-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B5udKl/HrD7DbAN5oNF4E9UgWmJ4mPEjb1emfESPL44+xmOXMMH2n94TDK7b86c9 mrwOyLQGnDm4veXD1Pu5pA== 0000889812-96-001724.txt : 19961118 0000889812-96-001724.hdr.sgml : 19961118 ACCESSION NUMBER: 0000889812-96-001724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA SYSTEMS & SOFTWARE INC CENTRAL INDEX KEY: 0000880984 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 222786081 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19771 FILM NUMBER: 96665531 BUSINESS ADDRESS: STREET 1: 200 RTE 17 CITY: MAHWAH STATE: NJ ZIP: 07430 BUSINESS PHONE: 2015292026 FORMER COMPANY: FORMER CONFORMED NAME: DEFENSE SOFTWARE & SYSTEMS INC DATE OF NAME CHANGE: 19930328 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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, 1996 COMMISSION FILE NO. 0-19771 DATA SYSTEMS & SOFTWARE INC. (Exact name of registrant as specified in charter) Delaware 22-2786081 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 200 Route 17, Mahwah, New Jersey 07430 (Address of registrant's 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Number of shares outstanding of the registrant's common stock, as of November 11, 1996: 7,369,178 DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 1 Consolidated Statements of Income for the nine month periods and three month periods ended September 30, 1995 and September 30, 1996 2 Statement of Changes in Shareholders' Equity for the nine month period ended September 30, 1996 3 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1995 and September 30, 1996 4 Schedules to Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1995 and September 30, 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information Item 1. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, September 30, ----------- ------------ 1995 1996 ----------- ----------- (unaudited) ASSETS ($ 000) Current assets: Cash and cash equivalents $ 25,959 $ 18,918 Short-term interest bearing bank deposits 26,991 28,711 Marketable debt securities 83,965 56,802 Restricted cash 1,366 1,395 Accounts receivable - trade 21,040 15,545 Other receivables 18,876 16,523 Inventory 13,629 14,986 Other current assets 2,415 3,317 ----------- ----------- Total current assets 194,241 156,197 ----------- ----------- Investments 1,414 928 ----------- ----------- Property and equipment, net of accumulated depreciation of $14,726 and $25,222 at December 31, 1995 and September 30, 1996, respectively 71,889 107,385 ----------- ----------- Other assets: Capitalized software development costs, net 4,425 5,286 Intangible assets, primarily goodwill 843 508 Note receivable -- 2,000 Loans to affiliated companies 349 1,742 Other 2,216 2,225 ----------- ----------- 7,833 11,761 ----------- ----------- Total assets $ 275,377 $ 276,271 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt - banks and others $ 4,878 $ 1,881 Current maturities of long-term liabilities 11,493 10,023 Accounts payable - trade 25,300 22,364 Accrued payroll, payroll taxes, and social benefits 6,962 5,297 Other current liabilities 3,758 4,397 ----------- ----------- Total current liabilities 52,391 43,962 ----------- ----------- Long-term liabilities: Long-term debt, net of current maturities 12,355 12,245 Long-term liability in respect of customer advances 10,144 9,920 Foreign deferred taxes 1,812 4,204 Other 1,191 1,387 ----------- ----------- Total long-term liabilities 25,502 27,756 ----------- ----------- Minority interests 129,730 136,700 ----------- ----------- Shareholders' equity: Common stock - $.01 par value per share: Authorized 20,000,000 shares; Issued - 7,590,665 and 7,708,540 shares at December 31, 1995 and September 30, 1996, respectively 75 77 Additional paid-in capital 33,742 33,948 Retained earnings 35,785 35,676 ----------- ----------- 69,602 69,701 Treasury stock, at cost - 339,362 shares at December 31, 1995 and September 30, 1996 (1,848) (1,848) ----------- ----------- Total shareholders' equity 67,754 67,853 ----------- ----------- Total liabilities and shareholders' equity $ 275,377 $ 276,271 =========== ===========
