218) (225) (360) (910)
Gain on changes in ownership interests in
subsidiaries....................................... 26,339 -- -- -- --
Loss accrual for bank guarantees..................... -- -- -- (1,135)(2) --
Unrealized loss from writedown of investment......... -- -- -- (6,103)(3) --
Other income (loss), net............................. 5 609 (111) (838) (209)
-------- -------- -------- -------- --------
Income (loss) before income taxes.................. 47,781 9,127 (12,493) (9,879) (6,705)
Provision for income taxes........................... 4,837 2,141 3,507 35 3,785
-------- -------- -------- -------- --------
Income (loss) after taxes.......................... 42,944 6,986 (16,000) (9,914) (10,490)
Minority interests................................... (25,026) (7,699) 676 878 275
Equity (loss) in affiliates, net of minority
interests.......................................... (169) (1,767) 4,880 (3,908) (5,102)
-------- -------- -------- -------- --------
Net income (loss).................................. $ 17,749 $ (2,480) $(10,444) $(12,944) $(15,867)
Other comprehensive income:
Unrealized gain (loss) on securities available for
sale............................................... -- -- -- 110 (110)
-------- -------- -------- -------- --------
Comprehensive loss................................... $ 17,749 $ (2,480) $(10,444) $(12,834) $(15,977)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings (loss) per share............................ $ 2.43 $ (0.34) $ (1.42) $ (1.75) $ (2.13)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of shares.................... 7,307 7,369 7,369 7,391 7,433
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $141,850 $13,676 $ 7,201 $ 5,719 $20,007
Total assets(4).......................................... 271,631 69,411 63,272 47,684 48,408
Short-term debt, including current maturities of
long-term debt......................................... 16,371 2,124 3,709 974 8,375
Long-term debt, net of current maturities................ 22,499 331 481 687 2,584
Minority interests(4).................................... 128,959 -- -- -- --
Total shareholders' equity............................... 64,779 62,556 52,308 39,418 24,546
</TABLE>
- ------------------
(1) Gain from the sale of the assets of the help desk segment in April 1998.
(2) Loss from the accrual of loss contingencies in 1998 in connection with
guarantees given by the Company on behalf of an affiliate and former
subsidiary of the Company.
(3) Unrealized loss from the writedown of the Company's investment in Tower to
reflect market value of Tower's shares at December 31, 1998.
(4) Reflects investment in equity affiliates, net of minority interests at
December 31, 1996, 1997, 1998 and 1999.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion includes statements that are forward-looking in
nature. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect our business and operations. Certain of these
factors are discussed at "Item 1. Description of Business Factors That May
Influence Future Results."
During 1999, we operated in three reportable segments: computer consulting
and development services, computer hardware and utility solutions.
Computer Consulting and Development Services
Gross profit margins in this segment continued to experience downward
pressure due to increased labor costs in the Israeli operations resulting from
the relative shortage of qualified programmers and engineers. We expect that the
competitive marketplace for qualified engineers will continue to affect margins
in 2000 and future periods.
Computer Hardware
In 1999 this segment suffered a decrease in sales and profitability due to
its highly concentrated customer base, dependence on a small number of
customers, increasing pressure on prices within the industry and increased
competition from the direct sales efforts of the major equipment vendors.
Although in the last quarter of 1999 we diversified our customer base and
achieved record sales, we may be harmed in the future by these developments.
Utility Solutions
Since 1992 we have been designing, developing and marketing two-way
interactive communications solutions which provide real-time remote automated
meter reading and data management capabilities to utilities, energy service
companies and industrial and commercial customers. In January 1998, we acquired
certain assets and licensed intellectual property from Lucent Technologies, Inc.
This technology is being used by our Comverge Technologies subsidiary, which is
marketing the Comverge Distributed Connection to commercial and industrial
customers in the U.S. In August 1999 we acquired the Scientific-Atlanta Control
Systems business division, including its line of load control products and
Maingate gateway system.
With the sale of our interest in Tower in January 2000, our results in
future periods will no longer be affected by our pro rata inclusion of Tower's
net income as equity (loss) in affiliates.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations items as a
percentage of our total sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 70.0 77.5 81.1 77.8 79.0
------- -------- -------- -------- --------
Gross profit..................................... 30.0 22.5 18.9 22.2 21.0
Research and development expenses, net............. 3.4 4.3 3.3 4.3 3.2
Selling, general and administrative expenses....... 12.3 14.1 47.2 38.1 32.1
Gain on sale of division........................... -- -- -- 16.0 --
------- -------- -------- -------- --------
Operating income (loss).......................... 14.3 4.1 (31.6) (4.2) (14.2)
Finance income (expenses), net..................... 2.1 2.4 0.6 (0.6) (2.1)
Gain on changes in ownership interests in
subsidiary....................................... 20.3 -- -- --
Loss accrual for bank guarantees................... -- -- -- (3.0) --
Unrealized loss from writedown of
investment....................................... -- -- -- (16.3) --
Other income (loss), net........................... -- 0.4 (0.2) (2.4) (0.5)
------- -------- -------- -------- --------
Income (loss) before income taxes................ 36.8 6.9 (31.2) (26.5) (16.9)
Income taxes....................................... 3.7 1.6 8.8 0.1 9.5
------- -------- -------- -------- --------
Income (loss) after income taxes................. 33.1 5.3 (40.0) (26.6) (26.4)
Minority interests................................. (19.3) (5.9) 1.7 2.5 0.7
Equity (loss) in affiliates........................ (0.1) (1.3) 12.2 (10.4) (12.8)
------- -------- -------- -------- --------
Net income (loss).................................. 13.7% (1.9)% (26.1)% (34.5)% (40.0)%
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
The following table sets forth certain information with respect to revenues
and profits of our three reportable business segments for the year ended
December 31, 1999 and the five reportable business segments for the year ended
December 31, 1998, including the percentages of revenues and profits
attributable to the segment. The column marked "Other" aggregates information
relating to miscellaneous operating segments which may be combined for reporting
under applicable accounting principles.
<TABLE>
<CAPTION>
COMPUTER MULTIMEDIA
CONSULTING COMPUTER UTILITY HELP DESK ENTERTAINMENT
SERVICES HARDWARE SOLUTIONS SOFTWARE SOFTWARE OTHER TOTAL(*)
---------- -------- --------- --------- ------------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues from external
customers..................... $ 18,784 $15,218 $ 5,061 -- -- $ 285 $39,348
Percentage of total revenues
from external customers....... 48% 38% 13% -- -- 1% 100%
Segment profit (loss)........... $ (832) $ 328 $(3,297) -- -- $ 64 $(3,737)
Year ended December 31, 1998:
Revenues from external
customers..................... $ 18,640 $16,374 $ 212 $ 785 $ 152 $ 972 $37,135
Percentage of total revenues
from external customers....... 50% 44% 1% 2% -- 3% 100%
Segment profit (loss)........... $ 5,742 $ 1,514 $(3,428) $(1,352) $(663) $(294) $ 1,519
</TABLE>
- ------------------
(*) Our consolidated sales for 1998 and 1999 included $360,000 in management
fees received from Tower. See Note 19 to the consolidated financial
statements included in this Report for reconciliation to our consolidated
financial information.
12
<PAGE>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Sales. The increase in sales in 1999 as compared to 1998 was primarily due
to the sales of the utility solutions segment, which first began to have
substantial sales in the second quarter of 1999. These sales included load
control products as well as gateway products. As reflected in the table above,
this increase was partially offset by a decrease in computer hardware sales,
primarily during the first half of 1999, as well as the sale of our PHD help
desk division in April 1998. The decrease in sales in 1998 as compared to 1997
was primarily due to the sale of the help desk division.
Gross Profit. Gross profit remained stable in 1999 as compared to 1998
because the increased gross profit in the utility solutions segment was offset
by decreased gross profit and gross profit margin in the computer hardware
segment and by the sale of the help desk division. The decrease in gross profit
margin in the computer hardware segment resulted from a shift in sales to lower
margin customers and products which caused gross profit margin in this segment
to decrease from 20% in 1998 to 15% in 1999.
The increase in gross profit and gross profit margin in 1998 as compared to
1997 was primarily due to the writedown in 1997 of previously deferred
production expenses related to the discontinuation of our Cybrcard product.
Gross profit and gross profit margin in the computer hardware segment increased
as well. These increases were partially offset by the sale of the help desk
division. Gross profit margin in the computer consulting and development
services segment experienced continued downward pressure during the three year
period due to increased labor costs resulting from the relative shortage of
qualified programmers and engineers.
Research and Development Expenses ("R&D"). The decrease in R&D in 1999 as
compared to 1998 was due to lower R&D in the utility solutions segment, as the
development of the EPSM product approached completion. The increase in R&D in
1998 as compared to 1997 was due to increased EPSM product development expenses
incurred to prepare the product for commercial release.
Selling, General and Administrative Expenses ("SG&A"). The decrease in
SG&A, both nominally and as a percentage of sales, in 1999 as compared to 1998
was primarily due to the sale of the help desk division, partially offset by
increased marketing activity and administrative costs related to the utility
solutions segment, which increased its level of activity significantly in 1999.
The decrease in SG&A in 1998 as compared to 1997, was primarily due to the sale
of the help desk division and the reduced level of activity in the multimedia
entertainment segment, partially offset by increased marketing activity related
to our utility solutions segment.
Gain on Sale of Division. We recognized a gain from the sale of our help
desk division in April 1998.
Finance Expense, Net. The increase in finance expenses in 1999 as compared
to 1998 was due to the term loan taken in August 1999 to finance the acquisition
of the Scientific-Atlanta Control Systems business division, increased
utilization of our lines of credit and the finance expenses related to the
convertible debentures we issued in the last quarter of 1999.
Unrealized Loss From Writedown of Investment. Due to the continued
decrease in Tower's share price in the last quarter of 1998, we wrote down our
investment by $6.1 million to reflect Tower's public share price as of December
31, 1998.
Income Taxes. The income tax provisions for 1999, 1998 and 1997 were based
on actual tax computations. The tax expense in 1999 is entirely due to foreign
taxes related to the sale of our interest in Tower. We established a valuation
allowance against all deferred tax assets due to our history of losses and the
uncertainty of utilization of these tax benefits. For a detailed analysis of the
income tax provision, see Note 18 to our consolidated financial statements.
Equity (Loss) in Affiliates. The continued increase in equity losses in
over the three year period resulted from losses in Tower, primarily attributable
to a continued decrease in Tower sales and capacity utilization.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 we had working capital of approximately
$20 million. The increase in working capital was primarily due to the
reclassification of our investment in Tower as a current investment following
our agreement to sell our Tower investment in December 1999. We financed our
corporate activities, the operations
13
<PAGE>
of our U.S. subsidiaries and our acquisition activity, including our purchase of
the minority interest in our DSI Israel subsidiary and of the Scientific-Atlanta
Control Systems business division, from the net proceeds of short term bank debt
of $6 million, bearing interest at prime plus 1%, and the issuance of our $2
million of 0% subordinated convertible debentures.
In January 2000 we received approximately $27 million (net of applicable
withholding taxes) from the sale of our Tower investment. In February 2000 we
redeemed $1.74 million of the debentures for a redemption price of
$2.0 million. The $260,000 balance of the debentures was converted into 84,794
shares of our Common Stock. We believe we now have adequate liquidity to finance
our operating activities and corporate expenses for this year and the forseeable
future.
DSI Israel satisfied its financial and operating requirements in 1999
through increased usage of bank credit lines made available, sale of marketable
securities and cash from operations. Bank credit lines currently available to
DSI Israel total approximately $2 million, denominated in NIS and bearing
interest at an average interest rate of the Israeli prime rate plus 0.75% per
annum. The Israeli prime rate fluctuates and as of December 31, 1999 was 12.2%.
As of December 31, 1999 DSI Israel was utilizing $1.6 million of these lines.
In April 1999 we purchased the minority interest in DSI Israel at an
aggregate cost of approximately $2.75 million.
The increase in accounts receivable, inventory and goodwill and other
intangible assets, as well as short term debt, accounts payable and other
current liabilities at the end of 1999 as compared to the end of 1998, was
primarily attributable to the acquisition of the assets and the increased level
in the utility solution segment.
Impact of Inflation and Currency Fluctuations
During 1999 a majority of our sales were denominated in dollars. The
remaining portion is primarily denominated in NIS, linked to the dollar. Such
sales transactions are negotiated in dollars; however, for the convenience of
the customer they are settled in NIS. These transaction amounts are linked to
the dollar between the date the transactions are entered into until the date
they are effected and billed for. From the time these transactions are effected
and billed for, through the date of settlement, amounts are primarily unlinked.
The majority of our expenses in 1999 were in dollars or dollar-linked NIS and
virtually all the remaining expenses were in NIS. The dollar cost of our
operations in Israel is affected adversely by the devaluation of the NIS in
relation to the dollar since most of its transactions are linked to or are
denominated in US dollars. This adverse effect principally arises with respect
to its severance pay obligations and also with respect to the unbilled portion
of long term projects.
As of December 31, 1999, virtually all of our monetary assets and
liabilities that were not denominated in dollars or dollar-linked NIS were
denominated in NIS, and the net amount of such monetary assets and liabilities
was not material. In the event that in the future we have material net monetary
assets or liabilities that are not denominated in dollar-linked NIS, such net
assets or liabilities would be subject to the risk of currency fluctuations.
14
<PAGE>
SUMMARY QUARTERLY FINANCIAL DATA
The following table sets forth certain of our unaudited quarterly financial
information for the years ended December 31, 1998 and 1999. This information
should be read in conjunction with our financial statements and the notes
thereto.
<TABLE>
<CAPTION>
1998 1999
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............................... $11,717 $ 9,734 $ 8,151 $ 7,893 $ 7,676 $ 8,265 $ 9,217 $14,550
Cost of sales....................... 9,199 7,407 6,451 6,118 5,910 6,552 7,482 11,410
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)................. 2,518 2,327 1,700 1,775 1,766 1,713 1,735 3,140
R&D, net............................ 342 416 496 351 309 272 196 492
SG&A................................ 4,889 2,867 2,825 3,722 2,790 2,872 3,180 3,890
Gain on sale of division............ -- 5,998 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)............. (2,713) 5,042 (1,621) (2,298) (1,333) (1,431) (1,641) (1,242)
Financial income (expenses), net.... (31) (10) (30) (142) (16) 190 (156) (867)
Loss accrual for bank guarantees.... -- -- (1,135) -- -- -- -- --
Unrealized loss from writedown of
investment........................ -- -- -- (6,103) -- -- -- --
Other income (loss), net............ 45 (427) (609) 153 175 (196) (242) 54
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes... (2,699) 4,605 (3,395) (8,390) (1,174) (1,437) (2,039) (2,055)
Income tax expense (benefit)........ 31 42 (41) 3 37 (25) 20 3,753
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) after income taxes.... (2,730) 4,563 (3,354) (8,393) (1,211) (1,412) (2,059) (5,808)
Minority interests.................. 175 220 184 299 18 91 95 (479)
Equity (loss) in affiliates......... (349) (1,247) (1,336) (976) (1,513) (1,761) (1,140) (688)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................... (2,904) 3,536 (4,506) (9,070) (2,706) (3,082) (3,104) (6,975)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) per share........... (0.39) 0.48 (0.62) (1.23) (0.39) (0.39) (0.42) (0.93)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Weighted average number of shares
outstanding....................... 7,369 7,376 7,310 7,402 7,433 7,433 7,433 7,433
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are required to make certain disclosures in respect to our 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.
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.
15
<PAGE>
Concentrations of Credit Risk
We are subject to credit risk through our trade receivables. As of
December 31, 1999, approximately 19% of our 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Furnished at the end of this Report commencing on page F-1. Consolidated
Financial Statements of Tower Semiconductor Ltd. are included commencing at
page T-1 in accordance with Rule 3-09(a) of Regulation S-X.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to each director and nominee for director and the
information relating to our executive officers, appearing under the captions
"Election of Directors--Certain Information Regarding Directors and Executive
Officers," in our definitive proxy statement for the 2000 Annual Meeting of
Stockholders to be filed on or before May 1, 2000 (the "2000 Proxy Statement"),
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to compensation of directors and executive
officers, appearing under the caption "Election of Directors--Executive and
Director Compensation," "Election of Directors--Employment
Arra9ngements--Executive Compensation" in the 2000 Proxy Statement, is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership, appearing under the caption
"Stock Ownership" in the 2000 Proxy Statement, is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and transactions,
appearing under the caption "Certain Related Party Transactions" in the 2000
Proxy Statement, is hereby incorporated by reference.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 -- Certificate of Incorporation of the Registrant, with amendments thereto (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File
No. 33-70482) (the "1993 Registration Statement")).
3.2 -- By-laws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-44027) (the "1992 Registration Statement")).
3.3 -- Amendments to the By-laws of the Registrant adopted December 27, 1994 (incorporated herein by
reference to Exhibit 3.3 of the Registrant's Current Report on Form 8-K dated January 10, 1995).
4.1 -- Specimen certificate for the Common Stock (incorporated herein by reference to Exhibit 4.2 to the
1992 Registration Statement).
4.2 -- Form of Underwriter's Warrant Agreement, including form of Underwriter's Warrant (incorporated
herein by reference to Exhibit 4.4 to the 1993 Registration Statement).
4.3 -- Form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.3 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K")).
4.4 -- Warrant Agreement dated August 30, 1999 between Bank Leumi USA and the Registrant, including Form
of Warrant (incorporated herein by reference to Exhibit 4.1 to the Registrant's Quarterly Report
on Form 10-Q for the period ended September 30, 1999 (the "Third Quarter 1999 10-Q")).
4.5 -- Securities Purchase Agreement between the Registrant and Bounty Investors LLC dated as of
October 12, 1999, including Form of Warrant (incorporated herein by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated October 12, 1999 (the "October 1999 8-K")).
4.6 -- Form of Registration Rights Agreement between the Registrant and Bounty Investors LLC dated as of
October 12, 1999 (incorporated herein by reference to Exhibit 1 to October 1999 8-K).
*10.1 -- Employment Agreement between the Registrant and George Morgenstern, dated as of January 1, 1997
(incorporated herein by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 10-K").
*10.2 -- Employment Agreement between the Registrant and Shmuel Fogel, dated September 1, 1986
(incorporated herein by reference to Exhibit 10.3 to the 1992 Registration Statement).
10.3 -- Agreement between the Registrant and Shmuel Fogel, dated December 23, 1998 (incorporated herein by
reference to Exhibit 10.3 to the 1998 10-K).
10.4 -- Agreement between the Registrant and Shmuel Fogel, dated December 24, 1998 (incorporated herein by
reference to Exhibit 10.4 the 1998 10-K).
*10.5 -- 1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the 1992 Registration
Statement).
*10.6 -- 1994 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.4 to the
1995 10-K).
*10.7 -- 1994 Stock Option Plan for Outside Directors, as amended (incorporated herein by reference to
Exhibit 10.5 to the 1995 10-K).
10.8 -- 1995 Stock Option Plan for Non-management Employees (incorporated herein by reference to
Exhibit 10.6 to the 1995 10-K).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.9 -- Amended and Restated Credit Agreement dated August 30, 1999 between Bank Leumi USA and the
Registrant (incorporated herein by reference to Exhibit 10.1 to the Third Quarter 1999 10-Q).
10.10 -- Term Note dated August 30, 1999 of the Registrant payable to Bank Leumi USA (incorporated herein
by reference to Exhibit 10.2 to the Third Quarter 1999 10-Q).
10.11 -- Agreement dated as of December 22, 1999 among the Registrant, the Israel Corporation Ltd. and
Tower Semiconductor Holdings (1993) Ltd. (incorporated herein by reference to the Registrant's
Report on Form 8-K dated December 30, 1999).
