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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-19771
DATA SYSTEMS & SOFTWARE INC.
(Exact name of registrant as specified in charter)
Delaware 22-2786081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
200 Route 17, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip code)
(201) 529-2026
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Number of shares outstanding of the registrant's common stock, as of
November 1, 2000: 7,398,087
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<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1999 and September 30, 2000........................................ 1
Consolidated Statements of Operations
for the three and nine month periods ended September 30, 1999 and 2000 ............... 2
Consolidated Statement of Changes in Shareholders' Equity
for the nine month period ended September 30, 2000 .................................. 3
Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 1999 and 2000 ......................... 4
Notes to Consolidated Financial Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................ 9
PART II. Other Information
Item 1. Legal Proceedings .................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................... 11
Item 6. Exhibits and Reports on Form 8-K ..................................................... 11
Signatures ...................................................................................... 12
</TABLE>
Certain statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as "the
Company\we expect(s)", "the Company\we anticipate(s)", "the Company\we
believe(s)", "the Company\we estimate(s)" and other phrases of similar meaning.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect the business and operations of the Registrant.
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
ASSETS 1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................... $ 1,379 $ 9,757
Short-term interest-bearing bank deposits (Note 2) .......................................... 1,009 5,783
Investment held for sale (Note 3) ........................................................... 25,900 --
Restricted cash ............................................................................. 536 326
Trade accounts receivable, net .............................................................. 10,078 10,999
Inventory ................................................................................... 1,249 273
Other current assets ........................................................................ 945 1,195
-------- --------
Total current assets .................................................................... 41,096 28,333
-------- --------
Investments (Note 4) ............................................................................. -- 123
-------- --------
Property and equipment, net ...................................................................... 1,853 1,585
-------- --------
Other assets:
Goodwill and other intangible assets, net ................................................... 4,285 3,277
Long-term deposits (Note 2) ................................................................. -- 11,000
Other ....................................................................................... 838 463
-------- --------
5,123 14,740
-------- --------
Total assets ............................................................................ $ 48,072 $ 44,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................................................. $ 8,173 $ 1,336
Trade accounts payable ...................................................................... 5,809 5,534
Accrued payroll, payroll taxes and social benefits .......................................... 1,246 1,841
Other current liabilities ................................................................... 5,838 3,211
-------- --------
Total current liabilities ............................................................... 21,066 11,922
-------- --------
Long-term liabilities:
Convertible debentures (Note 5) ............................................................. 1,562 --
Long-term debt (Note 6) ..................................................................... -- 6,000
Other (Note 7) .............................................................................. 584 620
-------- --------
Total long-term liabilities ............................................................. 2,146 6,620
-------- --------
Minority interests ............................................................................... 10 40
-------- --------
Shareholders' equity:
Common stock - $.01 par value per share:
Authorized 20,000,000 shares; Issued and outstanding - 7,923,540 and
8,035,334 shares at December 31, 1999 and September 30, 2000, respectively .............. 79 80
Additional paid-in capital .................................................................. 35,702 35,335
Warrants .................................................................................... 432 432
Deferred compensation expense ............................................................... (73) --
Retained earnings ........................................................................... (8,925) (6,543)
-------- --------
27,215 29,304
Treasury stock, at cost - 490,262 and 637,247 shares at
December 31, 1999 and September 30, 2000, respectively .................................. (2,365) (3,105)
-------- --------
Total shareholders' equity .............................................................. 24,850 26,199
-------- --------
Total liabilities and shareholders' equity .............................................. $ 48,072 $ 44,781
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 1 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Products .................................................. $ 10,632 $ 30,215 $ 4,315 $ 10,374