The accompanying notes are an integral part of these financial statements. -1- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Nine months ended Three months ended September 30, September 30, ---------------------------- ---------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ($000, except per share amounts) Sales: Products $ 78,037 $ 87,630 $ 28,539 $ 24,574 Services 14,772 13,515 5,226 4,128 ----------- ----------- ----------- ----------- 92,809 101,145 33,765 28,702 ----------- ----------- ----------- ----------- Cost of sales: Products 54,382 68,263 19,728 20,744 Services 11,101 10,503 4,079 3,408 ----------- ----------- ----------- ----------- 65,483 78,766 23,807 24,152 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit 27,326 22,379 9,958 4,550 Research and development expenses, net 1,775 3,263 609 1,535 Selling, general and administrative expenses 11,886 13,272 4,380 4,192 ----------- ----------- ----------- ----------- Operating income (loss) 13,665 5,844 4,969 (1,177) Financial income 3,551 5,055 4,033 1,347 Financial expense (1,724) (2,383) (2,690) (660) Gain on changes in ownership interests in subsidiaries 26,339 -- 26,303 -- Other income, net 17 1,869 25 1,840 ----------- ----------- ----------- ----------- Income before taxes on income 41,848 10,385 32,640 1,350 Taxes on income 2,977 3,084 1,099 1,434 ----------- ----------- ----------- ----------- Income (loss) after taxes on income 38,871 7,301 31,541 (84) Minority interests (20,463) (6,868) (14,891) (724) Equity in affiliated companies (147) (542) (20) (416) ----------- ----------- ----------- ----------- Net income (loss) $ 18,261 ($ 109) $ 16,630 ($ 1,224) =========== =========== =========== =========== Earnings (loss) per common and common equivalent share $ 2.55 ($ 0.01) $ 2.17 ($ 0.17) =========== =========== =========== =========== Weighted average number of shares (in thousands) 7,165 7,364 7,675 7,373 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -2- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Statement of Changes in Shareholders' Equity (unaudited)
Number Additional of Common paid-in Treasury Retained shares stock capital stock earnings Total --------- --------- --------- --------- --------- --------- ($ 000, except for share amounts) Balance, January 1, 1996 7,590,665 $ 75 $ 33,742 ($ 1,848) $ 35,785 $ 67,754 Common stock issued in restricted stock award 100,000 1 587 -- -- 588 Unamortized restricted stock award compensation -- -- (486) -- -- (486) Common stock issued upon exercise of options 17,875 1 105 -- -- 106 Net loss -- -- -- -- (109) (109) --------- --------- --------- --------- --------- --------- Balance, September 30, 1996 7,708,540 $ 77 $ 33,948 ($ 1,848) $ 35,676 $ 67,853 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. -3- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, ---------------------------- 1995 1996 ----------- ----------- ($ 000) Cash flows from operating activities: Net income (loss) $ 18,261 ($ 109) Adjustments to reconcile net income (loss) to net cash provided by operating activities - see Schedule A 2,891 18,072 ----------- ----------- Net cash provided by operating activities 21,152 17,963 ----------- ----------- Cash flows used in investment activities: Short-term and long-term bank deposits, net 2,127 (1,678) Restricted cash, net (55) (97) Investment in marketable securities (224,949) (152,148) Proceeds from realization of marketable securities 167,909 181,312 Acquisitions of property and equipment (33,391) (46,929) Proceeds from sale of property and equipment 39 39 Proceeds from sale of shares in a non-affiliated company -- 80 Investments in capitalized software development costs, net (1,927) (1,655) Investments in other assets (831) (36) Loans to affiliated companies (266) (1,760) Net cash acquired (transferred) on purchase (sale) of subsidiaries - see Schedule B 272 (130) ----------- ----------- Net cash used in investment activities (91,072) (23,002) ----------- ----------- Cash flows from (used in) financing activities: Net proceeds from public offering of securities of subsidiary 87,965 -- Proceeds from issuance of common stock 2,240 106 Purchase of treasury stock (1,281) -- Short-term debt, net 1,166 (1,810) Customer advances - long-term 4,170 -- Proceeds from long-term debt 2,048 714 Repayments of long-term debt (3,432) (1,012) ----------- ----------- Net cash provided by (used in) financing activities 92,876 (2,002) ----------- ----------- Net increase (decrease) in cash and cash equivalents 22,956 (7,041) Cash and cash equivalents at beginning of period 6,627 25,959 ----------- ----------- Cash and cash equivalents at end of period $ 29,583 $ 18,918 =========== =========== Supplemental cash flow information: Cash paid during the period for: Interest $ 745 $ 622 =========== =========== Income taxes $ 2,123 $ 1,724 =========== ===========