10.12 -- Credit Agreement dated as of February 7, 2000 between Comverge Technologies, Inc. and Bank Leumi
USA.
10.13 -- $6,000,000 Term Note of Comverge Technologies, Inc. dated as of February 7, 2000, payable to Bank
Leumi USA.
10.14 -- Promissory Note between George Morgenstern and the Registrant, dated as of December 31, 1997
(incorporated herein by reference to Exhibit 10.36 to the 1997 10-K).
10.15 -- License Agreement between the Registrant and Lucent Technologies Inc. dated as of January 9, 1998
(incorporated herein by reference to the Registrant's Current Report on Form 8-K dated
February 17, 1998).
*10.16 -- Employment Agreement between the Registrant and Yacov Kaufman, dated as of January 1, 1999
(incorporated herein by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.17 -- Asset Purchase Agreement between Comverge Technologies, Inc. and Scientific-Atlanta, Inc. dated as
of June 11, 1999 (incorporated by reference from the Third Quarter 1999 10-Q).
21.1 -- List of subsidiaries.
24.1 -- Consent of Deloitte & Touche LLP.
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------
* This exhibit includes a management contract, compensatory plan or
arrangement in which one or more directors or executive officers of the
Registrant participate.
(b) Financial Statement Schedules
None.
(c) Reports on Form 8-K
1. Report on Form 8-K filed on October 13, 1999 relating to our private
placement of convertible debentures.
2. Amendment No. 1 to Report on Form 8-K, filed on November 12, 1999
relating to the acquisition by the Registrant's Comverge subsidiary of
certain assets of the Control Systems Business Unit of Scientific-
Atlanta, Inc.
3. Amendment No. 2 to Report on Form 8-K, filed on December 14, 1999
relating to the acquisition by the Registrant's Comverge subsidiary of
certain assets of the Control Systems Business Unit of Scientific-
Atlanta, Inc.
4. Report on Form 8-K filed on December 30, 1999 relating to the
disposition of the Registrant's interest in Tower Semiconductor Ltd.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Mahwah, State of New Jersey, on March 29, 2000.
DATA SYSTEMS & SOFTWARE INC.
By: /s/ GEORGE MORGENSTERN
----------------------------------
George Morgenstern
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant, in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ GEORGE MORGENSTERN Chairman of the Board; President; Chief March 29, 2000
-------------------------- Executive Officer; and Director
George Morgenstern
/s/ ROBERT L. KUHN Vice Chairman and Director March 29, 2000
--------------------------
Robert L. Kuhn
/s/ YACOV KAUFMAN Vice President, Chief Financial Officer March 29, 2000
-------------------------- (Principal Financial Officer and Principal
Yacov Kaufman Accounting Officer)
/s/ HARVEY EISENBERGER Director March 29, 2000
--------------------------
Harvey Eisenberger
/s/ ALLEN I. SCHIFF Director March 29, 2000
--------------------------
Allen I. Schiff
/s/ MAXWELL M. RABB Director March 29, 2000
--------------------------
Maxwell M. Rabb
/s/ SUSAN MALLEY Director March 29, 2000
--------------------------
Susan Malley
/s/ SHELDON KRAUSE Secretary and Director March 29, 2000
--------------------------
Sheldon Krause
</TABLE>
19
<PAGE>
DATA SYSTEMS & SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF DATA SYSTEMS & SOFTWARE INC.:
Independent Auditors' Report............................................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999.................................. F-2
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1997,
December 31, F-3 1998 and December 31, 1999.............................................................. F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997,
December 31, 1998 F-4 and December 31, 1999.............................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1998 and
December 31, 1999........................................................................................ F-5
Notes to Consolidated Financial Statements................................................................. F-7
CONSOLIDATED FINANCIAL STATEMENTS OF TOWER SEMICONDUCTOR LTD.:
Auditors' Report........................................................................................... T-1
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998.................................. T-2
Consolidated Statements of Operations for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997........................................................................................ T-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997.................................................................. T-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997........................................................................................ T-5
Notes to Consolidated Financial Statements................................................................. T-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Data Systems & Software Inc.
We have audited the accompanying consolidated balance sheets of Data
Systems & Software Inc. (the "Company") and its subsidiaries as of December 31,
1999 and 1998 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999 , in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 29, 2000
F-1
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 1,003 $ 1,379
Short-term interest bearing bank deposits................................................. 1,252 1,009
Marketable equity securities, available for sale (Note 4)................................. 1,383 --
Investment held for sale (Note 2)......................................................... -- 25,900
Restricted cash (Note 14c)................................................................ 752 536
Trade accounts receivable, net (Note 19c)................................................. 7,244 10,078
Inventory (Note 5)........................................................................ 704 1,249
Other current assets (Note 7)............................................................. 960 1,124
------- -------
Total current assets................................................................... 13,298 41,275
------- -------
Investments, net (Note 8)................................................................... 31,224 --
------- -------
Property and equipment, net (Note 9)........................................................ 1,738 1,853
------- -------
Other assets:
Goodwill and other intangible assets, net (Note 10)....................................... 661 4,285
Other..................................................................................... 1,057 995
------- -------
1,718 5,280
------- -------
Total assets........................................................................... $47,978 $48,408
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt (Note 11)................................................................. $ 974 $ 8,375
Trade accounts payable.................................................................... 2,105 5,809
Accrued payroll, payroll taxes and social benefits........................................ 2,561 1,246
Other current liabilities................................................................. 1,939 5,838
------- -------
Total current liabilities.............................................................. 7,579 21,268
------- -------
Long-term liabilities:
Convertible debentures (Note 12).......................................................... -- 2,000
Other (Note 13)........................................................................... 687 584
------- -------
Total long-term liabilities............................................................ 687 2,584
------- -------
Commitments and contingencies (Note 14)
Minority interests.......................................................................... 294 10
------- -------
Shareholders' equity (Note 15):
Common stock $.01 par value per share:
Authorized 20,000,000 shares; issued and outstanding 7,923,540 shares at December 31,
1998 and 1999......................................................................... 79 79
Additional paid-in capital................................................................ 34,979 35,398
Warrants.................................................................................. -- 432
Deferred compensation expense............................................................. (327) (73)
Retained earnings (deficit)............................................................... 6,942 (8,925)
------- -------
41,673 26,911
------- -------
Treasury stock, at cost--490,262 shares at December 31, 1998 and 1999..................... (2,365) (2,365)
Accumulated other comprehensive income (Note 4)........................................... 110 --
------- -------
Total shareholders' equity............................................................. 39,418 24,546
------- -------
Total liabilities and shareholders' equity............................................. $47,978 $48,408
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Sales:
Products..................................................................... $ 19,950 $ 18,062 $ 20,300
Services..................................................................... 20,046 19,433 19,408
-------- -------- --------
39,996 37,495 39,708
-------- -------- --------
Cost of sales:
Products..................................................................... 16,744 14,306 16,444
Services..................................................................... 15,693 14,869 14,910
-------- -------- --------
32,437 29,175 31,354
-------- -------- --------
Gross profit.............................................................. 7,559 8,320 8,354
Research and development expenses, net......................................... 1,335 1,605 1,269
Selling, general and administrative expenses................................... 18,859 14,303 12,732
Gain on sale of division (Note 17)............................................. -- 5,998 --
-------- -------- --------
Operating loss............................................................... (12,635) (1,590) (5,647)
-------- -------- --------
Interest income................................................................ 478 147 61
Interest expense............................................................... (225) (360) (910)
Loss from contingent performance of bank guarantees for affiliate (Notes 8c and
14c)......................................................................... -- (1,135) --
Unrealized loss from writedown of investment (Note 8b)......................... -- (6,103) --
Other loss, net................................................................ (111) (838) (209)
-------- -------- --------
Loss before income taxes..................................................... (12,493) (9,879) (6,705)
Provision for income taxes (Note 18)........................................... 3,507 35 3,785
-------- -------- --------
Loss after income taxes...................................................... (16,000) (9,914) (10,490)
Minority interests............................................................. 676 878 (275)
Equity income (loss) in affiliates, net of minority interests.................. 4,880 (3,908) (5,102)
-------- -------- --------
Net loss..................................................................... $(10,444) $(12,944) $(15,867)
-------- -------- --------
-------- -------- --------
Other comprehensive income:
Unrealized gain on securities available for sale (Note 4).................... -- 110 (110)
-------- -------- --------
Comprehensive loss........................................................ $(10,444) $(12,834) $(15,977)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share........................................... $ (1.42) $ (1.75) $ (2.13)
-------- -------- --------
-------- -------- --------
Weighted average number of shares outstanding (in thousands)................... 7,369 7,391 7,433
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN DEFERRED DEFERRED TREASURY RETAINED
SHARES STOCK CAPITAL COMPENSATION INTEREST WARRANTS STOCK EARNINGS
--------- ------ ---------- ------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997............... 7,709 $ 77 $ 33,997 $ -- $ -- $ -- $(1,848) $30,330
Amortization of restricted stock award
compensation........................ -- -- 196 -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- -- (10,444)
----- ---- -------- ---- ------ ---- -------- -------
Balances, December 31, 1997........... 7,709 77 34,193 -- -- -- (1,848) 19,886
Common stock issued in restricted
stock award......................... 155 1 435 -- -- -- -- --
Unamortized restricted stock award
compensation........................ -- -- -- (436) -- -- -- --
Common stock issued as compensation... 50 1 100 -- -- -- -- --
Common stock issued upon exercise of
options............................. 10 -- 55 -- -- -- -- --
Purchase of treasury stock............ -- -- -- -- -- -- (517) --
Amortization of restricted stock award
compensation........................ -- -- 196 109 -- -- -- --
Unrealized gain on securities
available for sale.................. -- -- -- -- -- -- -- --
Net loss.............................. (12,944)
----- ---- -------- ---- ------ ---- -------- -------
Balances, December 31, 1998............. 7,924 79 34,979 (327) -- -- (2,365) 6,942
Imputed interest on convertible
debenture........................... -- -- 377 -- (377) -- -- --
Discount on convertible debenture..... -- -- 300 -- -- -- -- --
Amortization of restricted stock award
compensation and warrants........... -- -- 46 254 -- -- -- --
Issuance of warrants.................. -- -- -- -- -- 432 -- --
Amortization of warrants.............. -- -- -- -- 73 -- -- --
Unrealized loss on securities
available for sale.................. -- -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- -- (15,867)
----- ---- -------- ---- ------ ---- -------- -------
Balances, December 31, 1999............. 7,924 $ 79 $ 35,702 $(73) $ (304) $432 $(2,365) $(8,925)
----- ---- -------- ---- ------ ---- -------- -------
<CAPTION>
OTHER
COMPREHENSIVE
INCOME TOTAL
------------- --------
<S> <C> <C>
Balances, January 1, 1997............... $ -- $ 62,556
Amortization of restricted stock award
compensation........................ -- 196
Net loss.............................. -- (10,444)
----- --------
Balances, December 31, 1997........... -- 52,308
Common stock issued in restricted
stock award......................... -- 436
Unamortized restricted stock award
compensation........................ -- (436)
Common stock issued as compensation... -- 101
Common stock issued upon exercise of
options............................. -- 55
Purchase of treasury stock............ -- (517)
Amortization of restricted stock award
compensation........................ -- 305
Unrealized gain on securities
available for sale.................. 110 110
Net loss.............................. (12,944)
----- --------
Balances, December 31, 1998............. 110 39,418
Imputed interest on convertible
debenture........................... -- --
Discount on convertible debenture..... -- 300
Amortization of restricted stock award
compensation and warrants........... -- 300
Issuance of warrants.................. -- 432
Amortization of warrants.............. -- 73
Unrealized loss on securities
available for sale.................. (110) (110)
Net loss.............................. -- (15,867)
----- --------
Balances, December 31, 1999............. $ -- $(24,546)
----- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss..................................................................... $(10,444) $(12,944) $(15,867)
Adjustments to reconcile net loss to net cash used in operating
activities--see Schedule A................................................ 2,221 7,113 10,643
-------- -------- --------
Net cash used in operating activities........................................ (8,223) (5,831) (5,224)
-------- -------- --------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net.................................... 363 (1,179) 243
Restricted cash................................................................ (330) 1,034 216
Investment in marketable securities............................................ (33,475) (5,898) --
Proceeds from maturity of marketable securities................................ 37,208 999 --
Proceeds from sale of marketable securities.................................... -- 6,528 1,520
Net proceeds from sale of division--see Schedule C............................. -- 6,595 --
Acquisitions of property and equipment......................................... (862) (929) (1,276)
Proceeds from sale of property and equipment................................... 53 135 327
Investment in capitalized software costs....................................... (1,372) -- --
Acquisitions of intangible assets.............................................. -- (504) (4,192)
Increase in other assets....................................................... 4,291 -- --
Purchase of minority interest share of subsidiary.............................. -- -- (559)
Net effect of change in reporting method--see Schedule B....................... 102 -- --
-------- -------- --------
Net cash provided by (used in) investing activities.......................... 5,978 6,781 (3,721)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from exercise of option warrants of subsidiary, net................... (211) -- --
Proceeds from issuance of common stock, net.................................... -- 156 --
Purchase of treasury stock..................................................... -- (517) --
Proceeds from sale of shares received in partial conversion of note
receivable................................................................... -- 1,871 --
Short-term debt, net........................................................... 566 (2,064) 7,824
Proceeds from long-term debt................................................... 1,359 453 52
Issuance of convertible debentures............................................. -- -- 2,000
Repayments of long-term debt................................................... (509) (1,270) (555)
-------- -------- --------
Net cash provided by (used in) financing activities.......................... 1,205 (1,371) 9,321
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........................... (1,040) (421) 376
Cash and cash equivalents at beginning of year................................. 2,464 1,424 1,003
-------- -------- --------
Cash and cash equivalents at end of year....................................... $ 1,424 $ 1,003 $ 1,379
-------- -------- --------
-------- -------- --------
Supplemental cash flow information:
Cash paid during the period for:
Interest.................................................................. $ 183 $ 205 $ 386
-------- -------- --------
-------- -------- --------
Income taxes.............................................................. $ 773 $ 195 $ 106
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
A. Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................................... $1,479 $1,092 $ 1,351
Minority interests............................................................... (676) (878) 275
Writedown of capitalized software development costs.............................. 1,663 -- --
Allowance for writeoff against note receivable................................... -- 610 --
Allowance for bank guarantees for affiliate...................................... -- 1,135 --
Writeoff of investment in affiliates and related receivables..................... -- 498 --
Earnings on marketable debt securities........................................... (107) (30) --
Deferred income taxes............................................................ 2,638 -- --
Increase in liability for severance pay.......................................... 120 351 (23)
Loss (equity) in affiliates...................................................... (4,880) 3,908 5,102
Gain on sale of division--see Schedule C......................................... -- (5,998) --
Gain on sale of securities....................................................... -- (192) (247)
Unrealized loss from writedown of investment..................................... -- 6,103 237
Loss (gain) on sale of property, plant and equipment, net........................ (15) (37) 51
Amortization of restricted stock award compensation.............................. 196 305 300
Interest expense related to warrants issued...................................... -- -- 128
Discount on convertible debentures............................................... -- -- 300
Imputed interest on convertible debentures....................................... -- -- 377
Other............................................................................ (169) (50) (15)
Decrease (increase) in accounts receivable and other current assets.............. (1,327) 1,136 (2,998)
Decrease (increase) in inventory................................................. 424 (327) (545)
Decrease (increase) in long-term receivables..................................... (165) 227 62
Increase (decrease) in accounts payable and other current liabilities............ 3,040 (809) 6,288
Increase in liability in respect of customer advances, net....................... -- 69 --
------ ------ -------
$2,221 $7,113 $10,643
------ ------ -------
------ ------ -------
B. Net effect of change in reporting method (Note 8c):
Working capital, net of cash..................................................... $ (18)
Investment recorded.............................................................. 1,157
Other assets..................................................................... (1,037)
------
$ 102
------
------
C. Assets/liabilities transferred upon sale of division (Note 17):
Trade accounts receivable, net................................................... $ 754
Property and equipment, net...................................................... 405
Accrued payroll, payroll taxes and social benefits............................... (111)
Other current liabilities........................................................ (451)
------
$ 597
------
------
D. Non-cash activities:
Receipt of capital stock in partial conversion of note receivable (Note 6)....... $1,871
------
------
Unrealized gain (loss) on securities available for sale (Note 4)................. $ 110 $ (110)
------ -------
------ -------
Subsidiary stock issued in exchange for certain assets (Note 3).................. $ 50
------
------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--GENERAL AND SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Data Systems & Software Inc., a Delaware corporation ("DSSI"), through its
subsidiaries (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, (iii) is a provider of
control products and data communication solutions for utilities and
(iv) through an equity affiliate, engages in the manufacture of semiconductor
products. (In December 1999, the Company agreed to sell its interest in its
affiliate and is no longer engaged in the manufacture of semiconductor products.
See Note 2). DSSI's shares are traded on the Nasdaq National Market.
(b) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(c) Significant Accounting Policies
FOREIGN CURRENCY TRANSLATION
The currency of the primary economic environment in which the operations of
the Company are conducted is the United States dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional currency. Transactions and
balances that are denominated in dollars are presented at their dollar amounts.
Transactions and balances in other currencies are remeasured into dollars in
accordance with the principles of Statement of Financial Accounting Standards
("SFAS") No. 52. Accordingly, items have been remeasured as follows:
Monetary items--at the current exchange rate at balance sheet date.
Non-monetary items--at historical exchange rates.
Income and expenditure items--at the exchange rate current as of the date
of recognition of those items (excluding depreciation and other items
deriving from non-monetary items).
All exchange gains and losses from the remeasurement of monetary balance sheet
items denominated in non-dollar currencies are reflected in the statement of
operations when they arise.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts
of all majority-owned or controlled subsidiaries. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. Material intercompany balances and transactions have been
eliminated. Minority interests in net income are limited to the extent of their
equity capital. Losses in excess of minority interest equity capital are charged
against the majority interest.
F-7
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--GENERAL AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's prior years
consolidated financial statements to conform with the current year's
consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and demand deposits in banks and
short-term investments (primarily time deposits and certificates of deposit)
with original maturities of three months or less.
INVESTMENTS IN SECURITIES
Marketable equity securities which are available for sale are reflected at
market value, and the amount of market value in excess of cost is reflected in
shareholders' equity, in conformance with provisions of SFAS No. 115.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
for raw materials, spare parts and supplies on the average cost method. For work
in process and finished goods, cost is determined on the basis of standard
costs, adjusted for variances as appropriate. For merchandise inventories, cost
is determined on the first-in, first-out method.
INVESTMENTS
Investments in 50% or less of the voting control of companies or other
entities over whose operating and financial policies the Company has the ability
to exercise significant influence ("affiliates") are accounted for by the equity
method. Pursuant to this method, the Company includes its share of the
affiliate's earnings or losses in its results of operations. The carrying values
of these investments are periodically reviewed to determine whether impairment
exists.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost or fair values at the date of
acquisition. Depreciation is calculated based on the straight-line method over
the estimated useful lives of the depreciable assets. Improvements are
capitalized while repairs and maintenance are charged to operations as incurred.
COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs are capitalized prior to general
release, upon the establishment of technological feasibility for costs that the
Company believes will be recovered from anticipated revenues. These
determinations are made regularly by the Company on a product by product basis.
Amortization of these costs commences on the earlier of general release to
customers or the receipt of revenues from the product, based on the ratio of
current revenues to current and anticipated future gross revenues, but not less
than straight-line amortization over the expected economic life of the software
product . Capitalized software development costs that exceed their net
realizable value at each balance sheet date, as determined by management, are
written off. The Company has no capitalized software development costs.