Services .................................................. 14,526 15,303 4,902 4,632
-------- -------- -------- --------
25,158 45,518 9,217 15,006
-------- -------- -------- --------
Cost of sales:
Products .................................................. 9,007 24,558 4,022 8,696
Services .................................................. 11,162 10,971 3,685 3,169
-------- -------- -------- --------
20,169 35,529 7,707 11,865
-------- -------- -------- --------
Gross profit .......................................... 4,989 9,989 1,510 3,141
Research and development ....................................... 777 698 196 158
Selling, general and administrative ............................ 8,842 12,358 3,180 3,805
Gain on sale of division ....................................... -- (1,144) -- (1,144)
-------- -------- -------- --------
Operating income (loss) ............................... (4,630) (1,923) (1,866) 322
Interest income ................................................ 293 1,180 4 420
Interest expense ............................................... (275) (705) (160) (187)
Other income (loss), net ....................................... (38) 4,865 (17) 18
-------- -------- -------- --------
(4,650) 3,417 (2,039) 573
Minority interests ............................................. 204 -- 95 --
Loss in affiliates, net of minority interests .................. (4,414) -- (1,140) --
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ...................................... (8,860) 3,417 (3,084) 573
Provision for income taxes ..................................... 32 591 20 55
-------- -------- -------- --------
Income (loss) from continuing operations
after income taxes ........................................ (8,892) 2,826 (3,104) 518
Loss from discontinued operation ............................... -- 104 -- --
-------- -------- -------- --------
Net income (loss) before extraordinary item .................... (8,892) 2,722 (3,104) 518
Extraordinary loss on early redemption
of convertible debentures ................................. -- 340 -- --
-------- -------- -------- --------
Net income (loss) ..................................... $ (8,892) $ 2,382 $ (3,104) $ 518
======== ======== ======== ========
Basic net income (loss) per share:
Net income (loss) from continuing operations .............. $ (1.20) $ 0.38 $ (0.42) $ 0.07
Discontinued operations ................................... -- (0.01) -- --
Extraordinary item ........................................ -- (0.05) -- --
-------- -------- -------- --------
Net income (loss) ..................................... $ (1.20) $ 0.32 $ (0.42) $ 0.07
======== ======== ======== ========
Weighted average number
of shares outstanding ................................. 7,433 7,464 7,433 7,462
======== ======== ======== ========
Diluted net income (loss) per share:
Net income (loss) from continuing operations .............. $ (1.20) $ 0.36 $ (0.42) $ 0.07
Discontinued operations ................................... -- (0.01) -- --
Extraordinary item ........................................ -- (0.04) -- --
-------- -------- -------- --------
Net income (loss) ..................................... $ (1.20) $ 0.31 $ (0.42) $ 0.07
======== ======== ======== ========
Weighted average number
of shares outstanding ................................. 7,433 7,805 7,433 7,809
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 2 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Additional
Number Common Paid-In Deferred Treasury Retained
of Shares Stock Capital Compensation Warrants Stock Earnings Total
--------- ----- ------- ------------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
January 1, 2000 7,924 $ 79 $ 35,702 $ (73) $ 432 $ (2,365) $ (8,925) $ 24,850
Conversion of
convertible debentures 85 1 259 -- -- -- -- 260
Reversal of imputed
interest on
convertible debentures -- -- (317) -- -- -- -- (317)
Exercise of options 26 -- 66 -- -- -- -- 66
Amortization of
restricted stock award
compensation -- -- -- 73 -- -- -- 73
Repurchase of
outstanding warrants -- -- (375) -- -- -- -- (375)
Purchase of treasury
shares -- -- -- -- -- (740) -- (740)
Net income -- -- -- -- -- -- 2,382 2,382
-------- -------- -------- -------- -------- -------- -------- --------
Balances as of
September 30, 2000 8,035 $ 80 $ 35,335 $ -- $ 432 $ (3,105) $ (6,543) $ 26,199
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 3 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) ......................................................... $ (8,892) $ 2,382
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ......................................... 906 1,195
Minority interests .................................................... (204) --
Issuance of subsidiary shares to minority interests ................... -- 30
Gain on sale of investment held for sale .............................. -- (4,989)
Increase (decrease) in liability for severance pay .................... 24 38
Loss in affiliates .................................................... 4,414 --
Gain on sale of securities ............................................ (247) --
(Gain) loss on sale of property, plant and equipment, net ............. 38 (14)
Gain on sale of division .............................................. -- (1,144)
Amortization of restricted stock award compensation ................... 191 73
Amortization of deferred interest on convertible debentures ........... -- 336
Reversal of imputed interest on convertible debentures ................ -- (317)
Interest expense related to warrants issued ........................... 27 245
Other ................................................................. (125) (123)
Increase in accounts receivable and other current assets .............. (1,351) (1,357)