The accompanying notes are an integral part of these financial statements. -4- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Schedules to Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, ---------------------------- 1995 1996 ----------- ----------- ($ 000) A. Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization $ 6,108 $ 12,017 Gain on changes in ownership interests in subsidiaries (26,339) -- Gain on sale of ownership interests in affiliated company -- (1,710) Minority interests 20,463 6,868 Earnings on marketable debt securities (1,095) (1,991) Deferred income taxes 414 2,484 Increase in liability for severance pay 572 322 Equity in affilliated companies 147 542 Other 404 199 Decrease (increase) in accounts receivable and other current assets (11,743) 6,067 Increase in inventory (2,584) (2,205) Increase (decrease) in accounts payable and other current liabilities 16,544 (3,038) Decrease in liability in respect of customer advances, net -- (1,483) ----------- ----------- $ 2,891 $ 18,072 =========== =========== B. Net cash acquired (transferred) on purchase (sale) of subsidiaries: Company's shares issued upon acquisition of shares of subsidiaries consolidated for the first time $ 1,134 -- Receivables assumed upon sale of subsidiary -- (589) Investment recorded -- (23) Working capital, net of cash (220) 212 Property and equipment (78) 260 Goodwill on acquisition (498) 142 Other assets (66) -- Other liabilities -- (132) ----------- ----------- $ 272 ($ 130) =========== =========== C. Non - cash activities: Issuance of common stock realted to business acquisitions $ 1,134 -- =========== =========== Receivables assumed upon the sale of a subsidiary -- $ 589 =========== ===========
The accompanying notes are an integral part of these financial statements. -5- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) Note 1: Basis of Presentation In the opinion of the Company, all adjustments necessary for a fair presentation have been reflected herein. In addition to adjustments of a normal recurring nature, such adjustments included the write-down of certain plant design costs and inventory, which in the aggregate reduced net income by approximately $170,000 during the second quarter of 1996. Certain financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. Note 2: Inventory Inventory is made up as follows: December 31, September 30, 1995 1996 ------------- ------------- ($,000) Raw materials $ 8,264 $10,979 Work in process 4,774 3,676 Finished goods 591 331 --------- --------- $ 13,629 $14,986 ========= ========= Note 3: Legal Proceedings Between June and September 1996, five suits were filed in the United States on behalf of a purported class of the shareholders of Tower, against Tower, its Co-chief Executive Officers, and its Chairman of the Board of Directors. Two of the actions were also brought against the Company. The complaints seek to certify a class of all persons who purchased or otherwise acquired Tower's ordinary shares between May 25, 1996 and June 10, 1996. The complaints allege, on behalf of the class, that the defendants made misstatements and omissions regarding (i) the relationship between Tower and a major customer and (ii) Tower's process development efforts in connection therewith, in violation of certain U.S. Federal securities laws. In November 1996, the court granted an order consolidating three of the actions and appointing lead plaintiffs and plaintiffs' counsel. Under the order, the plaintiffs are required to file an amended consolidated complaint before the end of 1996. The Company believes the aforementioned suits to be without merit and intends to vigorously defend itself against them. Tower has indemnified the defendants, up to the limits permitted by the Israel Companies Ordinance, from any liability arising out of the actions. The Company believes that it has sufficient insurance to cover the costs of defense of the actions and of any adverse determination or settlement. -6- Note 4: Recent Developments Semiconductor Segment In June 1996, Tower announced that it and a major customer had mutually agreed on the terms for