F-8
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--GENERAL AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the net carrying value of
assets of subsidiaries acquired in purchase transactions. Goodwill is amortized
based on the straight-line method over periods ranging from five to seven and a
half years. Management reviews goodwill on a periodic basis to determine whether
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable.
LICENSE
The costs of a technology license, including professional fees related
thereto, are presented at estimated fair market value at acquisition date. These
costs are amortized on a straight-line basis over the five-year term of the
license.
PATENTS
The costs of registered patents and patents pending acquired from third
parties are presented at estimated fair market value at acquisition date. In
addition, registration costs and fees for patents are capitalized. Registered
patents costs are amortized over the estimated remaining useful life of the
patents, from four to fourteen years. Costs for patents pending are not
amortized until they are registered.
REVENUE RECOGNITION
Revenues are recognized as products are shipped or services are provided,
except for revenues from fixed-price contracts, which are recorded on the basis
of the percentage-of-completion method. Revenues from such contracts are
recorded as costs (primarily direct labor) are incurred, in the proportion that
actual costs incurred bear to total estimated costs. Percentage-of-completion
estimates are reviewed periodically, and any adjustments required are reflected
in the period when such estimates are revised. Losses on contracts, if any, are
recognized in the period in which the loss is determined.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") costs, not qualifying for capitalization
as software development costs, net of related participation, are charged to
operations as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25. In accordance therewith, the
Company records compensation for share options granted to employees at the date
of grant based on the difference between the exercise price of the options and
the market value of the underlying shares at that date, as well as for the fair
value of restricted shares issued to employees. Deferred compensation is
amortized to compensation expense over the vesting period of the underlying
options. See Note 15a for pro forma disclosures required in accordance with SFAS
No. 123.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on specific identification of
accounts considered to be doubtful of collection. The allowance for doubtful
accounts amounted to $86 and $181 at December 31, 1998 and 1999, respectively.
Bad debt expense related to trade accounts receivable was $8, $37 and $169 for
the years ended December 31, 1997, 1998 and 1999, respectively. Of the change in
the allowance for doubtful accounts during 1998, $315 was attributable to the
sale of the help desk division of the Company (see Note 17).
F-9
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--GENERAL AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss, capital loss and tax credit carryforwards. Deferred tax assets and
liabilities are classified as current or noncurrent based on the classification
of the related assets or liabilities for financial reporting, or according to
the expected reversal dates of the specific temporary differences, if not
related to an asset or liability for financial reporting. Valuation allowances
are established against all deferred tax assets if it is more likely than not
that they will not be utilized.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed for impairment on a
quarterly basis and whenever events or changes in circumstances occur indicating
that the net carrying amount may not be recoverable. The review is based on
comparing the carrying amount of the long-lived assets to the undiscounted
estimated cash flows over the remaining useful lives. If the sum of the expected
undiscounted future cash flows is less than the carrying amount of the assets,
the Company would recognize an impairment loss. The impairment loss, if
determined to be necessary, would be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company
determined that, as of December 31, 1998 and 1999, there had been no impairment
in the carrying value of its long-lived assets.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company has adopted the provisions of SFAS No. 128 "Earnings Per
Share," which establishes standards for computing and presenting net income
(loss) per share. SFAS No. 128 prescribes a presentation of basic earnings per
share and also requires, among other things, dual presentation of basic and
diluted earnings per share for all entities with complex capital structures.
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) by the weighted average number of shares outstanding for each
period presented. Diluted earnings per share is computed by dividing net income
(loss) by the weighted average number of shares outstanding plus the dilutive
potential of common shares which would result from the exercise conversion of
stock options or of convertible securities.
No stock options or convertible securities were included in the computation
of net loss per share, as doing so would have been anti-dilutive.
COMPREHENSIVE LOSS
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." Comprehensive income includes both net income and other comprehensive
income. The Company's accumulated other comprehensive income consisted of an
unrealized gain on an available for sale investment. Since this standard applies
only to the presentation of comprehensive income, it does not have any effect of
the Company's financial position, results of operations, or cash flows. Prior
year financial information has been presented to conform with SFAS 130
requirements.
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
F-10
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--GENERAL AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
designated as a hedge. SFAS 133 is effective for fiscal years beginning after
June 15, 2000. Management is currently evaluating what impact, if any, this may
have on the Company's consolidated financial statements.
NOTE 2--INVESTMENT IN TOWER
For the years ending December 31, 1997, 1998 and 1999, DSSI owned 60% of
the shares of Tower Semiconductor Holdings 1993 Ltd. ("Tower Holdings") which
owned 41.0%, 44.8% and 45.3% of Tower Semiconductor Ltd. ("Tower") for those
years, respectively. Tower's shares are traded on the Nasdaq National Market.
See Note 8b for summary financial information of Tower.
In December 1999, the Company entered into an agreement to sell its
interest in Tower to the 40% minority owner of Tower Holdings, for $30,889.
Closing of the agreement was subject to third-party administrative approvals,
which were received in January 2000. At this time the Company received the
proceeds from the sale net of an Israeli dividend withholding tax. In light of
the sale, the Company's interest in Tower has been classified as a current asset
as of December 31, 1999.
NOTE 3--ACQUISITIONS
(a) In August, 1999, the Company acquired the assets of the Control Systems
division of Scientific-Atlanta, Inc., making it an integral part of the
Company's utility solutions segment. The purchase price for the acquisition was
$4,181 of which $1,507 was allocated to inventory, $639 to property and
equipment, $248 to patents and patents pending and $1,787 to goodwill. The
purchase price is subject to certain adjustments one year after the closing. The
allocation of the purchase price is preliminary and accordingly the Company's
allocation of the purchase price to the various assets may change.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if this acquisition had
occurred at the beginning of each of the periods presented, with pro forma
adjustments to give effect to depreciation, amortization of goodwill and patents
and interest expense on acquisition debt.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------
1998 1999
------------------------ ------------------------
<S> <C> <C>
Net sales........................................................ $ 48,846 $ 44,535
Net loss......................................................... (20,148) (18,568)
Net loss per share............................................... $ (2.73) $ (2.50)
</TABLE>
(b) In January 1998, the Company acquired certain assets and licensed
intellectual property for use in its utility solutions segment. The acquisition
was accounted for by the purchase method of accounting and, accordingly, the
purchase price of $1,353 (including transaction costs and value of subsidiary
stock issued related thereto) was allocated to the assets acquired (primarily
fixed assets, inventory and an exclusive license) based on the estimated fair
value at the date of acquisition. Of the purchase price, $1,225 was paid to the
seller in cash, $78 was paid in cash for transaction costs and 5,000 shares of
common stock of Comverge Technologies, a new subsidiary of the Company, with an
assigned value of $10 per share, was given to the seller, accounting for the
remaining $50 of the purchase price.
(c) In April 1999, the Company purchased the minority interest in the
Company's Decision Systems Israel subsidiary, a public company whose shares were
traded on the Tel Aviv Stock Exchange, for aggregate consideration of $2,750.
The Company recorded goodwill of approximately $2,200 in connection with the
acquisition. Subsequent to the acquisition, the Israeli subsidiary was no longer
considered public.
F-11
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4--MARKETABLE EQUITY SECURITIES, AVAILABLE FOR SALE
Marketable securities in 1998 consisted solely of approximately 3,000,000
shares (approximately 4% ownership) of Mofet Israel Technology Fund, Ltd.
("Mofet Fund"), a public venture capital fund whose shares are traded on the Tel
Aviv Stock Exchange. For the year ended December 31, 1998, this investment was
presented at fair market value to reflect the Company's intention to sell the
shares in 1999. The Company in fact sold its shares in early 1999. At
December 31, 1998, the market value of the Mofet Fund shares exceeded their cost
investment by approximately $110. The Company recorded a gain of $247 on the
sale, which is included in other loss, net, for the year ended December 31,
1999.
NOTE 5--INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Raw materials, spare parts and supplies................................ $250 $1,047
Work in process........................................................ 7 72
Finished goods and merchandise......................................... 447 130
---- ------
$704 $1,249
---- ------
---- ------
</TABLE>
NOTE 6--NOTE RECEIVABLE
In 1996, the Company sold its interest in a joint venture to its joint
venture partner in exchange for a $2,000 unsecured note, bearing annual interest
of 8.25%, payable July 1, 1998. In February 1998, the Company signed an
agreement with the maker of the note ("the maker"), modifying the note to permit
its conversion into shares of publicly traded common stock of the maker. In
April 1998, the maker issued to the Company 3,000,000 such shares, which, based
on its agreement with the maker, represented payment of approximately $1,700 of
the approximately $2,300 of principal and accrued interest on the note. The
Company subsequently sold these shares for approximately $1,900. In June 1998,
the maker filed for protection under Chapter 11 of the Bankruptcy Act, and the
Company therefore established a reserve for doubtful debts equal to the
remaining balance of approximately $610 that remains outstanding on the note.
The doubtful debt expense resulting from this allowance, partially offset by a
gain of $192 from the sale of the shares, is included in other loss, net for the
year ended December 31, 1998.
NOTE 7--OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Prepaid expenses....................................................... $315 $ 397
Deferred interest expense.............................................. -- 179
Deferred debenture costs............................................... -- 45
Employee loans......................................................... 139 170
Foreign income tax receivable (Israel)................................. 157 43
Other.................................................................. 349 290
---- ------
$960 $1,124
---- ------
---- ------
</TABLE>
F-12
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8--INVESTMENTS
(a) Composition
Investments consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Investment in Tower Holdings (see (b) below)........................... $ 56,155 $--*
Other investments (see (c) below)...................................... 335 --
-------- --
56,490 --
Minority interests in Tower Holdings................................... 25,266 --*
-------- --
$ 31,224 $--
-------- --
-------- --
</TABLE>
- ------------------
* As the Company signed an agreement in December 1999 to sell its interest in
Tower (see Note 2), in 1999 the investment has been classified as investment
held for sale, net of minority interest.
(b) Investment in Tower Holdings
Tower Holdings owned 44.8% and 45.3% of Tower as of December 31, 1998 and
1999, respectively.
Set forth below is condensed financial information of Tower:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Current assets......................................................... $ 85,285 $ 75,453
Property and equipment................................................. 88,429 72,683
Current liabilities.................................................... 19,248 19,452
Long-term debt......................................................... 12,127 12,106
Other long-term liabilities............................................ 5,347 1,532
Shareholders' equity................................................... 143,325 122,121
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Sales....................................................... $125,917 $69,637 $69,815
Operating income (loss)..................................... 20,140 (23,998) (25,166)
Net income (loss)........................................... 19,171 (15,544) (20,467)
</TABLE>
The market value of the Company's share (net of minority interest) of Tower
Holdings' investment in Tower as of December 31, 1998 was approximately $30,889,
significantly below the carrying value of the equity investment as of
December 31, 1998 of $36,992 (net of minority interest). The Company recorded a
writedown to market value of $6,103 at December 31, 1998 with respect to its
Tower investment, since the decline in market price was determined to be other
than temporary.
(c) Other Investments
In 1995, the Company established a joint venture for the development and
production of multimedia entertainment software, in which the Company owned a
50% interest. In 1997, the Company purchased the other 50% interest in the joint
venture, and, accordingly, the Company has consolidated this activity since
1997. In 1998, the Company suspended all development and marketing related to
this activity.
The Company owns 50% of the Mofet Fund's management company. The Company's
investment, which is accounted for on the equity method, amounted to $98 and $0
at December 31, 1998 and 1999, respectively. The management company's contract
to manage the fund expired on January 5, 2000. The Company recorded a $50
writedown against this investment in 1998 in order to reflect the carrying value
of the investment at the amount equal to its estimated future cash flows through
the termination of the management contract.
F-13
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8--INVESTMENTS--(CONTINUED)
The Company owned approximately 17% of the outstanding common stock of a
privately-held Beijing-based software consulting and development company. The
Company accounted for its investment on a cost basis, which amounted to $237 at
December 31, 1998. In 1999, the Company wrote-off the investment based on
management's estimate of expected future cash flows from the investment. The
writedown with respect to this investment is included in other losses, net.
NOTE 9--PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
ESTIMATED USEFUL LIFE ----------------------------------------
(IN YEARS) 1998 1999
--------------------- ------------------ ------------------
<S> <C> <C> <C>
Cost:
Computer hardware and software........................... 3-5 $2,392 $3,201
Office furniture and equipment........................... 4-10 1,477 1,606
Motor vehicles........................................... 7 766 365
Leasehold improvements................................... Term of Lease 220 240
------ ------
4,855 5,412
------ ------
Accumulated depreciation and amortization:
Computer hardware and software................................................... 1,647 2,355
Office furniture and equipment................................................... 940 815
Motor vehicles................................................................... 360 193
Leasehold improvements........................................................... 170 196
------ ------
3,117 3,559
------ ------
Property and equipment, net........................................................ $1,738 $1,853
------ ------
------ ------
</TABLE>
Depreciation and amortization in respect of property and equipment amounted
to $886, $867 and $792 for 1997, 1998 and 1999, respectively.
NOTE 10--GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill and other intangible assets consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $1,077 and $1,519 respectively ..... $190 $3,668
License, net of accumulated amortization of $109 and $225 respectively........... 471 343
Patents, net of accumulated amortization of $0 and $1 respectively............... -- 274
---- ------
$661 $4,285
---- ------
---- ------
</TABLE>
Amortization in respect of goodwill, license and patents amounted to $288,
$232 and $559 for 1997, 1998 and 1999, respectively.
NOTE 11--SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Short term debt.................................................................. $470 $8,294
Current maturities of long-term debt............................................. 504 81
---- ------
$974 $8,375
---- ------
---- ------
</TABLE>
F-14
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11--SHORT-TERM DEBT--(CONTINUED)
Short-term debt at December 31, 1999 includes $5,947 received from a bank
to finance the acquisition described in Note 3a. The debt bears interest at
prime +1% annually (9.5% at December 31, 1999) and is payable monthly with the
principal payable in August 2000. The debt is secured by substantially all of
the Company's assets.
NOTE 12--CONVERTIBLE DEBENTURES
In October 1999, the Company completed a private placement of $2,000 of 0%
Convertible Subordinated Debentures (the "Debentures") and 100,000 warrants with
an exercise price of $3.06625, to purchase common stock of the Company. In
addition, the Company issued 20,000 warrants with an exercise price of $3.06625,
as partial compensation to a finder in connection with the private placement.
The warrants expire in October 2002. The Debentures are payable in October 2001
and do not bear interest. Interest of approximately $377 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 $3.06625 and 85% of the
average closing bid prices for the common stock for the five trading days
preceding delivery notice of the conversion. The Company recorded $114 of
deferred interest expense with respect to the issuance of the warrants. In
addition, a discount on conversion feature of $300 was recorded to interest
expense with respect to the Debentures.
NOTE 13--OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Debt to Israeli banks and lease companies*............................. $ 606 $ 103
Less--current maturities............................................... 504 81
------ ------
102 22
------ ------
Liability for employee termination benefits**.......................... 2,781 2,948
Less--funded amounts................................................... 2,196 2,386
------ ------
585 562
------ ------
$ 687 $ 584
------ ------
------ ------
</TABLE>
- ------------------
* The long-term portion is due in the year 2001 and bears interest at rates
ranging from 5% to 10%. Interest expense on short-term and long-term debt for
1997, 1998 and 1999 amounted to $183, $205 and $911, respectively.
** Under Israeli law and labor agreements, the Company's subsidiaries in Israel
are required to make severance and pension payments to dismissed employees
and to employees leaving employment in certain other circumstances. The
obligation for severance pay benefits, as determined by the Israeli Severance
Pay Law, is based upon length of service and last salary. These obligations
are substantially covered by regular deposits with recognized severance pay
and pension funds and by the purchase of insurance policies. The pension
plans are multi-employer and independent of the Company. Therefore, no
information is available regarding their present value and the net assets
available for benefits. Pension and severance pay costs for 1997, 1998 and
1999 were approximately $949, $1,486 and $725, respectively.
F-15
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 14--COMMITMENTS AND CONTINGENCIES
(a) Leases of Property and Equipment
Rental and leasing expenses for 1997, 1998 and 1999 amounted to 1,146,
1,258 and 1,463, respectively. Future minimum lease payments on non-cancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------
<S> <C>
2000........................................................... $ 762
2001........................................................... 417
2002........................................................... 245
2003........................................................... 96
2004........................................................... 70
------
$1,590
------
------
</TABLE>
In January 2000, an Israeli subsidiary signed an agreement extend its lease
for office space and other premises until the 2010. Future minimum rental
payments with respect to this lease are $242 for 2000 and $2,499 in total.
(b) Employee Retirement Savings Plan
The Company sponsors a tax deferred retirement savings plan that permits
eligible U.S. employees to contribute varying percentages of their compensation
up to the limit allowed by the Internal Revenue Service. This plan also provides
for discretionary Company contributions. No discretionary contributions were
made for the years ended December 31, 1997, 1998 and 1999.
(c) Guarantees
Short-term debt at December 31, 1997 included $1,456 received from
investors as financing for future projects of the Company. In January 1998 this
amount was repaid in full. In 1997, short-term debt received as financing for
future projects was secured by a bank deposit, which was classified as
restricted cash and which bore interest of approximately 4% per annum. The
Company undertook a direct guarantee, by means of a deposit (classified as
restricted cash), of approximately $752 and $536 in the years ended December 31,
1998 and 1999, respectively, of certain bank commitments arising out of the
operating activities of an Israeli affiliate, a former subsidiary of the
Company, the total of such commitments being approximately $1,135. The Company
accrued in 1998 loss contingencies of approximately $1,390 in connection with
these guarantees and with the writeoff of related receivables.
The Company maintains lines of credit with Israeli banks totaling
approximately $2,000. Of these credit lines, approximately $1,600 was utilized
as of December 31, 1999. These lines of credit are denominated in unlinked New
Israeli Shekels ("NIS") and on average bear interest at 1% above the Prime rate
for unlinked NIS loans. At December 31, 1999 this rate was 12.2%.
NOTE 15--SHAREHOLDERS' EQUITY
(a) Stock Option Plans
The Company's stock option plans provide for the granting to officers,
directors and other key employees of options to purchase shares of common stock
at not less than 85% of market value on the date of grant. The purchase price
must be paid in cash. To date, the Company has issued options under the plans at
market value. All options expire within five to ten years from the date of the
grant. The options generally vest over a two to three year period from the date
of grant of the option. The total authorized number of options under the various
plans is 2,600,000, and the number remaining available for issuance is 287,200.