Decrease (increase) in inventory ...................................... (1,695) 1,425
Decrease in other assets .............................................. 111 375
Decrease (increase) in accounts payable and other liabilities ......... 1,677 (2,656)
-------- --------
Net cash used in operating activities ................................. (5,126) (4,501)
-------- --------
Cash flows provided by (used in) investing activities:
Short-term and long-term bank deposits, net ............................... 1,009 (29,852)
Restricted cash ........................................................... 543 210
Acquisitions of property and equipment .................................... (2,139) (548)
Proceeds from sale of property and equipment .............................. 117 116
Proceeds from sale of investment held for sale ............................ -- 30,889
Proceeds from sale of marketable securities and maturity of deposits ...... 1,520 14,078
Net proceeds from sale of division ........................................ -- 1,838
Purchase of minority interest share of subsidiary ......................... (559) --
Acquisition of intangible assets .......................................... (2,692) (9)
-------- --------
Net cash provided by (used in) investing activities ................... (2,201) 16,722
-------- --------
Cash flows provided by (used in) financing activities:
Short-term debt, net ...................................................... 7,229 (6,990)
Proceeds of long-term debt ................................................ 39 6,000
Repayments of long-term debt .............................................. (523) (64)
Proceeds from issuance of common stock, net ............................... 46 --
Proceeds from stock options exercised ..................................... -- 66
Issuance of shares from conversion of convertible debt .................... -- 260
Purchase of treasury shares ............................................... -- (740)
Repurchase of outstanding warrants ........................................ -- (375)
Redemption of convertible debt ............................................ -- (2,000)
-------- --------
Net cash provided by (used in) financing activities ................... 6,791 (3,843)
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... (536) 8,378
Cash and cash equivalents at beginning of period ............................... 1,003 1,379
-------- --------
Cash and cash equivalents at end of period ..................................... $ 467 $ 9,757
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
- 4 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Supplemental cash flow information:
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1999 2000
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest ................................................... $ 188 $ 684
========== ==========
Income taxes ............................................... $ 44 $ 462
========== ==========
Non-cash activities:
Reversal of unrealized gain on securities available for sale $ (172)
==========
Adjustment of goodwill to inventory sold ................... $ 449
==========
Assets/liabilities transferred upon sale of division:
Trade accounts receivable, net ................................. $ 245
Property and equipment, net .................................... 86
Other current liabilities ...................................... 363
----------
$ 694
==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
- 5 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 1: Basis of Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been reflected herein. Certain financial information, which is
normally included in financial statements prepared in accordance with generally
accepted accounting principles, but which is not required for interim reporting
purposes, has been omitted. The accompanying consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the Company's prior years'
consolidated financial statements to conform with the current year's
consolidated financial statements.
Note 2: Short and Long-Term Deposits
Short- and long-term deposits are comprised of the following:
Interest
Maturity date Rate Amount
------------- ---- ------
Short-term deposits:
Asset backed security April 2001 6.70% $ 994
Certificate of deposit December 2000 6.53% 4,789
--------
$ 5,783
========
Long-term deposits:
Asset-backed security November 2001 7.05% $ 5,000
Certificate of deposit (*) February 2002 6.90% 6,000
--------
$ 11,000
========
(*) A security interest has been granted against this deposit securing the
repayment of long-term bank debt. (see Note 6).
Note 3: Investment Held for Sale
In December 1999, the Company entered into an agreement to sell its
interest in Tower Semiconductor Ltd. ("Tower") for $30,889. The closing of the
sale took place in January 2000, at which time the Company received the proceeds
from the sale. The Company recorded a gain of $4,989 which was included in other
income.
Note 4: Investments
In 2000, the Company received equity interests in two customers, as partial
compensation for services rendered. The equity was recorded at the fair value of
the services provided and accounted for under the cost method.
Note 5: Convertible Debentures
In February 2000, the Company redeemed a portion of the convertible
debentures for an aggregate redemption price of $2,001, recording an
extraordinary loss of $340 due to the early redemption. The $260 unredeemed
balance of the convertible debentures was converted into 84,794 shares of common
stock of the Company.
Note 6: Long-Term Debt
In February 2000 the Company refinanced a $6,000 short-term bank loan. The
loan principal is payable in a single installment at maturity in February 2002
and bears interest at LIBOR +0.75% payable quarterly.