terminating the agreement for the purchase by the major customer of wafers from Tower. A formal agreement between the parties was signed in September 1996. Sales to the major customer accounted for 10%, 11%, 13% and 9% of the Semiconductor segments' sales for the nine months ended September 30, 1995 and 1996 and the three months ended September 30, 1995 and 1996, respectively. During the first half of 1996 and continuing into the third quarter of 1996, there was a general downturn in the market for semiconductor products. Commencing in the second quarter of 1996, Tower experienced reductions in orders from customers and downward pressure on prices. As a result, Tower operated substantially below capacity during the third quarter of 1996. In July 1996, Tower terminated the employment of approximately 120 employees. Tower's obligations for employee termination benefits were fully covered by regular deposits made by Tower into recognized severance and pension funds, by insurance policies purchased by Tower, and by the liability on the balance sheet in respect of such benefits. Accordingly, any additional costs related to the aforementioned termination of employment were not material. Computer Segment Effective July 1, 1996, the Company sold 95% of its interest in Atir Ltd. and ceased to consolidate the results of Atir subsequent to that date. The Company maintains a 5% interest which it reflects under the cost method. The sale had no material profit or loss effect. Effective July 1, 1996, the Company's Decision Systems Israel Ltd. ("DSI") subsidiary sold its 50% interest in MIS Information Systems Holdings Ltd. to Geotek Technologies, Inc. ("Geotek"). DSI sold its interest in exchange for a $2 million unsecured note which bears interest at an annual rate of 8.25%, payable on or before July 1, 1998. The Company recorded a gain of approximately $1.7 million. Note 5: Taxes on Income Taxes on income for the three months ended September 30, 1996 include approximately $1.5 million in respect of a dividend to be distributed by the Company's Tower subsidiary in the fourth quarter of 1996. -7- Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company conducts its business through two business segments: Computer Software Services and Systems (the "Computer Segment") and Semiconductor Manufacturing (the "Semiconductor Segment"). Results of Operations Three and Nine Months Ended September 30, 1995 and 1996 The following tables set forth certain information with respect to the results of operations of the Company and its two business segments for the three months and nine months ended September 30, 1995 and 1996, the percentage of total revenues during each period attributable to selected components of income statement data, and the period to period changes and percentage changes in such components.
Three months ended September 30, ------------------------------------------------------------ Change 1995 1996 from 1995 ------------------------- ------------------------- ---------------------- Dollar % of Dollar % of Dollar amount sales amount sales amount % ------ ----- ------ ----- ------ - ($,000) ($,000) ($,000) Semiconductor segment: Sales 26,060 19,575 (6,485) -24.9% Gross profit 8,377 32.1% 2,510 12.8% (5,867) -70.0% R&D expenses, net 489 1.9% 983 5.0% 494 101.0% SG&A expenses 1,719 6.6% 1,455 7.4% (264) -15.4% Operating income 6,170 23.7% 72 0.4% (6,098) -98.8% Computer segment: Sales 7,705 9,127 1,422 18.5% Gross profit 1,581 20.5% 1,938 21.2% 357 22.6% R&D expenses, net 120 1.6% 552 6.0% 432 360.0% SG&A expenses 2,149 27.9% 2,179 23.9% 30 1.4% Operating loss (689) -8.9% (793) -8.7% (104) 15.1% Corporate: SG&A expenses 512 456 (56) -10.9% Combined: Sales 33,765 28,702 (5,063) -15.0% Gross profit 9,958 29.5% 4,448 15.5% (5,510) -55.3% R&D expenses, net 609 1.8% 1,535 5.3% 926 152.1% SG&A expenses 4,380 13.0% 4,090 14.2% (290) -6.6% Operating income (loss) 4,969 14.7% (1,177) -4.1% (6,146) -123.7% Net income (loss) 16,630 49.3% (1,224) -4.3% (17,854) -107.4%
-8-