F-16
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY--(CONTINUED)
A summary of the status of the Company's option plans as of December 31,
1997, 1998 and 1999, as well as changes during each of the years then ended, is
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- -------- ----------- -------- ----------- --------
(IN SHARES) (IN SHARES) (IN SHARES)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 1,423,492 $ 6.60 1,456,067 $ 6.57 1,498,717 $ 6.39
Granted.............................. 53,500 $ 5.82 95,000 $ 3.49 408,450 $ 2.10
Exercised............................ -- $ -- (10,000) $ 5.50 -- $ --
Forfeited............................ (20,925) $ 6.38 (42,350) $ 6.02 (183,317) $ 7.00
--------- --------- ---------
Outstanding at end of year............. 1,456,067 $ 6.57 1,498,717 $ 6.39 1,723,850 $ 5.32
--------- --------- ---------
--------- --------- ---------
Exercisable at end of year............. 1,162,816 $ 6.66 1,309,050 $ 6.64 1,276,683 $ 5.70
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE AS OF
OUTSTANDING AS OF DECEMBER 31, 1999 DECEMBER 31, 1999
-------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------- ----------- ----------------- -------------- ----------- --------------
(IN SHARES) (IN YEARS) (IN SHARES)
<S> <C> <C> <C> <C> <C>
$ 1.80-2.00.......................... 312,500 6.34 $ 1.82 137,334 $ 1.81
$ 2.44-3.69.......................... 152,500 6.74 2.87 92,500 3.01
$ 4.50-5.88.......................... 270,000 2.02 5.58 257,999 5.60
$ 6.06-7.88.......................... 958,850 2.94 6.59 758,850 6.55
$11.13............................... 30,000 5.73 11.13 30,000 11.13
--------- ---------
1,723,850 1,276,683
--------- ---------
--------- ---------
</TABLE>
The weighted average grant-date fair value of the 53,500, 95,000 and
408,450 options granted during 1997, 1998 and 1999, respectively, amounted to
$5.24, $1.65 and $1.60 per option, respectively. The Company utilized the
Black-Scholes option pricing model to estimate fair value, utilizing the
following assumptions for the respective years (all in weighted averages):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................................. 6.00% 5.00% 6.00%
Expected life of options............................................ 5.9 years 6.6 years 6.8 years
Expected annual volatility.......................................... 47% 39% 78%
Expected dividend yield............................................. None None None
</TABLE>
Had compensation cost for the Company's option plans been determined based
on fair value at the grant dates for awards made in 1997, 1998 and 1999 under
such plans in accordance with SFAS No. 123, the Company's pro forma net loss and
loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss-as reported................................................. $(10,444) $(12,944) $(15,867)
Pro forma net loss................................................... (10,566) (13,010) (16,658)
Basic and diluted net loss per share-as reported..................... (1.42) (1.75) (2.13)
Pro forma basic and diluted net loss per share....................... (1.44) (1.77) (2.24)
</TABLE>
The pro forma information in the above table also gives effect to the
application of SFAS No. 123 on the share option plans of the Company's
subsidiaries.
F-17
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY--(CONTINUED)
(b) Warrants
The Company has issued warrants at exercise prices equal to or greater than
market value on the date of issuance. A summary of warrant activity follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER OF AVERAGE NUMBER OF EXERCISE PRICE EXERCISE PRICE
WARRANTS EXERCISE PRICE WARRANTS NUMBER OF WARRANTS
--------- -------------- --------- -------------- --------- --------------
(IN (IN (IN
SHARES) SHARES) SHARES)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 433,825 $ 9.06 197,500 $10.18 197,500 $10.18
Granted............................. -- -- -- -- 370,000 3.23
Exercised........................... -- -- -- -- -- --
Forfeited........................... (236,325) 8.13 -- -- (197,500) 10.18
--------- ------- ---------
Outstanding at end of year.......... 197,500 $10.18 197,500 $10.18 370,000 $ 3.23
--------- ------- ---------
--------- ------- ---------
</TABLE>
In August 1999, the Company granted a lender (who financed the acquisition
described in Note 3a) 250,000 warrants to purchase common stock with an exercise
price of $3.31, the fair market value of the shares at the date of the grant.
The warrants expire on August 31, 2002. The Company recorded $318 of deferred
interest expense with respect to the issuance of the warrants of which $116 was
amortized to interest expense during 1999. The deferred interest is being
amortized over the life of the loan. The Company used the Black-Scholes
valuation method to estimate the fair value of the warrants.
See Note 12 with respect to additional warrants issued simultaneously with
the Debentures.
(c) Stock Awards
In March 1996, the Company granted 100,000 shares of common stock to its
Chief Executive Officer. The shares vest over a three-year period. Deferred
compensation in the aggregate amount of $587 was recorded against additional
paid-in capital at the date of grant, of which $196, $196 and $46 was amortized
to compensation expense during 1997, 1998 and 1999, respectively.
In August 1998, the Company granted 155,000 shares of common stock to its
Chief Executive Officer. The shares generally vest over a two-year period,
except that the vesting of 20,000 of the shares may be delayed until
additionally certain performance goals have been met. These performance goals
have not been met since the date of grant. Deferred compensation in the
aggregate amount of $436 was recorded against additional paid-in capital at the
date of grant, of which $109 and $254 was amortized to compensation expense
during 1998 and 1999, respectively.
(d) Stock Repurchase Program
In August 1998, the Company's Board of Directors authorized the purchase of
up to 500,000 shares of the Company's common stock. During 1998, the Company
purchased 150,630 of its own shares and at December 31, 1999 owned in the
aggregate 490,262 of its own shares.
(e) Other
In March 1996, the Company's Board of Directors adopted a stockholder
rights plan providing for the distribution of common stock purchase rights at
the rate of one right for each share of the Company's common stock held by
shareholders of record as of the close of business on April 1, 1996. The rights
plan is designed to deter coercive takeover tactics, including the accumulation
of shares in the open market or through private transactions, and to prevent an
acquirer from gaining control of the Company without offering a fair price to
all of the Company's shareholders. Each right initially entitles shareholders to
buy one-half of a share of common stock of the Company for $15. Generally, the
right will be exercisable only if a person or group acquires
F-18
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY--(CONTINUED)
beneficial ownership of 15% of more of the Company's common stock or commences a
tender or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's common stock.
If any person ("Acquiring Person") becomes the beneficial owner of 15% or
more of the Company's common stock, other than pursuant to a tender or exchange
offer for all outstanding shares of the Company approved by a majority of the
Company's independent directors, then, subject to certain exceptions set forth
in the rights plan, each right not owned by the Acquiring Person or related
parties will entitle its holder to purchase, at the right's then current
exercise price, shares of the Company's common stock (or in certain
circumstances, as determined by the Board of Directors, cash, other property or
other securities) having a value of twice the right's then current exercise
price. The Company will generally be entitled to redeem the rights at one half
of one cent per right at any time until 10 days (subject to extension) following
a public announcement that a 15% position has been acquired. The rights plan
will expire in March 2006.
NOTE 16--RELATED PARTY BALANCES AND TRANSACTIONS
Other assets include a loan, bearing interest at an annual rate of 7%, to
its Chief Executive Officer. The balance of this loan, including interest, was
approximately $612 and $511, at December 31, 1998 and 1999, respectively. Such
loan is repayable in installments over a period of five years. The Company paid
consulting and other fees to directors of $95, $108 and $97 for the years ended
December 31, 1997, 1998 and 1999, respectively which is included in selling,
general and administrative expenses. Approximately $92 and $32 received from an
affiliate for expense reimbursement during the years ended December 31, 1998 and
1999 was reflected as a reduction of selling, general and administrative
expenses. The Company paid legal fees for services rendered and out-of-pocket
disbursements to a firm in which a related party is a principal, of
approximately $401, $410 and $494 for the years ended December 31, 1997, 1998
and 1999, respectively. Approximately $66 and $176, included in other current
liabilities, was owed to this firm as of December 31, 1998 and 1999,
respectively. The Company paid the director of operations of one of its
subsidiaries, who is the son of the Company's Chief Executive Officer,
approximately $98, $122 and $132 for the years ending December 31, 1997, 1998
and 1999, respectively.
NOTE 17--GAIN ON SALE OF DIVISION
In April 1998 the Company sold certain assets and the technology related to
its help desk software segment for approximately $6,595. The Company recognized
a gain of approximately $5,998 before taxes in the second quarter of 1998 in
connection with this transaction.
F-19
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 18--INCOME TAXES
(a) Composition
Income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ---- ------
<S> <C> <C> <C>
Current:
Federal....................................................................... $ (4) $-- $ --
State and local............................................................... 161 (8) 35
Foreign*...................................................................... 716 52 3,745
------ ---- ------
873 44 3,780
------ ---- ------
Deferred:
Federal....................................................................... 1,853 -- 5
State and local............................................................... 218 (9) --
Foreign....................................................................... 563 -- --
------ ---- ------
2,634 (9) 5
------ ---- ------
$3,507 $35 $3,785
------ ---- ------
------ ---- ------
</TABLE>
- ------------------
(*) Primarily represents a provision for Israeli income taxes related to the
sale of the Company's interest in Tower.
(b) Effective Income Tax Rates
Set forth below is a reconciliation between the Federal tax rate and the
Company's effective income tax rates:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory Federal rates........................................................... 34 % 34 % 34 %
Increase (decrease) in income tax rate resulting from:
Israeli operations--net impact of Israeli statutory rate and special deduction.. (3) -- --
Non-deductible expenses......................................................... (1) (18) --
State and local income taxes-net................................................ 9 1 9
Net operating loss carryforward................................................. -- (2) 4
Other........................................................................... (5) (1) (6)
Increase in valuation allowance................................................. (62) (14) (97)
---- ---- ----
Effective income tax rates........................................................ (28)% 0 % (56)%
---- ---- ----
---- ---- ----
</TABLE>
F-20
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 18--INCOME TAXES--(CONTINUED)
(c) Analysis of Deferred Tax Assets (Liabilities)
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Accelerated depreciation for tax purposes.................... $ (14) $ 11
Intangible asset basis differences........................... 1 59
Other temporary differences.................................. 32 1,231
Net operating and capital loss carryforwards................. 9,928 10,315
Foreign tax credit carryforwards............................. 241 3,693
-------- --------
10,188 15,309
Valuation allowance.......................................... (10,188) (15,309)
-------- --------
Net deferred tax asset (liability)........................... $ -- $ --
-------- --------
-------- --------
</TABLE>
Due to the history of losses in the Company's operations, a valuation
allowance has been established against all deferred tax assets. The valuation
allowance relates principally to net operating loss and capital loss
carryforwards and Federal foreign tax credit carryforwards.
(d) Summary of Tax Loss Carryforwards
As of December 31, 1999, the Company had various tax loss carryforwards,
which expire as follows:
<TABLE>
<CAPTION>
NET OPERATING LOSS
-----------------------------
EXPIRATION FEDERAL STATE FOREIGN
- ------------------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
2001-2002............................................................... $ -- $ 710 $ --
2003-2004............................................................... -- 7,010 --
2005-2006............................................................... -- 5,133 --
2007-2009............................................................... 3,358 -- --
2011-2012............................................................... 9,880 -- --
2018-2019............................................................... 4,409 -- --
Unlimited............................................................... -- -- 7,074
------- ------- -------
Total................................................................. $17,647 $12,853 $ 7,074
------- ------- -------
------- ------- -------
</TABLE>
(e) Composition of Loss before Income Taxes
Composition of loss before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Domestic............................................................. $(11,206) $(7,450) $(5,534)
Foreign.............................................................. (1,287) (2,429) (1,171)
-------- ------- -------
$(12,493) $(9,879) $(6,705)
-------- ------- -------
-------- ------- -------
</TABLE>
NOTE 19--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
(a) General Information
The Company has three reportable segments in 1999: computer-consulting
services, computer hardware and utility solutions. In 1998, the Company also had
reportable segments with respect to its help desk software and multimedia
entertainment software. The computer consulting services and systems segment
provides computer software and systems consulting and development services,
primarily to high-technology customers in Israel and
F-21
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 19--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
the United States. The computer hardware segment sells and services
comprehensive PC-based computer hardware/software/networking solutions. The
utility solutions segment develops and markets interactive real-time
communications solutions targeted for the utilities market. The help desk
software segment, which provided solutions for the help desk market, was sold in
1998. The multimedia entertainment software segment, which consisted of the
Company's Cybrcard multimedia entertainment products, suspended operating
activity in the first quarter of 1998.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Similar
operating segments that operate in different countries are managed separately,
and, in accordance with the provisions of SFAS 131, the Company has aggregated
similar operating segments into one reportable segment.
(b) Information about Profit or Loss and Assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on the profit or loss from operations before income taxes not
including nonrecurring gains and losses.
The Company accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices. The
Company does not systematically allocate assets to the divisions of the
subsidiaries constituting its consolidated group, unless the division
constitutes a significant operation. Accordingly, where a division of a
subsidiary constitutes a segment that does not meet the quantitative thresholds
of FAS 131, depreciation expense is recorded against the operations of such
segment, without allocating the related depreciable assets to that segment.
However, where a division of a subsidiary constitutes a segment that does meet
the quantitative thresholds of FAS 131, related depreciable assets, along with
other identifiable assets, are allocated to such division.
The following tables represent segmented data for the years ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
COMPUTER
CONSULTING COMPUTER UTILITY
SERVICES HARDWARE SOLUTIONS OTHER(*) TOTAL
----------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues from external customers........................ $18,784 $15,218 $ 5,061 $285 $39,348
Intersegment revenues................................... 597 40 167 -- 804
Interest revenue........................................ 43 -- -- -- 43
Interest expense........................................ 233 5 1 -- 239
Depreciation and amortization........................... 416 48 516 15 995
Segment profit (loss)................................... (832) 328 (3,297) 64 (3,737)
Equity in net income of investees....................... (98) -- -- -- (98)
Income tax expense...................................... 60 10 1 -- 71
Segment assets.......................................... 5,632 5,082 6,829 6 17,549
Expenditures for segment assets......................... 286 28 954 -- 1,268
</TABLE>
- ------------------
(*) Represents two segments below the quantitative thresholds of FAS 131, a VAR
software operation in Israel and residual operations from the Company's
multimedia entertainment software segment.
F-22
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 19--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
COMPUTER MULTIMEDIA
CONSULTING COMPUTER UTILITY HELP DESK ENTERTAINMENT
SERVICES HARDWARE SOLUTIONS SOFTWARE SOFTWARE OTHER(*) TOTAL
---------- --------- --------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Revenues from external
customers.................. $ 18,460 $16,374 $ 212 $ 785 $ 152 $972 $37,135
Intersegment revenues........ 124 22 -- -- 159 -- 305
Interest revenue............. 57 -- -- -- -- -- 57
Interest expense............. 235 9 2 -- -- -- 246
Depreciation and
amortization............... 458 45 359 -- 20 52 934
Segment profit (loss)........ 5,742 1,514 (3,428) (1,352) (663) (294) 1,519
Sale of division (Note 17)... 5,998 -- -- -- -- -- 5,998
Loss on note (Note 6)........ 418 -- -- -- -- -- 418
Equity in net income of
investees.................. (198) -- -- -- -- -- (198)
Income tax expense
(benefit).................. 20 (43) -- -- -- -- (23)
Segment assets............... 7,796 3,659 1,544 -- 26 -- 13,025
Expenditures for segment
assets..................... 301 30 591 -- -- -- 922
</TABLE>
- ------------------
(*) Represents two operating segments below the quantitative thresholds of FAS
131, a VAR software operation in Israel and an Internet database venture.
Segment data for the year ended December 31, 1997 is presented in the
format used in prior years and not in accordance with the provisions of FAS 131,
as it would be impracticable to do so. The data for each business segment is
presented in this table according to geographical location of the operating
facilities. General corporate expenses are included with selling, general and
administrative expenses in the statements of operations.
<TABLE>
<CAPTION>
COMPUTER SEGMENT
----------------------------------------------
ADJUSTMENTS TOTAL SEMICONDUCTOR CORPORATE
UNITED AND COMPUTER SEGMENT UNITED
ISRAEL STATES ELIMINATIONS SEGMENT ISRAEL STATES TOTAL
------- ------- ------------ -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Total sales................ $14,346 $25,593 $ (354) $ 39,585 $ -- $ 411 $ 39,996
Intercompany............... -- (354) 354 -- -- -- --
------- ------- ------ -------- ------- ------- --------
Net sales.................. 14,346 25,239 -- 39,585 -- 411 39,996
Operating loss............. (1,482) (8,933) -- (10,415) -- (2,220) (12,635)
Identifiable assets........ 10,351 6,263 -- 16,614 68,649 7,103 92,366
Depreciation and
amortization............. 466 958 -- 1,424 -- 55 1,479
Capital expenditures....... 324 535 -- 859 -- 3 862
</TABLE>
F-23
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 19--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
(c) Reconciliations
The following tables represent data for the years ended December 31, 1998
and 1999 (for 1997 data, see b. above):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues:
Total revenues for reportable segments..................................................... $ 36,163 $ 39,063
Other operational segment revenues......................................................... 972 285
Revenue from management fee derived by non--operating segment (corporate headquarters)..... 360 360
-------- --------
Total consolidated revenues................................................................ $ 37,945 $ 39,708
-------- --------
-------- --------
Profit or Loss:
Total profit (loss) for reportable segments................................................ $ 1,813 $ (3,801)
Other operational segment income (loss).................................................... (294) 64
Unallocated amounts: Net loss of corporate headquarters(*)................................. (14,463) (12,130)
-------- --------
Total consolidated net loss................................................................ $(12,944) $(15,867)
-------- --------
-------- --------
Assets:
Total assets for reportable segmets........................................................ $ 13,025 $ 17,543
Unallocated amounts: Net assets of corporate headquarters(**).............................. 34,953 30,946
-------- --------
Total consolidated assets.................................................................. $ 47,978 $ 48,408
-------- --------
-------- --------
</TABLE>
- ------------------
(*) Unallocated loss in 1999, includes equity losses of Tower (net of minority
interest) of $5,004 and tax provisions of $3,693 with respect to the sale
by the Company of its interest in Tower (see Note 2).
Unallocated loss in 1998, includes Tower writedown of $6,103 (see Note 8b),
equity in losses of Tower (net of minority interest) of $3,710, and a
one--time loss accrual for bank guarantees and writeoffs related to an
affiliate of $1,390 (see Note 14d).
(**) Unallocated assets includes Tower investment (net of minority interest) of
$31,244 and $25,900 at December 31, 1998 and 1999, respectively (see
Notes 8 and 2 for 1998 and 1999, respectively).
<TABLE>
<CAPTION>
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
<S> <C> <C> <C>
OTHER SIGNIFICANT ITEMS
Year ended December 31, 1999
Depreciation and amortization............................................... $ 995 $ 356 $1,351
Expenditures for assets..................................................... 1,268 8 1,276
Equity in net income of investees........................................... (97) (5,004) (5,102)
Income tax expense.......................................................... 71 3,714 3,785
Year ended December 31, 1998................................................
Depreciation and amortization............................................... $ 934 $ 158 $1,092
Expenditures for assets..................................................... 922 7 929
Gain on sale of division.................................................... 5,998 -- 5,998
Equity in net income of investees........................................... (198) (3,710) (3,908)
</TABLE>
The reconciling items are all corporate headquarters data, which are not
included in the segment information. The reconciling item to adjust equity in
net income of investees is the Company's share of Tower's
F-24
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 19--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
loss. The reconciling item to adjust income tax expense is the tax expense
related to the Company's sale of its interest in Tower. None of the other
adjustments are significant.
(d) Geographic Information
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues attributable to countries based on location of
customer:
Israel....................................................... $12,769 $14,637 $15,401
United States................................................ 27,164 22,858 23,579
Far East..................................................... -- -- 708
Other........................................................ 63 -- 20
------- ------- -------
$39,996 $37,495 $39,708
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1999
------ ------
<S> <C> <C>
Long-lived assets located in the following countries:
Israel................................................................ $1,143 $ 852
United States......................................................... 595 1,001
</TABLE>
(e) Major Customers
<TABLE>
<CAPTION>
REVENUES FROM MAJOR CONSOLIDATED SALES
CUSTOMERS YEAR ENDED DECEMBER 31,
- -------------------------------- ---------------------------------------------------------
CUSTOMER SEGMENT 1997 1998 1999
- --------- ------------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
A........ Computer hardware $4,617 11.5% $ 5,930 15.8% $ 90 0.2%
B........ Computer hardware 4,273 10.7 4,470 11.9 5,651 14.2
------ ---- ------- ---- ------- ----
$8,890 22.2% $10,400 27.7% $ 5,741 14.4%
------ ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ----
</TABLE>
NOTE 20--FINANCIAL INSTRUMENTS
(a) General
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a contractual
obligation either to deliver or receive cash or another financial instrument to
or from a second entity. Examples of financial instruments include cash and cash
equivalents, trade accounts receivable, loans, investments, trade accounts
payable, accrued expenses, options and forward contracts.