- 6 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 7 - Other Long-Term Liabilities
Other long-term liabilities consists of the following:
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
Debts to Israeli banks and lease companies ................. $ 103 $ 38
Less current maturities .................................... 81 31
------ ------
22 7
------ ------
Liability for employee termination benefits ................ 2,948 3,117
Less - funded amounts ...................................... 2,386 2,517
------ ------
562 600
------ ------
Other ...................................................... -- 13
------ ------
$ 584 $ 620
====== ======
</TABLE>
Note 8: Discontinued Operations
The loss reflects a provision made in the second quarter for expenses
related to the help-desk segment, which the Company sold in 1998.
Note 9: Gain on Sale of Division
In September 2000, the Company completed the sale of substantially all the
assets of its CinNetic division, included in the computer consulting segment,
for a total of $1,838 resulting in a gain of $1,144. In 2000, the CinNetic
division had an operating loss of approximately $315.
Note 10: Segment Information
<TABLE>
<CAPTION>
Computer
consulting Computer Utility
services hardware solutions Other (*) Total
-------- -------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 2000:
Revenues from external customers $ 14,829 $ 15,397 $ 15,059 $ 195 $ 45,480
Intersegment revenues 190 186 1,209 -- 1,585
Segment profit (loss) 1,504 370 (1,625) 22 271
Nine months ended September 30, 1999:
Revenues from external customers $ 13,753 $ 9,218 $ 1,360 $ 557 $ 24,888
Intersegment revenues 113 26 331 -- 470
Segment profit (loss) (21) 74 (2,688) (283) (2,918)
Three months ended September 30, 2000:
Revenues from external customers $ 4,520 $ 5,847 $ 4,593 $ 46 $ 15,006
Intersegment revenues 3 9 534 -- 546
Segment profit (loss) 1,446 178 (654) (7) 963
Three months ended September 30, 1999:
Revenues from external customers $ 4,123 $ 4,072 $ 718 $ 214 $ 9,127
Intersegment revenues 27 10 (15) -- 22
Segment profit (loss) (289) 151 (1,326) 32 (1,432)
</TABLE>
----------
(*) Represents operating segments below the quantitative thresholds of FAS 131:
in 2000, a VAR software operation in Israel; and in 1999, the VAR software
operation in Israel, an Internet database venture and a multimedia
entertainment operation.
- 7 -
<PAGE>
DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(dollars in thousands)
Note 10: Segment Information
Reconciliation of Segment Profit to Consolidated Net Income (Loss)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
---------------------- ----------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total profit (loss) for reportable segments $(2,613) $ 249 $(1,463) $ 970
Other operational segment profit (loss) (305) 22 31 (7)
Unallocated amounts:
Net profit (loss) of corporate headquarters (5,974)* 2,111* (1,672)* (445)
------- ------- ------- -------
Total consolidated net income (loss) $(8,892) $ 2,382 $(3,104) $ 518
======= ======= ======= =======
</TABLE>
----------
(*) In 1999 includes equity in losses of Tower (net of minority interest)
of $3,227 and in 2000 includes a $4,989 gain from the sale of Tower
shares.
(**) Includes equity losses of Tower (net of minority interest) of $1,738.
Reconciliation of Segment Revenue to Consolidated Revenue
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
--------------------- ---------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue reportable segments $24,331 $45,285 $ 8,913 $14,960
Other operational segment revenues 557 195 214 46
Revenue from management fee derived by
non-operating segment (corporate headquarters) 270 38 90 --
------- ------- ------- -------
Total consolidated revenue $25,158 $45,518 $ 9,217 $15,006
======= ======= ======= =======
</TABLE>
- 8 -
<PAGE>
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" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
During 1999 and in the first nine months of 2000, we operated in three
reportable segments: computer consulting and development services, computer
hardware, and utility solutions. The following analysis should be read together
with the segment information provided in Note 10 to the interim financial
statements included in this quarterly report, which information is hereby
incorporated by reference into this Item 2.
Computer Consulting and Development Services
Sales and gross profits in the third quarter and first nine months of 2000
increased in comparison to the same periods in 1999. These increases were
attributable to increased sales and profitability in our Israeli activities.
Although gross profit margins improved in the third quarter, the competitive
marketplace for qualified engineers in general and in Israel in particular
continues and we expect that such competition will have a negative effect on
profit margins in the future.