Nine months ended September 30, ----------------------------------------------------- Change 1995 1996 from 1995 ---------------------- --------------------- ---------------------------- Dollar % of Dollar % of Dollar amount sales amount sales amount % ------ ----- ------ ----- ------ - ($,000) ($,000) ($,000) Semiconductor segment: Sales 70,808 76,125 5,317 7.5% Gross profit 22,356 31.6% 16,589 21.8% (5,767) -25.8% R&D expenses, net 1,310 1.9% 2,476 3.3% 1,166 89.0% SG&A expenses 4,826 6.8% 5,625 7.4% 799 16.6% Operating income 16,220 22.9% 8,488 11.2% (7,732) 47.7% Computer segment: Sales 22,001 25,020 3,019 13.7% Gross profit 4,970 22.6% 5,688 22.7% 718 14.4% R&D expenses, net 465 2.1% 787 3.1% 322 69.2% SG&A expenses 5,615 25.5% 6,396 25.6% 781 13.9% Operating loss (1,110) -5.0% (1,495) -6.0% (385) -34.7% Corporate: SG&A expenses 1,445 1,149 (296) -20.5% Combined: Sales 92,809 101,145 8,336 9.0% Gross profit 27,326 29.4% 22,277 22.0% (5,049) -18.5% R&D expenses, net 1,775 1.9% 3,263 3.2% 1,488 83.8% SG&A expenses 11,886 12.8% 13,170 13.0% 1,284 10.8% Operating income 13,665 14.7% 5,844 5.8% (7,821) -57.2% Net income (loss) 18,261 19.7% (109) -0.1% (18,370) -100.6%
Sales. The decrease in Semiconductor Segment sales in the third quarter of 1996 as compared to the same period in 1995 was primarily due to a decrease of 25.1% in shipments resulting from the termination of a purchase agreement with a major customer and the general downturn in the market for semiconductor products, as well as a decrease of 0.6% in the average unit selling price. The increase in Computer Segment sales in the third quarter of 1996 as compared to the same period in 1995 was due to increased sales from the Segment's United States operations, partially offset by a decrease in sales from the segment's Israeli operations, resulting primarily from the sale of the Company's Atir subsidiary. The increase in Semiconductor Segment sales in the first nine months of 1996 as compared to the same period in 1995 was primarily due to an increase in shipments of 8.0% due to the relatively strong market for semiconductor products in the first half of 1996, partially offset by a decrease of 0.4% in the average selling price. The increase in Computer Segment sales in the nine month ended September 30, 1996 as compared to the same period in 1995 was a result of increases in sales from -9- both the Israeli and United States operations of the segment, partially offset by the decrease in sales resulting from the sale of Atir, effective as of July 1, 1996. Gross Profit. The decrease in gross profit as a percentage of Semiconductor Segment sales for the three months and nine months ended September 30, 1996 as compared to the same periods in 1995 was primarily attributable to the impact of increased direct costs associated with the expansion of the Company's manufacturing capacity and the operation of the plant below capacity during the 1996 periods. The increase in gross profit as a percentage of Computer Segment sales was primarily due to improved profitability in the Company's Databit computer hardware subsidiary. Research and Development Expenses. The increase in research and development expenses (net of government grants) in the Semiconductor Segment reflected increased process development expenses related to the implementation of Tower's technology advancement plan. The increase in research and development expenses in the Computer Segment was primarily attributable to write-downs of previously capitalized software of the Professional Help Desk and Electric Power Supply Management projects during the third quarter of 1996. Selling, General and Administrative Expenses ("SG&A"). The decrease in SG&A in the Semiconductor Segment for the three months ended September 30, 1996 as compared to the same period in 1995 was primarily attributable to lower profit sharing expenses as a result of reduced profitability. The increase in SG&A in the Semiconductor Segment for the nine months ended September 30, 1996 as compared to the same period in 1995, was primarily attributable to a write-down of certain accumulated costs related to the specific location of a new manufacturing facility being contemplated by Tower. Operating Income. The decrease in operating income was primarily attributable to the aforementioned decrease in gross profit and increase in research and development costs. Financial Income and Expense. The decrease in financial income over financial expense for the three months ended September 30, 1996 compared with the same period in 1995 was primarily attributable to the Company's Tower subsidiary, which had lower monetary balances, higher exchange rate expenses and higher loan interest expenses during the