In accordance with SFAS Nos. 105, 107, and 119, the Company makes certain
disclosures with regard to financial instruments, including derivatives. These
disclosures include, among other matters, the nature and terms of derivative
transactions, information about significant concentrations of credit risk, and
the fair value of financial assets and liabilities.
(b) 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. See
Note 2 for information regarding the book and fair market value of the Company's
investment in Tower. At December 31, 1999, the Debenture had a fair market value
of approximately $108 in excess of its book value.
F-25
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 20--FINANCIAL INSTRUMENTS--(CONTINUED)
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
short--term bank deposits, marketable security investments and trade
receivables. The Company's maintains its cash and cash equivalents as well as
its short--term bank deposits at various major financial institutions.
Management believes that the financial institutions that hold the Company's
investments are financially sound, and accordingly, minimal credit risk exists
with respect to these investments. Approximately 19% of the trade accounts
receivable were due from a U.S. customer that pays its trade receivables over
usual credit periods. Credit risk with respect to the balance of trade
receivables is generally diversified due to the large number of entities
comprising the Company's customer base.
NOTE 21--SUBSEQUENT EVENTS
In February 2000, the Company redeemed $1,740 of the $2,000 convertible
debentures for an aggregate redemption price of $2,001. The $260 balance of the
convertible debentures were converted into 84,794 shares of common stock of the
Company.
F-26
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Tower Semiconductor Ltd.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. (the "Company") and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors' Regulations
(Auditor's Mode of Performance)--1973, which standards are substantially
identical to generally accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
their operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999, in accordance with generally
accepted accounting principles in Israel. As applicable to these financial
statements, such accounting principles are substantially identical in all
material respects to generally accepted accounting principles in the United
States, except as indicated in Note 18.
BRIGHTMAN ALMAGOR & CO.
Certified Public Accountants
Tel Aviv, Israel
January 31, 2000
T-1
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
NOTE 1999 1998
---- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 10,505 $ 7,320
Short-term interest-bearing deposits......................................... 11 31,375 31,962
Marketable debt securities................................................... 3 5,060 25,160
Trade accounts receivable (net of allowance for doubtful accounts of $125 and
$530, respectively)......................................................... 9,14 8,306 5,249
Other receivables............................................................ 4 5,034 3,792
Inventories.................................................................. 5 13,511 9,839
Other current assets......................................................... 1,662 1,963
-------- --------
Total current assets....................................................... 75,453 85,285
-------- --------
Long-term investments........................................................... 6 6,000 6,000
-------- --------
Property and equipment, net..................................................... 7,11 72,683 88,429
Other assets.................................................................... 1,075 333
-------- --------
Total assets............................................................... $155,211 $180,047
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.............................................................. 8 $ 95 $ 21
Trade accounts payable....................................................... 12,338 11,713
Current portion of long-term liability in respect of customer advances....... 16 760 4,560
Due to related parties....................................................... 9 71 42
Other current liabilities.................................................... 10 6,188 2,912
-------- --------
Total current liabilities.................................................. 19,452 19,248
Long-term debt.................................................................. 11 12,106 12,127
Long-term liability in respect of customer advances............................. 16 -- 1,076
Other long-term liabilities..................................................... 12 1,532 4,271
Commitments and contingencies................................................... 16 -- --
-------- --------
Total liabilities.......................................................... 33,090 36,722
-------- --------
-------- --------
Shareholders' equity:
Ordinary shares, NIS 1 par value--authorized 30,000,000 shares; issued
13,263,593 and 13,241,502 shares, respectively.............................. 13 4,329 4,324
Additional paid-in capital................................................... 138,539 138,354
Shareholder receivables and unearned compensation............................ (945) (981)
Retained earnings (deficit).................................................. (10,730) 9,737
-------- --------
131,193 151,434
Treasury stock, at cost--1,300,000 and 1,157,500 shares, respectively........... 13 (9,072) (8,109)
-------- --------
Total shareholders' equity................................................. 122,121 143,325
-------- --------
-------- --------
Total liabilities and shareholders' equity................................. $155,211 $180,047
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
T-2
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
NOTE 1999 1998 1997
----- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................................. 14,16 $ 69,815 $ 69,637 $125,917
Cost of sales......................................................... 77,033 76,781 89,556
-------- -------- --------
Gross profit (loss).............................................. (7,218) (7,144) 36,361
-------- -------- --------
Operating costs and expenses:
Research and development............................................ 16 9,238 8,107 7,271
Marketing, general and administrative............................... 9 8,710 8,747 8,550
Other expenses...................................................... -- -- 400
-------- -------- --------
17,948 16,854 16,221
-------- -------- --------
-------- -------- --------
Operating income (loss).......................................... (25,166) (23,998) 20,140
Financing income, net................................................. 2,277 2,741 2,452
Gain from sale of equipment........................................... 17 13 615
-------- -------- --------
Income (loss) before income taxes (benefit)...................... (22,872) (21,244) 23,207
Income taxes (benefit)................................................ 15 (2,405) (5,700) 4,036
-------- -------- --------
Net income (loss).............................................. $(20,467) $(15,544) $ 19,171
-------- -------- --------
-------- -------- --------
Basic earnings (loss) per ordinary share:
Earnings (loss) per share........................................... $ (1.54) $ (1.18) $ 1.45
-------- -------- --------
-------- -------- --------
Net income (loss) used to compute basic earnings (loss) per share... $(20,219) $(15,544) $ 19,171
-------- -------- --------
-------- -------- --------
Weighted average number of ordinary shares outstanding--in
thousands........................................................ 13,156 13,137 13,235
-------- -------- --------
-------- -------- --------
Diluted earnings per ordinary share:
Earnings per share.................................................. $ 1.38
--------
--------
Net income used to compute diluted earnings per share............... $ 19,225
--------
--------
Weighted average number of ordinary shares outstanding--in
thousands........................................................ 13,945
--------
--------
</TABLE>
See notes to consolidated financial statements.
T-3
<PAGE>
TOWER SEMICONDUCTOR LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDER
RECEIVABLES
ORDINARY SHARES ADDITIONAL AND RETAINED
-------------------- PAID-IN UNEARNED EARNINGS TREASURY
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCK TOTAL
---------- ------ ---------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 1,
1997..................... 13,205,450 $4,314 $137,787 $ (861) $ 19,345 $ -- $160,585
Exercise of share options.. 29,910 9 290 299
Cancellation of unearned
compensation in respect
of non-vested options,
net...................... (39) 39 --
Amortization of unearned
compensation............. 86 86
Expenses connected with
issuance of employee
share options............ (25) (25)
Cash dividend paid......... (13,235) (13,235)
Net income................. 19,171 19,171
---------- ------ -------- ------ -------- -------- --------
Balance--December 31,
1997..................... 13,235,360 4,323 138,013 (736) 25,281 -- 166,881
Exercise of share options.. 6,142 1 50 51
Cancellation of unearned
compensation in respect
of non-vested options,
net...................... 291 (291 --
Amortization of unearned
compensation............. 46 46
Purchase of treasury
stock.................... (8,109) (8,109)
Net loss................... (15,544) (15,544)
---------- ------ -------- ------ -------- -------- --------
Balance--December 31,
1998..................... 13,241,502 4,324 138,354 (981) 9,737 (8,109) 143,325
Exercise of share options.. 22,091 5 185 190
Amortization of unearned
compensation............. 10 10
Repayment of Shareholder
receivables.............. 26 26
Purchase of treasury
stock.................... (963) (963)
Net loss................... (20,467) (20,467)
---------- ------ -------- ------ -------- -------- --------
Balance--December 31,
1999..................... 13,263,593 $4,329 $138,539 $ (945) $(10,730) $ (9,072) $122,121
---------- ------ -------- ------ -------- -------- --------
---------- ------ -------- ------ -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
T-4
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows--operating activities
Net income (loss)............................................................ $(20,467) $(15,544) $ 19,171
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Income and expense items not involving cash flows:
Depreciation and amortization........................................... 26,643 25,414 23,648
Deferred income taxes (benefit)......................................... (2,405) (5,700) 4,036
Gain from sale of equipment............................................. (17) (13) (615)
Earnings on marketable debt securities.................................. (981) (1,394) (1,637)
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable........................ (3,057) 5,759 86
Decrease (increase) in other receivables and other current assets....... 1,026 923 (1,156)
Decrease (increase) in inventories...................................... (3,672) 2,593 1,857
Increase in trade accounts payable...................................... 525 276 1,923
Increase (decrease) in due to related parties........................... 29 (165) (207)
Increase (decrease) in other current liabilities........................ 3,182 (3,050) 1,803
Decrease in liability in respect of customer advances, net.............. (4,876) (3,154) (8,824)
Increase (decrease) in other long-term liabilities...................... 33 (762) 577
-------- -------- --------
Net cash provided by (used in) operating activities.................. (4,037) 5,183 40,662
Cash flows--investing activities
Investments in property and equipment........................................ (15,297) (20,878) (29,390)
Investment grants received................................................... 2,530 6,685 13,041
Proceeds from sale of equipment.............................................. 90 69 766
Increase in other assets..................................................... (1,075) -- --
Decrease (increase) in deposits.............................................. 587 21,113 (25,978)
Investments in marketable debt securities.................................... (14,467) (35,648) (48,836)
Proceeds from realization of marketable debt securities...................... 35,548 38,089 57,876
Long-term investments........................................................ -- (3,750) (2,000)
-------- -------- --------
Net cash provided by (used in) investing activities.................. 7,916 5,680 (34,521)
Cash flows--financing activities
Proceeds from exercise of share options...................................... 190 51 299
Share option plan and share issuance expenses................................ -- -- (25)
Increase (decrease) in short-term debt....................................... 74 (294) 86
Increase (decrease) in long-term debt........................................ (21) 17 67
Purchase of treasury stock................................................... (963) (8,109) --
Repayment of Shareholder receivables......................................... 26 -- --
Cash dividend paid........................................................... -- -- (13,235)
-------- -------- --------
Net cash used in financing activities................................ (694) (8,335) (12,808)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........................ 3,185 2,528 (6,667)
Cash and cash equivalents--beginning of year................................... 7,320 4,792 11,459
-------- -------- --------
Cash and cash equivalents--end of year.................................. $ 10,505 $ 7,320 $ 4,792
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest....................................... $ 669 $ 730 $ 748
-------- -------- --------
-------- -------- --------
Cash paid during the year for income taxes................................... $ 73 $ 371 $ 1,578
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
T-5
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--DESCRIPTION OF BUSINESS AND GENERAL
A. Description of Business
Tower Semiconductor Ltd. (the "Company"), incorporated in Israel, commenced
operations in March 1993. The Company is an independent "foundry" manufacturer
of semiconductor integrated circuits on silicon wafers. As a foundry, the
Company manufactures wafers using its advanced production capabilities and the
proprietary integrated circuit designs of its customers. In addition, the
Company also offers certain integrated circuit design services.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized by the
complexity and sensitivity of the manufacturing process, by high levels of fixed
costs, and by the need for constant improvements in production technology.
The Company has a wholly owned marketing subsidiary in the U.S. and a
50.1%-owned (on a fully diluted basis) ASIC design center subsidiary in Israel.
The operations of these subsidiaries have not been material to the Company's
financial position or results of operations since their incorporation.
The Company's ordinary shares are traded on the Nasdaq National Market.
B. Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The Company's financial statements include the financial statements of the
Company and its majority-owned subsidiaries, after elimination of material
intercompany transactions and balances.
B. Cash and Cash Equivalents
Cash and cash equivalents consist of deposits in banks and short-term
investments (primarily time deposits and certificates of deposit) with original
maturities of three months or less.
C. Marketable Debt Securities
Marketable debt securities that the Company has the positive intent and
ability to hold to maturity are reflected at amortized cost.
D. Allowance for Doubtful Accounts
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in management's
estimation, is uncertain.
T-6
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
E. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
for raw materials, spare parts and supplies on the basis of average cost per
unit. Cost is determined for work in process and finished goods on the basis of
actual production cost.
F. Investments in Other Entities
Long-term investments in other entities, over whose operating and financial
policies the Company does not have the ability to exercise significant
influence, are presented at cost.
G. Property and Equipment
Property and equipment are presented at cost, net of investment grants
received or receivable, and less accumulated depreciation and amortization.
Depreciation is calculated based on the straight-line method over the estimated
economic lives of the assets or terms of the related leases, as follows:
<TABLE>
<S> <C>
Land and buildings under capital lease.......................................... 14-25 years
Machinery and equipment......................................................... 5 years
Transportation vehicles......................................................... 7 years
</TABLE>
In accordance with SFAS No. 121 "Accounting for Impairment of Long-Lived
Assets to Be Disposed Of" management reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable, based on estimated future cash flows.
H. Income Taxes
The Company records deferred income taxes to reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and for tax purposes. Deferred taxes are computed
based on the tax rates anticipated to be in effect (under applicable law at the
time the financial statements are prepared) when the deferred taxes are expected
to be paid or realized.
Deferred tax liabilities and assets are classified as current or noncurrent
based on the classification of the related asset or liability for financial
reporting, or according to the expected reversal dates of the specific temporary
differences, if not related to an asset or liability for financial reporting.
Deferred tax liabilities are recognized for temporary differences that will
result in deductible amounts in future years. Deferred tax assets are recognized
for temporary differences which will result in deductible amounts in future
years and for carryforwards. A valuation allowance against such deferred tax
asset is recognized if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
I. Revenue Recognition
Revenues are recognized upon delivery or as services are rendered. An
accrual for estimated returns, computed primarily on the basis of historical
experience, is recorded at the time of sale.
J. Research and Development
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the Government of Israel and others, as
participation in research and development programs, are offset against research
and development costs.
T-7
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
K. Earnings (Loss) per Ordinary Share
Basic earnings (loss) per ordinary share are calculated based on the
weighted average number of ordinary shares outstanding for each period presented
(including retroactive effect for the beginning of each period of shares issued
upon exercise of share options during such period) and give effect to shares
issuable from options whose exercise is probable based on specific calculations.
Diluted earnings (loss) per share include the effects of all outstanding options
which have a dilutive effect on earnings (loss) per share. See Note 18 for
disclosure of earnings (loss) per share data in accordance with U.S. GAAP.
L. Foreign Exchange Agreements
The Company, from time to time, enters into foreign exchange agreements as
a hedge against non-dollar equipment purchase and other firm commitments. Gains
and losses on such agreements through the date that the equipment is received or
the commitment is realized are deferred, while gains and losses subsequent
thereto, through the date of actual payment of the liability, are included in
financing income, net.
M. Functional Currency and Transaction Gains and Losses
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly, the Company
uses the dollar as its functional and reporting currency. Financing income, net,
reflects net foreign currency transaction losses, which amounted to $39, $523
and $384 in 1999, 1998 and 1997, respectively.
N. Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees"("APB 25"). Pursuant to this accounting standard, the Company records
deferred compensation for share options granted to employees at the date of
grant based on the difference between the exercise price of the options and the
market value of the underlying shares at that date. The compensation cost of
plans not considered fixed as defined by APB 25 is remeasured at each balance
sheet date. Deferred compensation is amortized to compensation expense over the
vesting period of the underlying options.
See Note 13B(5) for pro forma disclosures required by Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123").
O. New Accounting Pronouncements--Derivative Instruments
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), effective for
fiscal years beginning after June 2000, requires, among other provisions, that a
company disclose all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The Company has not yet
assessed the ramifications of SFAS 133 on the Company's future results of
operations or financial position.
T-8
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
P. Reclassifications
Certain amounts in prior years' financial statements have been reclassified
in order to conform to the 1999 presentation.
NOTE 3--MARKETABLE DEBT SECURITIES
Marketable debt securities as of December 31, 1999 and 1998 consist of
United States government agencies notes in the amount of $5,060 and $25,160,
respectively. Marketable debt securities as of December 31, 1999 bear yield to
maturity of 4.88% and mature in April 2000. The market value of the notes as of
December 31, 1999 and 1998 was approximately equal to their book value.
NOTE 4--OTHER RECEIVABLES
Other receivables consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Investment grants receivable...................................................... $3,667 $1,793
Government agencies............................................................... 1,367 1,999
------ ------
$5,034 $3,792
------ ------
------ ------
</TABLE>
NOTE 5--INVENTORIES
Inventories consist of the following(1):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
------- ------
<S> <C> <C>
Raw materials................................................................... $ 3,863 $2,928
Spare parts and supplies........................................................ 3,152 3,627
Work in process................................................................. 6,180 2,651
Finished goods.................................................................. 316 633
------- ------
$13,511 $9,839
------- ------
------- ------
</TABLE>
- ------------------
(1) Net of write-downs to net realizable value of $510 and $610 as of
December 31, 1999 and 1998, respectively.
NOTE 6--LONG-TERM INVESTMENTS
Long-term investments consist primarily of the following:
A. An investment in Saifun Semiconductor Ltd. ("Saifun") based on an
agreement between the Company and Saifun signed in October 1997. Pursuant
to such agreement, the Company has certain exclusive semiconductor
manufacturing rights for certain licensed technology. The agreement also
sets certain limitations on Saifun regarding future licensing of such
technology.
Pursuant to certain provisions of the agreement, the Company and
Saifun are obligated, under certain circumstances, to pay each other
royalties and Saifun is obligated to produce, through the Company, at least
75% of its products based on the aforementioned technology.
As of December 31, 1999 and 1998, the Company had invested an
aggregate of $4,250, in Saifun in exchange for 14.6% of Saifun's equity (on
a diluted basis--13.4%). In addition, pursuant to the agreement,
T-9
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--LONG-TERM INVESTMENTS--(CONTINUED)
the Company is obligated to invest another $750 upon the achievement of
specific development milestones with regard to such technology.
B. As of December 31, 1999 and 1998, the Company had invested $1,500
in shares of Virage Logic Corporation ("Virage") for 7.3% and 8.4%,
respectively, of that company's share capital (on a diluted basis--5.7% and
8.1%, respectively). Virage specializes in the development of intellectual
property for advanced memories. In June 1998, the Company and Virage signed
an agreement for the development and supply of certain design tools based
on the Company's technologies.
NOTE 7--PROPERTY AND EQUIPMENT, NET
A. Composition
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cost(1):
Land and buildings under capital lease..................................... $ 31,539 $ 30,134
Machinery and equipment.................................................... 141,383 132,324
Transportation vehicles.................................................... 2,610 2,414
-------- --------
175,532 164,872
-------- --------
Accumulated depreciation and amortization:
Land and buildings under capital lease..................................... 7,730 5,968
Machinery and equipment.................................................... 94,001 69,638
Transportation vehicles.................................................... 1,118 837
-------- --------
102,849 76,443
-------- --------
$ 72,683 $ 88,429
-------- --------
-------- --------
</TABLE>
- ------------------
(1) As of December 31, 1999, the cost of buildings, machinery and equipment is
reflected net of investment grants of $82,107 (as of December 31,
1998--$77,670).
B. Investment Grants
In connection with the formation of the Company, the Investment Center of
the Ministry of Industry and Trade of the State of Israel ("Investment Center"),
under its "approved enterprise" program, approved an investment program for
expenditures on buildings and equipment in the aggregate amount (as amended) of
approximately $96,850. The approval certificate provides for a benefit track
entitling the Company to investment grants at a rate of 38% of the investments
included in such certificate. The Company completed its investments under this
program during 1996, and received final approval from the Investment Center in
November 1997 for the investments made under this program.
In January 1996, an investment program ("existing program") for expansion
of the Company's plant in the aggregate amount (as amended in December 1999) of
$232,430 was approved by the Investment Center. The approval certificate
provides for a benefit track entitling the Company to investment grants at a
rate of 34% of the investments included in such certificate. The Company
invested approximately $133,463 through December 31, 1999 under the existing
program. Pursuant to the approval, as amended, the investments in respect of the
existing program are required to be completed by December 31, 2000. Due to the
Company's estimation that its investments will not reach the aggregate approved
amount by such date, the Company intends to apply to the Investment Center for
extension of the period for completing the investments in respect of the
existing program.