Computer Hardware
Sales in this segment in the third quarter and first nine months of 2000
increased in comparison to the comparable periods in 1999. Gross profit margins
continued to decline due to competitive market conditions and a shift from a
narrow customer base to a broader more competitive customer base.
Utility Solutions
In August 1999 we acquired the Scientific-Atlanta Control Systems division,
including its line of load control products and Maingate gateway system. The
segment first began to have significant sales in the second quarter of 1999.
These sales increased throughout the rest of 1999 and the first half of 2000,
primarily due to sales of load control products. Sales declined in the third
quarter this year, as compared to the immediately preceding quarter, due to
lower load control product sales, partially offset by an increase in gateway
product sales. Sales in the fourth quarter of 2000 are not expected to return to
the level reached in the second quarter of 2000.
Results of Operations
The following table sets forth certain information with respect to the
results of operations of the Company for the nine and three months ended
September 30, 1999 and 2000, including the percentage of total revenues during
each period attributable to selected components of operations statement data and
the period to period percentage changes in such components.
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
-------------------------------------------- ------------------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
% of % of % of % of % of % of
($,000) sales ($,000) sales 1999 ($,000) sales ($,000) sales 1999
-------- --- -------- --- --- -------- --- -------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 25,158 100% $ 45,518 100% 81% $ 9,217 100% $ 15,006 100% 63%
Cost of sales 20,169 80 35,529 78 76 7,707 84 11,865 79 54
-------- --- -------- --- -------- --- -------- ---
Gross profit 4,989 20 9,989 22 100 1,510 16 3,141 21 108
R&D expenses 777 3 698 2 (10) 196 2 158 1 (19)
SG&A expenses 8,842 35 12,358 27 40 3,180 34 3,805 26 20
Gain on sale of division -- -- (1,144) (3) -- -- (1,144) (8)
-------- --- -------- --- -------- --- -------- ---
Operating income (loss) (4,630) (18) (1,923) (4) 58 (1,866) (20) 322 2 117
Interest income (expense), net 18 -- 475 1 (156) (2) 233 2 249
Other income (loss) (38) -- 4,865 10 (17) -- 18 -- 206
-------- --- -------- --- -------- --- -------- ---
Profit (loss) before income (4,650) (18) 3,417 7 173 (2,039) (22) 573 4 128
taxes
Minority interests 204 1 -- -- (100) 95 1 -- -- (100)
Equity loss, net of minority
interests (4,414) (18) -- -- (100) (1,140) (13) -- -- (100)
-------- --- -------- --- -------- --- -------- ---
Income (loss) from continuing (8,860) (35) 3,417 7 139 (3,084) (34) 573 4 119
operations before income tax
Provision for income taxes 32 -- 591 1 20 -- 55 -- 175
-------- --- -------- --- -------- --- -------- ---
Income (loss) from continuing (8,892) (35) 2,826 6 132 (3,104) (34) 518 4 117
operations after income taxes
Loss from discontinued operation -- -- 104 -- -- -- -- -- --
-------- --- -------- --- -------- --- -------- ---
Net income (loss) before (8,892) (35) 2,722 6 131 (3,104) (34) 518 4 117
extraordinary item
Extraordinary loss early
redemption of convertible
debentures -- -- 340 1 -- -- -- -- --
-------- --- -------- --- -------- --- -------- ---
Net income (loss) $ (8,892) (35)% $ 2,382 5% 127% $ (3,104) (34)% $ 518 4% 117%
======== === ======== === ======== === ======== ===
</TABLE>
- 9 -
<PAGE>
SALES. The increase in sales in both the third quarter and first nine
months of 2000, as compared to the comparable periods in 1999, was due primarily
to increased utility solutions segment sales. Utility solutions segment sales
increased to $4.6 and $15 million in the third quarter and first nine months of
2000, respectively, compared to $718,000 and $1.4 million in the comparable
periods of 1999. The computer hardware and software consulting segments also
recorded increased sales in the third quarter of 2000 as compared to the same
quarter in 1999, increasing by $1.8 million and $400,000 respectively. Sales in
these segments increased in the first nine months of 2000 by $6.2 million and
$1.1 million, respectively, compared to the same period in 1999.