T-10
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--PROPERTY AND EQUIPMENT, NET--(CONTINUED)
Receipt of the above grants is subject to various conditions. In the event
the Company fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received plus interest and certain
inflation adjustments. In order to assure fulfillment of the conditions related
to the receipt of investment grants, floating liens were registered in favor of
the State of Israel on substantially all assets of the Company. In management's
opinion, the Company has been substantially in compliance with the conditions
through December 31, 1999.
NOTE 8--SHORT-TERM DEBT
The Company has received a letter of intent from one of its banks, pursuant
to which such bank stated its intention to make available to the Company during
2000, short-term credit of up to $30,000 at terms to be agreed upon prior to
drawdown.
NOTE 9--RELATED PARTIES BALANCES AND TRANSACTIONS
A. Balances
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
----------------
1999 1998
----- -----
<S> <C> <C> <C>
Trade accounts receivable............................................... $ 174
-----
-----
Accounts payable........................................................ $ 62 $ 42
----- -----
----- -----
</TABLE>
B. Transactions
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Purchases of raw materials................................................ $ 55
----
----
Management fees........................................................... $480 $480 $480
---- ---- ----
---- ---- ----
Purchases of fixed assets................................................. $531 $962
---- ----
---- ----
Services provided, net.................................................... $ 20 $361
---- ----
---- ----
Expense reimbursements.................................................... $ 89 $256
---- ----
---- ----
Participation in third party funds........................................ $190 $ 94
---- ----
---- ----
</TABLE>
NOTE 10--OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Accrued salaries.................................................................. $1,560 $1,391
Vacation accrual.................................................................. 1,615 1,216
Government agency................................................................. 1,908 --
Other............................................................................. 1,105 305
------ ------
$6,188 $2,912
------ ------
------ ------
</TABLE>
T-11
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11--LONG-TERM DEBT
In connection with the formation of the Company, the Company assumed
certain long-term bank loans in the aggregate amount of $12,064. The Company was
obligated to repay the principal of these loans in 12 equal quarterly payments
commencing in May 2000. In January 2000, the Company's banks agreed to extend
such commencing date to January 2002. The loans bear interest at 0.3% over the
rate that the Company earns on deposits maintained by the Company at its banks;
any portion of the loans not covered by such deposits will bear annual interest
at the three-month Libor rate plus up to 1.25%.
The agreements with the Company's banks restrict the Company's ability to
place liens on its assets (other than to the State of Israel in respect of
investment grants) without the prior consent of the banks. Furthermore the
agreements contain certain restrictive financial covenants. As of December 31,
1999, the Company was in full compliance with such covenants.
NOTE 12--OTHER LONG-TERM LIABILITIES
A. Composition
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Net liability for employee termination benefits (see B below):
Gross obligation........................................................................... $ 8,152 $ 6,929
Amounts funded through deposits to severance pay funds and purchase of insurance
policies................................................................................ (7,088) (6,238)
------- -------
1,064 691
Deferred income taxes (see Note 15B)......................................................... -- 2,679
Other........................................................................................ 468 901
------- -------
$ 1,532 $ 4,271
------- -------
------- -------
</TABLE>
B. Employee Termination Benefits
Israeli law and labor agreements determine the obligations of the Company
to make severance payments to dismissed employees and to employees leaving
employment under certain other circumstances. The liability for severance pay
benefits, as determined by Israeli Law, is based upon length of service and the
employee's most recent monthly salary. This liability is primarily covered by
regular deposits made by the Company into recognized severance and pension funds
and by insurance policies purchased by the Company. The amounts so funded are
not reflected on the balance sheets, since they are controlled by the fund
trustees and insurance companies and are not under the control and management of
the Company.
Expenses relating to employee termination benefits were approximately
$2,139, $1,266 and $1,674 for 1999, 1998 and 1997, respectively.
NOTE 13--SHAREHOLDERS' EQUITY
A. Share Purchase Plan
In December 1993, the Company sold 234,497 ordinary shares to key senior
management employees pursuant to a share purchase plan for an aggregate purchase
price of $678, of which, after 9,000 ordinary shares were sold during 1999,
225,497 shares were outstanding as of December 31, 1999. Loans extended by the
Company financed approximately 99% of the aggregate purchase price required to
be paid by the employees. Such loans are denominated in new Israeli shekels
("NIS"), linked to the Israeli Consumer Price Index and bear
T-12
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--SHAREHOLDERS' EQUITY--(CONTINUED)
annual interest of 2%. All shares under the plan are fully vested. The ordinary
shares are subject to certain restrictions on sale or transfer. The employee's
obligation to repay loans received to finance the purchase of the ordinary
shares is secured by such shares and is repayable upon the sale of the ordinary
shares in accordance with a formula set forth in the share purchase plan.
B. Share Option Plans
(1) The Company maintains seven share option plans as follows:
(a) 1994 Share Option Plan and 1995 Share Option Plan--These plans
provide for the grant of options to employees (including senior management)
to purchase ordinary shares at exercise prices which may not be less than
85% of the market value of the ordinary shares at the date of grant. In
addition, pursuant to the plans, the options granted may not be exercisable
beyond ten years from the first grant date under each plan.
Options granted to date become vested over a four-year period
according to various vesting schedules. In July 1996, the exercise price of
vested options granted under the 1994 plan was reduced from primarily $17
per share to $13 per share, while the exercise price of non-vested options
granted at such date was reduced from primarily $17 per share to $9.125 per
share (the market value of the shares at such time). The exercise price of
all options granted under the 1994 plan and 1995 plan after July 1996 has
been the market value of the shares on the date of grant.
(b) 1998 Share Option Plan--In May 1998, the Board of Directors of the
Company approved a stock option plan for the grant of options to certain
Company employees. In November 1998, approximately half of the options was
exchanged for new options (see (d) below). All options under this plan were
granted at an exercise price equal to the market price of the Company's
shares at the date of grant. Options granted under this plan are
exercisable over a ten-year period from the date of grant, subject to
certain time and performance vesting criteria.
The options granted are to be held in trust on an irrevocable basis
until the date of exercise. In the event the vesting criteria of the
options are met, the trustee of the trust is generally required to exercise
the options and sell the underlying shares at the prevailing market price.
At the end of the ten-year exercise period, the trustee is required to
exercise the options and sell the underlying shares if the market price of
the shares at such time exceeds the exercise price of the options by $1.00.
Pursuant to generally accepted accounting principles, the options are
treated as the equivalent of a stock appreciation right. Accordingly,
changes in the market price of the Company's shares may have an effect on
the aggregate compensation expense recorded in respect of these options.
(c) Options Granted to the Co-CEOs During 1998--In October 1998, the
Board of Directors of the Company approved a stock option plan pursuant to
which each of the Company's two Co-Chief Executive Officers was granted the
right to purchase up to 300,000 ordinary shares of the Company at an
exercise price of $7.00, the market price of the Company's shares on the
date of grant. The options vest at the end of seven years from the date of
grant and may be exercised for a period of five years from the date they
become exercisable. The options provide for accelerated vesting at certain
milestones based primarily on the market price of the Company's shares
reaching a level, as amended by the Board of Directors of the Company in
August 1999, ranging from $15-$20 per share.
(d) Options Granted to Senior Employees During 1998--In November 1998,
in the framework of the exchange of options mentioned in paragraph
(b) above, new options were granted to senior employees. Such options were
granted at an exercise price equal to the market price of the Company's
shares at the date of grant. Options granted under this plan vest after six
years with accelerated vesting if certain performance criteria are met. The
options are exercisable for five years following the vesting date.
T-13
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--SHAREHOLDERS' EQUITY--(CONTINUED)
(e) Options Granted to Senior Employees During 1999--In February 1999,
the Board of Directors of the Company approved a new stock option plan for
the grant of options to certain senior employees of the Company.
Substantially all options under the plan were granted at an exercise price
of $7.06, the market price of the Company's shares at the date of grant.
The options vest at the end of five years from the date of grant and may be
exercised for a period of five years from the date they become exercisable.
The options provide for accelerated vesting at certain milestones based
primarily on the market price of the Company's shares reaching a level, as
amended by the Board of Directors of the Company in October 1999, ranging
from $15-$20 per share.
(f) Options Granted to New and Key Employees During 1999--In February
1999, the Board of Directors of the Company approved a new stock option
plan for the grant of options to new and key employees of the Company at an
exercise price which may not be less than 85% of the market value of the
ordinary shares at the date of grant. In addition, pursuant to the plan,
the options granted may not be exercisable beyond ten years from the date
of grant. Options under this plan, of which 87,000 options (35%) have been
granted to date, become vested over a four-year period according to various
vesting schedules.
(2) A summary of the status of the Company's share option plans as of
December 31, 1999, 1998 and 1997, as well as changes during each of the years
then ended, is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER OF AVERAGE NUMBER AVERAGE
OF SHARE EXERCISE SHARE EXERCISE OF SHARE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of beginning of year......... 1,781,783 $ 8.25 769,567 $ 9.45 729,656 $ 9.10
Granted..................................... 247,000 7.78 1,089,659 7.56 104,340 11.84
Exercised................................... (22,091) 8.80 (6,142) 8.33 (29,910) 10.00
Terminated.................................. -- -- --
Forfeited................................... (111,919) 9.42 (71,301) 9.90 (34,519) 8.60
--------- --------- --------
Outstanding as of end of year............... 1,894,773 8.08 1,781,783 8.25 769,567 9.45
--------- --------- --------
--------- --------- --------
Options exercisable as of end of year....... 486,911 9.22 360,046 9.42 199,107 9.72
--------- --------- --------
--------- --------- --------
</TABLE>
(3) The following table summarizes information about share options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING AS OF EXERCISABLE AS OF
DECEMBER 31, 1999 DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE
PRICES NUMBER CONTRACTURAL AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------- ----------- ---------------- -------------- ----------- --------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$ 7.00- 7.50............................ 802,000 10.15 $ 7.04 13,250 $ 7.32
8.00- 8.75............................ 808,728 8.08 8.41 284,166 8.75
9.13- 9.81............................ 199,552 6.71 9.34 136,052 9.17
10.25-11.25............................ 33,000 8.36 10.37 11,250 10.33
12.00-13.82............................ 51,493 5.84 12.80 42,193 12.88
--------- -------
1,894,773 486,911
--------- -------
--------- -------
</TABLE>
(4) The weighted average grant-date fair value of the 247,000, 1,089,659
and 104,340 options granted during 1999, 1998 and 1997 amounted to $4.42, $4.14
and $7.56 per option, respectively. The Company utilized
T-14
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--SHAREHOLDERS' EQUITY--(CONTINUED)
the Black-Scholes option pricing model to estimate fair value, utilizing the
following assumptions for the years 1999, 1998 and 1997 (all in weighted
averages):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................................... 5.50% 5.50% 5.50%
Expected life of options.................................. 4.4 years 7.3 years 4.5 years
Expected annual volatility................................ 65% 44% 79%
Expected dividend yield................................... None None None
</TABLE>
(5) Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made in 1999, 1998
and 1997 in accordance with SFAS 123, the Company's pro forma net income (loss)
and earnings (loss) per share would have been as follows:
<TABLE>
<S> <C> <C> <C>
Pro forma net income (loss)............................... $ (21,434) $ (16,104) $ 17,860
--------- --------- ---------
--------- --------- ---------
Pro forma basic earnings (loss) per share................. $ (1.63) $ (1.23) $ 1.35
--------- --------- ---------
--------- --------- ---------
Pro forma diluted earnings per share...................... $ 1.28
---------
---------
</TABLE>
C. Description of Ordinary Shares
As of December 31, 1999 and 1998, the Company had 30,000,000 authorized par
value NIS 1 ordinary shares, of which 13,263,593 and 13,241,502, respectively,
were issued. Holders of ordinary shares are entitled to participate equally in
the payment of cash dividends and bonus share (stock dividend) distributions
and, in the event of the liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. Each ordinary share is
entitled to one vote on all matters to be voted on by shareholders.
D. Treasury Stock
During 1998, the Board of Directors of the Company authorized, subject to
certain conditions, the purchase of up to 1,400,000 ordinary shares to
facilitate the exercise of employee stock options under the Company's share
option plans. During 1999 and 1998, the Company funded the purchase by a trustee
of 142,500 and 1,157,500, respectively, of the Company's ordinary shares.
NOTE 14--INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. Sales by Geographic Area (as percentage of total sales)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States.............................................................................. 97% 88% 38%
Far East--primarily Singapore.............................................................. -- 10 61
Other...................................................................................... 3 2 1
---- ---- ----
Total................................................................................... 100% 100% 100%
---- ---- ----
---- ---- ----
</TABLE>
T-15
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14--INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS--(CONTINUED)
B. Long-Lived Assets by Geographic Area
Substantially all of the Company's long-lived assets are located in Israel.
C. Major Customers (as percentage of total sales)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A............................................................... 39% 47% 70%
Customer B............................................................... 33 27 15
Customer C............................................................... 8 1 --
Customer D............................................................... 8 1 --
Customer E............................................................... 3 9 7
</TABLE>
As of December 31, 1999 and 1998, the above major customers constituted
most of the trade accounts receivable reflected on the balance sheet (see also
Note 17E).
NOTE 15--INCOME TAXES
A. Approved Enterprise Status
Virtually all of the Company's facilities have been granted approved
enterprise status, as provided by the Israeli Law for the Encouragement of
Capital Investments--1959 ("Investments Law") (see Note 7B).
The tax benefits derived from approved enterprise status relate only to
taxable income attributable to approved enterprise investments. Pursuant to the
Investments Law and the approval certificates for the Company's approved
enterprise programs, the Company's income attributable to its various approved
enterprise investments is currently taxed at a rate of 20% through periods
ending between 2002 and 2009, depending on the specific approval certificate and
the Israeli residents share holders. The portion of the Company's taxable income
that is not attributable to approved enterprise investments is subject to
regular "Company Tax" at the rate of 36%.
The tax benefits are also conditioned upon fulfillment of the requirements
stipulated by the Investments Law and the regulations promulgated thereunder, as
well as the criteria set forth in the certificates of approval. In the event of
a failure by the Company to comply with these conditions, the tax benefits could
be canceled, in whole or in part, and the Company would be required to refund
the amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been substantially in
compliance with the conditions through December 31, 1999 (see Note 7B).
T-16
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--INCOME TAXES--(CONTINUED)
B. Components of Deferred Tax Asset/Liability
The following is a summary of the components of the deferred tax benefit
and liability reflected on the balance sheets:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
------- --------
<S> <C> <C>
Deferred tax benefit--current:
Accrued vacation pay................................................. $ 323 $ 241
Other................................................................ 55 33
------- --------
378 274
Valuation allowance.................................................. (378) --
------- --------
Total current deferred tax benefit................................ $ -- $ 274
------- --------
------- --------
Net deferred tax liability--long-term:
Deferred tax asset--long-term:
Net operating loss carryforward...................................... $11,600 $ 7,588
Research and development............................................. 1,622 1,566
Liability for employee rights upon severance......................... 213 138
Unearned compensation................................................ 69 77
------- --------
13,504 9,369
Valuation allowance.................................................. (3,840) --
------- --------
9,664 9,369
Deferred tax liability--long-term:
Depreciation......................................................... (9,664) (12,048)
------- --------
Total net long-term deferred tax liability........................ $ -- $ (2,679)
------- --------
------- --------
</TABLE>
C. Effective Income Tax Rates
The reconciliation of the statutory tax rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Israeli statutory rate....................................................................... (36)% (36)% 36%
Reduced tax rate for approved enterprise..................................................... 16 16 (16)
Tax benefits for which deferred taxes were not recorded...................................... 18 -- --
Permanent differences and other, net(1)...................................................... (9) (7) (3)
---- ---- ----
(11)% (27)% 17%
---- ---- ----
---- ---- ----
</TABLE>
- ------------------
(1) Primarily includes special depreciation deduction in connection with the
location of the Company's plant.
T-17
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--INCOME TAXES--(CONTINUED)
D. Net Operating Loss Carryforward
The Company has net operating loss carryforwards for tax purposes of
approximately $58,000 as of December 31, 1999, which may be carried forward for
an unlimited period of time.
E. Final Tax Assessments
(1) The Company has not received final tax assessments from the income tax
authorities since its incorporation.
(2) During the second quarter of 1999, the Company's tax returns for the
years 1993-1997 were audited by the Israeli Income Tax Authorities
("Authorities"), resulting in revised assessments made by the Authorities. Based
upon advice of its counsel and tax advisers, the Company appealed all
substantial assessments resulting from the audit. The Company estimates that its
maximum exposure to additional tax, in the event that its appeal is
unsuccessful, is expected to be approximately $3,000.
NOTE 16--COMMITMENTS AND CONTINGENCIES
A. Legal Proceedings
(1) Between June and September 1996, several suits were filed in the United
States on behalf of a purported class of the Company's shareholders against the
Company, its Co-Chief Executive Officers, its Chairman of the Board of Directors
and the Company's indirect principal shareholder. The suits alleged that the
defendants made misstatements and omissions in violation of certain U.S. Federal
securities laws.
Although the Company believes that it had meritorious defenses against the
action, in January 1999, the Company entered into an agreement settling the
action. The settlement, which was approved by the Court in June 1999, provides
for a cash settlement of $16,275, all of which was covered by insurance policies
covering the Company and the other defendants.
(2) The Company has been separately approached by two parties alleging that
the Company is infringing on certain semiconductor production patents owned by
such parties and requesting that the Company enter into negotiations for a
license of the use of the technology covered by such patents.
The Company 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. The
Company is 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
the Company's financial condition, operating results and business.
B. Leases
The Company's offices and engineering and manufacturing operations are
located in a building complex situated in an industrial park in Migdal Haemek,
Israel. These premises are currently occupied under a long-term lease from the
Israel Lands Authority, which expires in 2032. The Company has no obligation for
lease payments related to this lease through the year 2032.
The Company occupies certain other premises under various operating leases.
The obligations under such leases were not material as of December 31, 1999.
T-18
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
C. Purchase Agreements
(1) The Company from time to time enters into long-term purchase agreements
with customers. Pursuant to such agreements, the Company is committed to sell,
and the customer is committed to purchase (subject to reductions in certain
circumstances), a specific monthly output derived from the start of processing
of silicon wafers at prices which are stipulated in the agreements and are
subject to periodic re-negotiations. From commencement of the Company's
operations through December 31, 1999, a substantial portion of the Company's
production has been sold under such agreements.
(2) Pursuant to an agreement, as amended from time to time, signed with a
major customer, during 1995 and 1996 the customer provided the Company with an
advance payment in the amount of $28,875. The advance bears interest at the
three-month Libor rate. Such agreement sets out a mechanism for offsetting the
aforementioned advance payment against wafer purchases through February 2000,
and for repaying the customer a portion of the advance payment still outstanding
at that time. The Company believes that it will not have to repay any portion of
such advance payment.
(3) Pursuant to a certain purchase agreement with a customer, the Company
is entitled to receive warrants to purchase share capital of the customer under
conditions stipulated in the agreement.
D. Profit Sharing Plan
The Company maintains an employee profit sharing plan. Under the terms of
this plan (i) 7.5% of the Company's profit before taxes, as defined ("PBT"),
each year is to be divided among all employees of the Company, including senior
management (the allocation of which is based on salary and a yearly performance
score for each employee); and (ii) 2.5% of PBT each year is to be divided among
key senior management employees. The profit sharing award with respect to each
year is paid in two installments in the following year. The Company's expenses
pursuant to the profit sharing plan were $2,312 for 1997.
E. Other Principal Agreements
The Company, from time to time in the normal course of business, enters
into long-term agreements with various entities for the joint development of
products and processes utilizing technologies owned by both the other entities
and the Company. Certain of such agreements contain commitments by the Company
and/or the other entities to purchase specific quantities of the products
developed.
F. Other Commitments
Receipt of certain research and development grants from the Government of
Israel is subject to various conditions. In the event the Company fails to
comply with such conditions, the Company may be required to repay all or a
portion of the grants received. In management's opinion, the Company has been in
full compliance with the conditions through December 31, 1999.
NOTE 17--FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a contractual
obligation either to deliver or receive cash or another financial instrument to
or from a second entity. Examples of financial instruments include cash and cash
equivalents, trade accounts receivable, loans, investments, trade accounts
payable, accrued expenses, options and forward contracts.
In accordance with Statements No. 105, 107 and 119 of the FASB, the Company
makes certain disclosures with regard to financial instruments, including
derivatives. These disclosures include, among other matters, the
T-19
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17--FINANCIAL INSTRUMENTS--(CONTINUED)
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
A. Foreign Exchange Agreements
The Company, from time to time, enters into foreign exchange agreements to
hedge exposure to equipment purchase commitments and other firm commitments.
These transactions qualify for hedge accounting in accordance with GAAP and,
accordingly, the results of such transactions are recorded concurrently with the
realization of the related items (i.e., receipt of the equipment and payment of
the related liability). The Company does not hold or issue derivative financial
instruments for trading purposes.
B. Credit Risk of Financial Instruments, Including Derivatives
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the exposure of
the Company through its use of derivatives.
The Company is exposed to credit-related losses in respect of derivative
financial instruments in a manner similar to the credit risk involved in the
realization or collection of other types of assets. In management's estimation,
due to the fact that derivative financial instrument transactions are entered
into solely with financial institution counterparties, it is not expected that
such counterparties will fail to meet their obligations. See E below with regard
to credit risks in respect of trade accounts receivable. Substantially all
remaining financial instruments held by the Company are due from governmental
entities and, accordingly, the Company's credit risk in respect thereof is
negligible.
C. Presentation of Foreign Exchange Transactions in the Financial Statements
The Company had no foreign exchange agreements outstanding as of
December 31, 1999. The aggregate contract amount of foreign exchange agreements
outstanding as of December 31, 1998 was $6,000.
Gains recognized on foreign exchange agreements amounted to $375 and $238
in 1999 and 1998, respectively, which were reflected primarily in cost of sales.
The results of foreign exchange agreements for 1997 were not material.
T-20
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17--FINANCIAL INSTRUMENTS--(CONTINUED)
D. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments did not
materially differ from their respective carrying amounts as of December 31, 1999
and 1998.
E. Concentrations of Credit Risk
Most of the Company's trade accounts receivable ($5,693 as of December 31,
1999) were due from the Company's two major customers, both of whom are large
multinational companies (see Note 14C).
NOTE 18--MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the primary material
difference between GAAP in Israel and in the U.S. relates to the presentation of
earnings (loss) per share data in 1999, 1998 and 1997. Set forth below is the
Company's earnings (loss) per share data in accordance with U.S. GAAP (SFAS
128):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic earnings (loss) per share................................... $(1.71) $(1.20) $ 1.45
------ ------ ------
------ ------ ------
Diluted earnings (loss) per share................................. $(1.71) $(1.20) $ 1.43
------ ------ ------
------ ------ ------
</TABLE>
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted per share computations for 1999, 1998 and
1997 in accordance with U.S. GAAP:
Reconciliation for 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN
THOUSANDS)
<S> <C> <C> <C>
Basic loss per share:
Loss available to ordinary shareholders......................... $ (20,467) 11,977 $ (1.71)
--------- ------- -------
--------- ------- -------
Effect of dilutive securities:
Options......................................................... -- -- --
--------- ------- -------
Diluted loss per share:
Loss available to ordinary shareholders after assumed
conversions................................................... $ (20,467) 11,977 $ (1.71)
--------- ------- -------
--------- ------- -------
</TABLE>
Options to purchase 1,894,773 ordinary shares at an average exercise price
of $8.08 per share were outstanding during 1999 but were not included in the
computation of diluted loss per share because their effect was anti-dilutive.
The options, which as of December 31, 1999 expire between April 2005 and
December 2009 (weighted average remaining contractual life of 8.76 years), were
still outstanding as of such date.
T-21
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18--MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP--(CONTINUED)
Reconciliation for 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN
THOUSANDS)
<S> <C> <C> <C>
Basic loss per share:
Loss available to ordinary shareholders......................... $ (15,544) 12,913 $ (1.20)
--------- ------- -------
--------- ------- -------
Effect of dilutive securities:
Options......................................................... -- --
--------- -------
Diluted loss per share:
Loss available to ordinary shareholders after assumed
conversions................................................... $ (15,544) 12,913 $ (1.20)
--------- ------- -------
--------- ------- -------
</TABLE>
Options to purchase 1,781,783 ordinary shares at an average exercise price
of $8.25 per share were outstanding during 1998 but were not included in the
computation of diluted loss per share because their effect was anti-dilutive.
The options, which as of December 31, 1998 expire between April 2005 and July
2010 (weighted average remaining contractual life of 9.57 years), were still
outstanding as of such date.
Reconciliation for 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN
THOUSANDS)
<S> <C> <C> <C>
Basic earnings per share:
Income available to ordinary shareholders....................... $ 19,171 13,217 $ 1.45
--------- ------- -------
--------- ------- -------
Effect of dilutive securities:
Options......................................................... -- 235
--------- -------
Diluted earnings per share:
Income available to ordinary shareholders after assumed
conversions................................................... $ 19,171 13,452 $ 1.43
--------- ------- -------
--------- ------- -------
</TABLE>
Options to purchase 45,000 ordinary shares at an average exercise price of
$11.90 share were outstanding during 1997 but were not included in the
computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of the ordinary shares. The
options, which as of December 31, 1997 expire in November 2007, were still
outstanding as of such date.
T-22
<PAGE>
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18--MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP--(CONTINUED)
Implementation of SFAS 123:
Had compensation cost for the Company's share option plans been determined
based on fair value at the grant dates for awards made in 1999, 1998 and 1997 in
accordance with SFAS 123, the Company's pro forma net income (loss) and earnings
(loss) per share would have been as follows (for further information with regard
to the Company's share option plans and the assumptions for utilizing the
Black-Scholes pricing model, see Note 13B):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income (loss).......................................... $(21,434) $(16,104) $ 17,860
-------- -------- --------
-------- -------- --------
Pro forma basic earnings (loss) per share............................ $ (1.79) $ (1.25) $ 1.35
-------- -------- --------
-------- -------- --------
Pro forma diluted earnings (loss) per share.......................... $ (1.79) $ (1.25) $ 1.33
-------- -------- --------
-------- -------- --------
</TABLE>
T-23
<PAGE>
Exhibit 10.12
CREDIT AGREEMENT
BETWEEN
BANK LEUMI USA, AS LENDER
AND
COMVERGE TECHNOLOGIES, INC., AS BORROWER
Dated: As of February 7, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS.....................................................1
1.1 Definitions.....................................................1
1.2 Accounting Terms................................................5
SECTION 2. FINANCING.......................................................5
2.1 Term Loan.......................................................5
2.2 Interest........................................................6
2.2.1 LIBOR Rate...............................................6
2.2.2 Availability.............................................6
2.2.3 Calculation of Interest; Payment.........................6
2.2.4 Illegality...............................................7
2.2.5 Increased Costs..........................................7
2.2.6 Overdue Payments.........................................7
2.3 Prepayment......................................................8
2.4 Manner of Payments..............................................8
2.5 Security........................................................8
2.5.1 Security Agreements......................................8
2.5.2 Guarantee................................................8
2.5.3 Cash Collateral ........................................ 8
SECTION 3. CONDITIONS PRECEDENT............................................9
3.1. Evidence of Corporate Action....................................9
3.2. Representations and Warranties..................................9
3.3. Borrower's Obligations..........................................9
3.4. DSSI's Obligations..............................................9
3.5 Opinions.......................................................10
3.6 Event of Default...............................................10
SECTION 4. REPRESENTATIONS AND WARRANTIES.................................10
4.1 Organization...................................................10
4.1.1 Borrower's Corporate Existence and
Good Standing..........................................10
4.1.2 Organization Chart......................................10
4.1.3 DSSI's Corporate Existence and Good
Standing.............................................10
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.2 Authority......................................................10
4.2.1 Borrower's Authority...................................10
4.2.2 DSSI's Authority.......................................11
4.3 No Conflicts...................................................11
4.4 Compliance and Other Agreements................................12
4.4.1 Agreements, etc.........................................12
4.4.2 Orders, etc.............................................12
4.4.3 Agreements, Etc.........................................12
4.5 ERISA..........................................................12
4.6 Investment Company.............................................13
4.7 Approvals and Consents.........................................13
4.8 Regulation U, etc..............................................13
4.9 Financial Statements...........................................13
4.10 Taxes..........................................................13
4.11 Title to Properties/Priority of Liens..........................14
4.11.1 Title..................................................14
4.11.2 Security Interest......................................14
4.12 Litigation.....................................................14
4.13 Insurance......................................................14
4.14 Disclosure.....................................................15
4.15 No Event of Default............................................15
4.16 Use of Proceeds................................................15
SECTION 5. AFFIRMATIVE COVENANTS..........................................15
5.1 Preservation of Existence......................................15
5.2 Maintenance of Properties; Insurance...........................15
5.2.1 Properties..............................................15
5.2.2 Insurance...............................................15
5.3 Payment of Taxes...............................................16
5.4 Accounting; Financial Statements and Other
Information.................................................16
5.4.1 Quarterly Financial Reports.............................16
5.4.2 Annual Financial Reports................................16
5.4.3 Reports.................................................17
5.4.4 SEC Filings.............................................17
5.4.5 Other Information.......................................17
5.5 Compliance.....................................................17
5.6 ERISA..........................................................17
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.7 Payment of Indebtedness........................................18
5.8 Notification to Bank...........................................18
5.9 Further Assurances.............................................18
5.10 Inspection.....................................................18
5.11 Stock Ownership................................................19
SECTION 6. NEGATIVE COVENANTS.............................................19
6.1 Limitation on Liens............................................19
6.2 Mergers and Consolidations.....................................19
6.3 Change in Business.............................................19
6.4 Transfer of Assets.............................................19
6.5 No Pre-Payments................................................20
6.6 Guarantees to Others...........................................20
6.7 Change in Fiscal Year..........................................20
SECTION 7. EVENTS OF DEFAULT/REMEDIES.....................................20
7.1.1 Principal or Interest...................................20
7.1.2 Obligations.............................................20
7.1.3 Certain Covenants.......................................20
7.1.4 Other Covenant..........................................20
7.1.5 Representations.........................................20
7.1.6 Voluntary Insolvency Proceedings........................21
7.1.7 Involuntary Insolvency Proceedings......................21
7.1.8 Divestiture of Assets...................................21
7.1.9 Judgments...............................................21
7.1.10 Other Defaults.........................................22
7.1.11 ERISA..................................................22
7.1.12 Levies.................................................22
7.2 Remedies.......................................................22
SECTION 8. MISCELLANEOUS..................................................24
8.1 Expenses.......................................................24
8.2 Survival of Agreement..........................................24
8.3 No Waiver; Cumulative Remedies.................................24
8.4 Notices........................................................25
8.5 Amendments and Waivers.........................................25
8.6 Applicable Law.................................................25
8.7 Successors.....................................................25
8.8 Partial Invalidity.............................................25
8.9 Headings.......................................................25
8.10 WAIVER OF JURY TRIAL...........................................25
8.11 JURISDICTION; SERVICE OF PROCESS...............................26
8.12 Conflicts......................................................26
</TABLE>
EXHIBITS AND SCHEDULES
-iii-
<PAGE>
Exhibit A - Form of Note
-iv-
<PAGE>
CREDIT AGREEMENT, dated February 7, 2000, between COMVERGE TECHNOLOGIES,
INC., a Delaware corporation having an office at 23 Vreeland Road, Florham Park,
New Jersey (the "Borrower"), and BANK LEUMI USA, a New York banking corporation
having an office at 564 Fifth Avenue, New York, New York (the "Bank").
R E C I T A L:
A. Data Systems & Software Inc., a Delaware corporation ("DSSI"), now
and at all times since August 30, 1999, has owned not less than seventy (70%)
percent of the issued and outstanding shares of the Borrower. Pursuant to an
Amended and Restated Credit Agreement, dated said date (the "First Restated
Agreement"), the Bank made a loan to DSSI, the proceeds of which were used by
DSSI, among other things, to finance the acquisition by the Borrower of
substantially all of the assets of the Control Systems Division of Scientific
Atlanta Corporation (the "Acquisition") and to finance, in part, the working
capital requirements of the Borrower.
B. Concurrently, the Restated Agreement is being terminated, and DSSI is
repaying the loan made by The Bank to it pursuant thereto, and is satisfying all
other obligations which it has to the Bank pursuant to the Restated Credit
Agreement. The Bank, in consideration thereof, has agreed to enter into this
Credit Agreement with the Borrower, and subject to the terms and conditions
herein set forth, to make a term loan to the Borrower in the principal amount of
$6,000,000 (the "Term Loan"). The proceeds of the Term Loan are to be used, in
part, by the Borrower to repay DSSI for the loans made by DSSI to the Borrower,
to finance the Acquisition and to finance, in part, the Borrower's working
capital requirements.
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 or
<PAGE>
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.
"Acquisition" shall have the meaning defined in Recital A.
"Bank" means Bank Leumi USA, a New York banking corporation.
"Borrower" means Comverge Technologies, Inc., a Delaware
corporation.
"Business Day" means any day other than (i) a Saturday, Sunday or
other day on which commercial banks in New York, New York are authorized or
required to close under the laws of the State of New York, and (ii) any day on
which commercial banks in London are not open for dealing in dollar deposits in
the London Interbank Market.
"Cash Collateral" shall have the meaning defined in Section
2.5.3.
"Consolidated Group" shall have the meaning defined in Section
4.9.
"DSSI" shall have the meaning defined in Recital A.
"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.
"Eurocurrency Reserve Requirement" means, for any Interest
Period, the daily average of the stated maximum rate (expressed as a decimal) at
which reserves (including any marginal, supplemental or emergency reserves) are
required to be maintained during such Interest Period under Regulation D by the
Bank against "Eurocurrency Liabilities" (as such term is used in Regulation D),
but without benefit or credit of proration, exemptions or offsets that might
otherwise be available to the Bank from time to time under Regulation D. Without
limiting the effect of the foregoing, the Eurocurrency Reserve Requirement shall
reflect any other reserves required to be maintained by the Bank against (i) any
category of liabilities that includes deposits by reference to which the LIBOR
Rate is to be determined, or (ii) any category or extension of credit or other
assets that include loans where the
2
<PAGE>
interest or other charges are based upon The London Interbank Offered Rate.
"Financing Agreements" means the following agreements and
instruments (as such agreements and instruments may be hereafter amended
or supplemented): (i) the Security Agreement, (ii) the Note, (iii) the Guaranty,
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 principles as used by
the United States Financial Accounting Standards Board, as in effect from time
to time, consistently applied.
"Guaranty" shall have the meaning set forth in Section 2.5.2 of
this Agreement.
"Interest Period" means (i) initially, the period commencing on
the date hereof and ending on the same day three (3) months thereafter, and (ii)
thereafter, each period commencing on the last day of the next preceding
Interest Period and ending on the same day three months thereafter; provided,
however, that one (a) each such Interest Period that commences on the last
Business Day of a calendar month (or on any day for which there is not
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month,
(b) no Interest Period may extend beyond the Maturity Date, and (c) if an
Interest Period would end on a day that is not a Business Day, such Interest
Period shall be extended to the next Business Day, unless such Business Day
would fall in the next calendar month, in which event such Interest Period shall
end on the immediately preceding Business Day.
"Knowledge" whether with an initial upper or lower case means the
knowledge of any senior executive of the Borrower or of the Guarantor,
including, but not limited to their Chief Financial Officers.
"LIBOR Rate" means the rate per annum (rounded upward, if
necessary, to the nearest 1/16 of 1%) determined by the Bank to be equal to the
quotient of (i) the London Interbank Offered Rate for the principal balance of
the Term Loan for such Interest Period, divided by (ii) one minus the
Eurocurrency Reserve Requirement for such Interest Period.
"London Interbank Offered Rate" applicable to any Interest Period
means: (i) the arithmetic mean (rounded upward to the nearest 1/16 of 1%) of the
rates per annum for dollar deposits for the relevant Interest Period which
appear on page "LIBOR" of the Reuters Monitor Money Rates Service (or such other
page(s) as may replace the LIBOR page for the purpose of displaying offered
rates of leading reference banks
3
<PAGE>
in London for interbank deposits in dollars) at or about 11:00 a.m., London
time, on the second Business Day prior to the commencement of the Interest
Period, and (ii) if the rate may not be determined by the Bank as provided in
the preceding clause (i) for any reason as determined by the Bank in its sole
judgment, then the rate equal to the rate per annum at which dollar deposits are
offered to the Bank or any of its Affiliates in the London Interbank Market at
11:00 a.m., London time,, two (2) Business Days prior to the commencement of an
Interest Period in an amount comparable to the Interest Period and in the
principal amount of the Term Loan which shall be outstanding during such
Interest Period.
"Maturity Date" shall have the meaning defined in Section 2.1.
"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" means the promissory note evidencing the Term Loan.
"Obligations" means collectively the Term Loan and any fees,
charges or other financial obligations of the Borrower, the Guarantor 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.
"PBGC" means the Pension Benefit Guaranty Corporation 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.
"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."
"Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System, as amended or supplemented from time to time.
"Reportable Event" means any of the events set forth in
4
<PAGE>
Section 4043 of ERISA, if such event reasonably may result in a liability of the
Borrower to the Plan or the PBGC.
"Restated Agreement" shall have the meaning defined in Recital B.
"Security Agreement" shall have the meaning set forth in
Sections 2.5.1 of this Agreement.
"Term Loan" shall have the meaning defined in Recital B.
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.
SECTION 2. FINANCING.
2. 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:
2.1 Term Loan. Concurrently the Bank is making the Term Loan
to the Borrower in the principal amount of $6,000,000, The Term Loan will mature
on February 1, 2002 (the "Maturity Date"). The principal of the Term Loan may be
prepaid in whole or in part as provided in Section 2.3. Concurrently with the
execution and delivery of this Agreement, the Borrower is evidencing its
obligation to pay the principal of, and interest on, the Term Loan by executing
and delivering a term note in the form of Exhibit A annexed (the "Note") to the
Bank in the principal sum of $6,000,000.
2.2 Interest.
2.2.1 LIBOR Rate. Except as otherwise expressly
provided in this Section 2.2, the Borrower shall pay interest to the Bank on the
outstanding and unpaid principal amount of the Term Loan at a rate per annum
equal to the LIBOR Rate plus three quarters of one percent (3/4%).
2.2.2 Availability. The Bank shall, as soon as
practicable after 10:00 a.m., New York City time, two (2) Business Days prior to
the commencement of any Interest Period, determine the LIBOR Rate applicable to
the Term Loan and such LIBOR Rate shall be applicable
5
<PAGE>
to the Term Loan during such Interest Period. In the event the Bank shall have
determined (which determination shall be conclusive and binding upon the
Borrower) that dollar deposits in an amount approximately equal to the Term
Loan, with maturities comparable to the Interest Period, are not generally
available at such time in the London Interbank Market, or the rate at which such
dollar deposits are being offered will not adequately and fairly reflect the
cost to the Bank of making or maintaining a LIBOR Rate on the Term Loan or of
funding the same in the London Interbank Market during such Interest Period, or
reasonable means do not exist for ascertaining a LIBOR Rate, or a LIBOR Rate on
the Term Loan would be in excess of the maximum interest rate which the Borrower
may by law be required to pay, the Bank shall so notify the Borrower and the
Term Loan shall, on the date that otherwise would have been the first date of
the Interest Period, and at all times thereafter until the Bank notifies the
Borrower that the circumstances giving rise to such suspension no longer exist,
bear interest at a rate per annum equal the Reference Rate plus three quarters
of one percent (3/4%).