GROSS PROFIT. Gross profit increased in all segments, due primarily to the
increased sales, although the gross profit margin improved as well. Gross profit
margin improved both in the third quarter and first nine months of 2000, over
the comparable periods in 1999, due to the improved margins in both the computer
consulting segment and the utility solutions segment. In the first nine months
of 2000 the main contributor to the improved gross profit margin was the utility
solutions segment, with its increased level of activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). The increase in SG&A
was due primarily to increased administrative and marketing costs in the utility
solutions segment. SG&A of the utility solutions segment increased by $650,000
and $2.1 million in the third quarter and the first nine months of 2000,
respectively, as compared to the same periods in 1999. These increases are
associated with the segment's increased level of activity, including the
addition of the operations acquired from Scientific-Atlanta. In addition,
corporate expenses and computer hardware segment SG&A expenses increased in the
first nine months of 2000 by $900,000 and $590,000 respectively, primarily due
to bonus compensation and increased sales expenses, primarily in the first
quarter of 2000.
GAIN ON SALE OF DIVISION. The gain in the third quarter of 2000 was from
the sale of the computer consulting segment's CinNetic division for $1.8 million
resulting in a gain of $1.1 million.
INTEREST INCOME (EXPENSE). The increase in interest income was primarily
due to the interest earned on the proceeds from the sale of our investment in
Tower. This increase was partially offset by an increase in interest expense,
primarily due to the interest on the bank loan taken to finance the acquisition
of the Scientific-Atlanta Control Systems division in the third quarter of 1999.
OTHER INCOME. Other income in the first nine months of 2000 was primarily
from the sale of our investment in Tower in January 2000.
INCOME TAXES. Income taxes in the first nine months of 2000 were primarily
attributable to federal taxes related to the sale of our investment in Tower in
January of this year. Due to our history of losses we record valuation
allowances against any deferred tax assets.
EQUITY LOSS. The equity loss net of minority interests in the third quarter
and first nine months of 1999 resulted from losses in Tower. Since we sold our
investment in Tower we no longer included Tower's results.
FINANCIAL CONDITION
As of September 30, 2000 we had working capital of $16.4 million, including
cash, cash equivalents and short-term interest-bearing deposits of $15.5
million, and in addition had long-term interest-bearing cash deposits of $11
million. Some of the long-term deposits serve as security for a $6 million term
loan taken by our Comverge subsidiary to finance the acquisition of the
Scientific-Atlanta Control Systems division and for working capital
requirements. The loan is repayable in February 2002 and bears interest at a
rate of LIBOR +0.75% per annum.
The increase in cash equivalents and interest-bearing deposits is due to
the proceeds from the sale of our investment in Tower in January 2000. In
addition, proceeds from this sale were used to finance our operations, redeem
$1.8 million of the $2 million convertible debenture outstanding and reduce our
short-term debt.
We believe we now have adequate liquidity to finance our activities,
including the activities of our utility solutions segment, for the foreseeable
future.
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<PAGE>
PART II - Other information
Item 1: Legal Proceedings
None
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of Stockholders (the "Meeting") was held on
September 12, 2000. The election of directors was the only matter voted
upon at the Meeting. Set forth below is the number of votes cast for,
against or withheld, as well as the number of abstentions and/or broker
non-votes with respect to the election each director. There were no broker
non-votes. The following persons were elected as directors of the
Registrant at the Meeting:
Name Votes For Votes Withheld
---- --------- --------------
George Morgenstern 5,943,948 168,919
Robert L. Kuhn 5,934,348 178,519
Harvey Eisenberg 5,944,348 168,519
Sheldon Krause 5,934,348 178,519
Susan L. Malley 5,856,393 256,474
Maxwell M. Rabb 5,856,393 256,474
Allen L. Schiff 5,934,348 178,519
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated as of August 2, 2000 by and among
Data Systems & Software Inc., International Data Operations Inc. and
Eclipse Networks Inc., relating to the sale of substantially all of
the assets of CinNetic.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by its
Principal Financial Officer thereunto duly authorized.
DATA SYSTEMS & SOFTWARE INC.
Dated: November 14, 2000
By: /s/ YACOV KAUFMAN
----------------------------------
Yacov Kaufman
Chief Financial Officer
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