2.2.3 Calculation of Interest; Payment. Interest on
the Term Loan shall be calculated on the basis of the actual number of days
elapsed in a 360-day year and shall be due and payable on the last day of the
Interest Period with respect thereto. Whenever interest due on the Term Loan or
any portion thereof (as the case may be) shall be calculated by reference to the
Reference Rate, interest shall be due and payable on the outstanding principal
sum of the Term Loan or such portion (as the case may be) on the last day of
each month.
2.2.4 Illegality. Notwithstanding any other
provision in this Agreement, if the Bank determines that any applicable law,
rule or regulation, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive (whether or not having the
force of law) of any such authority, central bank or comparable agency shall
make it unlawful or impossible for the Bank to maintain or fund loans at the
LIBOR Rate or to give effect to its obligations as contemplated hereby, then
upon notice by the Bank to the Borrower, the Term Loan shall be automatically
converted to (and shall at all times thereafter, until the Bank notifies that
Borrower that such circumstances no longer exist, remain as) a loan bearing
interest at the Reference Rate plus three quarters of one percent (3/4%), but in
no event in excess of the maximum rate of interest permitted to be charged to
the Borrower pursuant to applicable law.
2.2.5 Increased Cost. The Borrower shall pay to the
Bank from time to time such amounts as the Bank may determine to be necessary to
compensate the Bank for any costs incurred by the Bank
6
<PAGE>
which the Bank determines are attributable to its making or maintaining any
loans at the LIBOR Rate hereunder, or any reduction in any amount receivable by
the Bank under this Agreement or the Note (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"),
resulting from any change after the date of this Agreement in U.S. federal,
state, municipal, or foreign laws or regulations (including Regulation D), or
the adoption or making after such date of any interpretations, directives, or
requirements applying to a class of banks including the Bank of or under any
U.S. federal, state, municipal, or any foreign laws or regulations (whether or
not having the force of law) by any court or governmental or monetary authority
charged with the interpretation or administration thereof ("Regulatory Change"),
which: (i) changes the basis of taxation of any amounts payable to the Bank
under this Agreement or the Note (other than taxes imposed on the overall net
income of the Bank for the Term Loan); or (ii) imposes or modifies any reserve,
special deposit, compulsory loan, or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, the Bank (including the Term Loan or any deposits referred to in
the definition of LIBOR Rate; or iii) imposes any other condition affecting this
Agreement or the Note (or any of such extensions of credit or liabilities). The
Bank will notify the Borrower of any event occurring after the date of this
Agreement which will entitle the Bank to compensation pursuant to this Section
2.2.5 as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation. Determinations by the Bank for purposes
of this Section 2.2.5 of the effect of any Regulatory Change on its costs of
making or maintaining loans based on the LIBOR Rate or on amounts receivable by
it in respect of the Term Loan, and of the additional amounts required to
compensate the Bank in respect of any Additional Costs, shall be conclusive,
provided that such determinations are made on a reasonable basis.
2.2.6 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 then
interest rate otherwise payable pursuant to this Agreement, but in no event in
excess of the maximum rate permitted by applicable law.
2.3 Prepayment. The Borrower may, upon at least five (5)
Business Days' notice to the Bank, prepay the Term Loan, in whole or in part,
with accrued interest to the date of such prepayment on the amount prepaid,
provided that (i) each partial prepayment shall be in a principal amount which
is not less than $250,000 and (ii) each prepayment shall be made only on the
last day of the Interest Period.
7
<PAGE>
The Borrower shall pay to the Bank, upon the request of the Bank, such amount or
amounts as shall be sufficient (in the reasonable opinion of the Bank) to
compensate it for any loss, cost or expenses incurred as a result of any payment
on account of the Term Loan on a date other than the last day of the Interest
Period including, but not limited to, acceleration of the Term Loan by the Bank
pursuant to Section 7.
2.4 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 Agree ments, in an amount equal
to any unpaid portion of such payment.
2.5 Security.
2.5.1 Security Agreement. Concurrently with the
execution and delivery of this Agreement, DSSI is granting a valid perfected
first priority security interest to the Bank in the Cash Collateral to secure
payment by the Borrower and DSSI of all of their Obligations to the Bank, by
executing and delivering to the Bank a Security Agreement, dated as of even date
herewith (the "Security Agreement").
2.5.2 Guarantee. Concurrently with the execution and
delivery of this Agreement, DSSI 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").
2.5.3 Cash Collateral. Concurrently with the
execution of this Agreement, DSSI as collateral under its Security Agreement,
has pledged a Certificate of Deposit to the Bank (the "Cash Collateral") in an
aggregate principal amount which is not less than $6,000,000, as collateral
security for payment of the Term Loan and the other Obligations, with a maturity
date of February 10, 2002 (the "Cash Collateral"). Unless an Event of Default
shall have occurred, the Bank shall remit to DSSI all interest earned on the
Cash Collateral within ten (10) days of the payment date thereof.
8
<PAGE>
SECTION 3. CONDITIONS PRECEDENT. The obligation of the Bank to
execute and deliver this Agreement, and to make the Term Loan, is
subject to the conditions precedent that:
3.1. Evidence of Corporate Action. The Bank shall have received
(i) Certificates of Good Standing from the Secretary of State of Delaware,
listing all charter documents of the Borrower and DSSI on file; (ii) a
Certificates of an authorized officer of each of the Borrower and DSSI
certifying (a) that attached thereto is a true and complete copy of resolutions
adopted by the Board of Directors of the
9
<PAGE>
Borrower or DSSI, as is appropriate, authorizing the execution, delivery and
performance of this Agreement and such Financing Agreements as to which it is a
party, (b) the incumbency and specimen signature of each officer of the Borrower
and DSSI executing the said documents, and a certification by another officer
thereof as to the incumbency and signature of the authorized officer, (iii)
copies of the Certificate of Incorporation and By-Laws of the Borrower and DSSI,
each as amended to date, certified as complete and correct by its Secretary, and
(iv) 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.
3.2. Representations and Warranties. All representations
and warranties contained herein or otherwise made to the Bank pursuant
to or in connection with this Agreement or any of the Financing
Agreements, shall be correct and complete in all material respects.
3.3. Borrower's Obligations. The Borrower shall have
executed and delivered to the Bank (i) the Note, and (ii) such other
documents as the Bank shall reasonably require.
3.4. DSSI's Obligations. DSSI shall have (i) satisfied all of
its obligations to the Bank pursuant to the Restated Agreement, and all of the
documents executed and delivered by it pursuant thereto, (ii) executed and
delivered to the Bank its Guaranty and Security Agreement and such other
documents as the Bank shall reasonably require, and (iii) deposited the Cash
Collateral with the Bank.
3.5 Opinions. The Bank shall have received a written opinions
from counsel to the Borrower and DSSI, in form and substance satisfactory to the
Bank and its counsel.
3.6 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 4. REPRESENTATIONS AND WARRANTIES. 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:
4.1 Organization.
4.1.1 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
10
<PAGE>
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.
4.1.2 DSSI's Corporate Existence and Good Standing.
DSSI 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. DSSI 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.
4.2 Authority.
4.2.1 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 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 Agree ments 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.
4.2.2 DSSI's Authority. DSSI has all of the requisite
legal right, power and authority to execute, deliver and perform the terms and
provisions of the Guaranty, its Security Agreement, the other Financing
Agreements executed by it, and all other instruments and documents delivered by
it pursuant hereto and thereto. DSSI has taken or caused to be taken all
necessary action to authorize the execution, delivery and performance of the
Guaranty, its Security Agreement, 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, its Security Agreement 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
DSSI, enforceable in accordance with their respective terms, except to the
extent that enforcement thereof may be limited by applicable
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bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and the availability of equitable remedies.
4.3 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 DSSI is a party, or by which either 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 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 DSSI
4.4 Compliance and Other Agreements.
4.4.1 Agreements, etc. Neither the Borrower nor DSSI
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 DSSI.
4.4.2 Orders, etc. Neither the Borrower nor DSSI 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 DSSI.
4.4.3 Agreements, Etc. Neither the Borrower nor DSSI
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
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and adversely affect the business, operations, prospects, properties or assets,
or the condition, financial or otherwise, of the Borrower or DSSI.
4.5 ERISA. The Borrower is in compliance in all material
respects with all applicable provisions of ERISA in 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.
4.6 Investment Company. Neither the Borrower nor DSSI is
an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940.
4.7 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 DSSI) which are required as a condition to the
validity or enforceability of this Agreement, the Financing Agreements or any
of the instruments or documents delivered or to be delivered pursuant hereto or
thereto have been effected or obtained and are in full force and effect.
4.8 Regulation U, etc. Neither the Borrower nor DSSI 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.
4.9 Financial Statements. The Borrower has heretofore
delivered to the Bank consolidated financial statements of the Borrower,
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DSSI, and certain Affiliates of DSSI (the "Consolidated Group") for the fiscal
years ended December 31, 1997, and December 31, 1998 and for the nine months
ended September 30, 1998 and September 30, 1999 (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 Consolidated
Group, as of the dates of and for the periods involved. There are no
liabilities, direct or indirect, fixed or contingent, of the Borrower and DSSI
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.
4.10 Taxes. The Borrower and DSSI have filed or caused to be
filed all tax returns required to be filed by each of them. The Borrower and
DSSI 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 DSSI
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
DSSI (as the case may be) in accordance with GAAP.
4.11 Title to Properties/Priority of Liens.
4.11.1 Title. The Borrower and DSSI have good and
marketable title to, or valid leasehold 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
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 DSSI, 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, except for liens in favor of the Bank.
4.11.2 Security Interest. The security interest
granted by DSSI to the Bank under the Security Agreement, constitutes a valid
and perfected first priority security interest and lien on the Cash Collateral,
as contemplated by the Security Agreement.
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4.12 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 DSSI or any of their
respective properties or assets, which (i) either in any case or in the
aggregate, if adversely determined, would materially and adversely affect the
business, operations, prospects, properties or assets or the condition,
financial or otherwise, of the Borrower or DSSI, or (ii) question the validity
or enforceability of this Agreement, the Financing Agreements, or any action to
be taken in connection with the transactions contemplated hereby or thereby.
4.13 Insurance. All physical properties and assets of the
Borrower 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.
4.14 Disclosure. None of the information contained in the
representations and warranties made by the Borrower and DSSI 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 Agreements, contains or will contain any untrue statement of a
material fact or omits or will omit to state a fact necessary in order to make
the statements contained herein or therein not materially misleading.
4.15 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.
4.16 Use of Proceeds. The proceeds of the Term Loan will be
used (i) to repay the loans made to the Borrower by DSSI to finance the
Acquisition and working capital needs of the Borrower, and (ii) for the ongoing
working capital needs of the Borrower.
SECTION 5 AFFIRMATIVE COVENANTS. 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:
5.1 Preservation of Existence. The Borrower will (i) preserve
and maintain its corporate existence and its rights, franchises
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and privileges 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.
5.2 Maintenance of Properties; Insurance.
5.2.1 Properties. The Borrower 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.
5.2.2 Insurance. The Borrower will maintain, at its
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.
5.3 Payment of Taxes. The Borrower 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 DSSI 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 DSSI, as
the case may be, shall have set aside appropriate and proper reserves which are
reflected on its books.
5.4 Accounting; Financial Statements and Other Information.
The Borrower and DSSI 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:
5.4.1 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 Consolidated Group as at the end
of such period, and the related consolidated statements of operations, retained
earnings, stockholders equity and changes in the financial position of the
Consolidated Group for each such period and for that part of the fiscal year of
the Borrower and DSSI then ended, all in the form filed by the Borrower or DSSI
with the Securities and Exchange Commission, setting forth in each case in
comparative 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 Consolidated Group.
5.4.2 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 Consolidated Group as at the end of such year and the related certified
consolidated statements of operations, retained earnings, stockholders equity
and changes in financial position of the Consolidated Group 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.
5.4.3 Reports. Promptly upon receipt thereof, copies
of any reports (including, without limitation, any management letters) submitted
to the Borrower or DSSI 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.
5.4.4 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 or DSSI.
5.4.5 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 DSSI.
5.5 Compliance. The Borrower 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 DSSI (as the case may be) is a party, the noncompliance with which
laws, rules, regulations, orders and agreements would materially adversely
affect the business, operations, property or assets, or the condition, financial
or otherwise, of the Borrower or DSSI (as the case may be).
5.6 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
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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.
5.7 Payment of Indebtedness. The Borrower shall promptly pay,
discharge, or satisfy before they become delinquent all of its material
indebtedness for borrowed money; provided, however, that the Borrower shall not
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 shall have
set aside appropriate and proper reserves which are reflected on its books.
5.8 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) against the
Borrower or any of its 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 business, (iv) each and
every default by the Borrower or DSSI 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, and (v) any change in the location of the chief executive
offices of the Borrower, as identified in Section 7.4 hereof or of DSSI as
identified in the Security Agreement.
5.9 Further Assurances. The Borrower will duly execute and
deliver, or will cause to be duly executed and delivered, such further
instruments and documents, 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.
5.10 Inspection. The Bank, or any Person designated by the
Bank, shall have the right, from time to time, to visit the Borrower's place or
places of business 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 DSSI's
books, records, journals, orders, receipts, correspondence and other data
relating to the Borrower's business, (ii) to verify such matters concerning the
Collateral, as the Bank (in its
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sole and absolute discretion) may consider appropriate, and (iii) to discuss the
affairs, finances and business of the Borrower with its officers and directors.
Upon request, the Borrower and DSSI 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 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 5.10.
5.11 Stock Ownership. DSSI, at all times, shall own not
less than fifty-one (51%) percent of all of the issued and outstanding
stock of each class of the Borrower.
SECTION 6. EVENTS OF DEFAULT/REMEDIES.
6.1 The occurrence of any one or more of the following events
shall constitute an "Event of Default":
6.1.1 Principal or Interest. If the Borrower shall
fail to pay any installment of principal or interest on the Note when
due and payable; or
6.1.2 Obligations. If the Borrower shall fail to pay
and satisfy any Obligation when due and payable; or
6.1.3 Certain Covenants. If there shall be a default
in the observance or performance of any covenant, condition or agreement
set forth in Sections 5.1 or 5.11; or
6.1.4 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
6.1.5 Representations. If any material represen-
tation or warranty made by or on behalf of the Borrower or DSSI, 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
6.1.6 Voluntary Insolvency Proceedings. If the
Borrower or DSSI or any of their Affiliates shall (i) apply for or
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consent to or acquiesce in 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
6.1.7 Involuntary Insolvency Proceedings. A
proceeding or case shall be commenced, without the application or consent of the
Borrower, DSSI or any of their Affiliates, in any court of competent
jurisdiction, seeking (i) liquidation, reorganization, dissolution, winding-up
or composition or adjustment of debts of the Borrower or DSSI, (ii) the
appointment of a trustee, receiver, liquidator, custodian or the like of the
Borrower, or DSSI 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 DSSI, 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
6.1.8 Divestiture of Assets. If any order, judgment,
or decree shall be entered in any proceeding requiring the Borrower, or DSSI, 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
6.1.9 Judgments. If one or more judgments exceeding
$1,000,000 in the aggregate, against the Borrower, or attachments to recover
more than $1,000,000 against any Borrower'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
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6.1.10 Other Defaults. If the Borrower 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
6.1.11 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 Multiemployer Plan; and in each case above,
such event or condition, 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
6.1.12 Levies. Any portion of the Cash Collateral is
attached, seized, becomes subject to a writ or distress or a warrant, or
is levied upon.
6.2 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
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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 DSSI 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 DSSI 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
liability of the Borrower or DSSI.
SECTION 7. MISCELLANEOUS.
7.1 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 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.
7.2 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.
7.3 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
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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.
7.4 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):
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:
Comverge Technologies, Inc.
23 Vreeland Road
Florham Park, New Jersey 07932
Attn: Frank Magnotti, President
With a copy to:
Ehrenreich Eilenberg & Krause
11 East 44th Street
New York, New York 10017
Attn: Sheldon Krause, Esq.
23
<PAGE>
7.5 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.
7.6 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.
7.7 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 referred to herein or therein without the prior written consent of the
Bank.
7.8 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.
7.9 Headings. The headings used herein are for convenience
only and do not constitute matters to be considered in interpreting this
Agreement.
7.10 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.
7.11 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,
24
<PAGE>
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.
7.12 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.
COMVERGE TECHNOLOGIES, INC.
By:
---------------------------------
Frank Magnotti
President
BANK LEUMI USA
By:
---------------------------------
Sarit Brosh
First Vice President
By:
---------------------------------
Steven Laufer
Assistant Vice President
25
<PAGE>
Exhibit 10.13
TERM NOTE
$6,000,000 New York, New York
As of February 7, 2000
A. GENERAL; TERMS OF PAYMENT
1. COMVERGE TECHNOLOGIES, 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 Six Million ($6,000,000) Dollars on February 1, 2002, or sooner
as provided in the Credit Agreement (as hereinafter defined).
This note is the Note referred to in that certain 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 the rate determined in
the Credit Agreement and be payable as is therein provided. In no event shall
interest exceed the maximum legal rate permitted for the Borrower.
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-
<PAGE>
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 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
2
<PAGE>
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.
COMVERGE TECHNOLOGIES, INC.
By:
------------------------
Frank Magnotti
President
23 Vreeland Road
Florham Park, New York 07932
3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION
- ---------------------------------------------------------------------------------- ------------
<S> <C>
Comverge Technologies, Inc........................................................ Delaware
Databit Inc....................................................................... Delaware
Decision Systems Israel Ltd....................................................... Israel
D.S.S. Defense Systems and Software Ltd........................................... Israel
International Data Operations, Inc................................................ Delaware
Powercom Control Systems Ltd...................................................... Israel
</TABLE>
<PAGE>
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
of Data Systems & Software Inc. (Forms S-8 Nos. 33-88442, 33-99196, 33-94974,
333-65799 and 333-36159) of our report dated March 29, 2000 relating to the
consolidated financial statements of Data Systems & Software Inc., appearing in
the Annual Report on Form 10-K of Data Systems & Software for the year ended
December 31, 1999 and to the reference to us under the heading "Experts" in the
Prospectuses included in Registration Statement Nos. 33-94974, 333-36159 and
333-65799.
DELOITTE & TOUCHE LLP
New York, New York
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contain summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,924
<SECURITIES> 25,900
<RECEIVABLES> 10,259
<ALLOWANCES> 181
<INVENTORY> 1,249
<CURRENT-ASSETS> 41,275
<PP&E> 5,412
<DEPRECIATION> 3,559
<TOTAL-ASSETS> 48,408
<CURRENT-LIABILITIES> 21,268
<BONDS> 2,584
0
0
<COMMON> 79
<OTHER-SE> 24,467
<TOTAL-LIABILITY-AND-EQUITY> 48,408
<SALES> 20,300
<TOTAL-REVENUES> 39,708
<CGS> 16,444
<TOTAL-COSTS> 31,354
<OTHER-EXPENSES> 14,001
<LOSS-PROVISION> 249
<INTEREST-EXPENSE> 910
<INCOME-PRETAX> (6,705)
<INCOME-TAX> 3,785
<INCOME-CONTINUING> (10,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,867)
<EPS-BASIC> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