current period. The increase in financial income for the nine months ended September 30, 1996 as compared to the same period in 1995 was primarily attributable to increased monetary balances in Tower, principally as a result of its public offering in July 1995. Other Income. The increase in other income for the three months and nine months ended September 30, 1996 was almost entirely attributable to the gain from the sale of the Company's interest in MIS Information Systems Holdings Ltd. Taxes on Income. The increase in taxes on income as a percentage of income before taxes was primarily attributable to (1) the recording of taxes payable on a dividend to be distributed by the Company's Tower subsidiary in the fourth quarter of 1996 and (2) the recording in the third quarter of 1995 of a non-taxable gain on changes in ownership interests in subsidiaries related to the a public offering of stock by the Company's Tower subsidiary of approximately $26.3 million. Financial Condition As of September 30, 1996, DSSI and its wholly-owned subsidiaries had working capital of $9.0 million including cash and cash equivalents of $2.1 million and marketable securities and short term bank deposits of $4.6 million. -10- As of September 30, 1996, Tower had working capital of $99.7 million, including cash and cash equivalents of $16.7 million and marketable securities and short term bank deposits of $79.9 million. In the first nine months of 1996 Tower generated cash from operations of $22.6 million and received grants from The Investment Center of the Israel Ministry of Industry and Trade of $24.0 million. During the first nine months of 1996, Tower used $46.6 million, net of the aforementioned government grants, for the purchase of fixed assets, primarily in connection with implementing its expansion and technology advancement plans. The decrease in cash and marketable securities, and increase in property and equipment since December 31, 1995 was attributable to the purchase by Tower of equipment related to its expansion and technology advancement plan. Tower's banks have agreed to make available to Tower, at its request, short-term credits in the aggregate amount of $30 million, subject to certain covenants. Tower declared a dividend payable on November 22, 1996 of $1.50 a share which will result in a total cash outlay by Tower of approximately $19.8 million. Out of this amount, DSSI will receive cash of approximately $4.1 million after applicable Israeli withholding taxes. As of September 30, 1996, DSI had working capital of $3.4 million, including cash and cash equivalents of $98,000 and marketable securities and short term bank deposits of $973,000. Certain DSI bank deposits serve as collateral for bank loans and guarantees. Impact of Inflation and Currency Fluctuations Approximately 90% of the Company's sales are denominated in dollars. The remaining portion is primarily denominated in New Israel Shekels ("NIS") that are linked to the dollar. Such sales transactions are negotiated in dollars but, for the convenience of the customer, are settled in NIS. These transaction amounts are linked to the dollar for the period between the date the transactions are entered into and the date they are effected and billed. Subsequent thereto, through the date of settlement, amounts are primarily unlinked. The majority of the Company's expenses in the first nine months of 1996 were in dollars or dollar-linked NIS and virtually all the remaining expenses were in NIS. The dollar cost of the Company's operations in Israel is influenced by the timing of, and the extent to which, any increase in the rate of inflation in Israel over the rate of inflation in the United States is not offset by the devaluation of the NIS in relation to the dollar. The Company believes that the rate of inflation in Israel has had a minor effect on its business to date. However, the Company's dollar costs in Israel will increase if inflation in Israel continues, as in the past years, to exceed the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind inflation in Israel. Tower has commitments outstanding in Japanese yen incurred for certain capital equipment expenditures. Tower purchases forward exchange contracts to reduce its financial exposure to fluctuations in the Japanese yen/US dollar exchange rate resulting from such commitments. The Company does not engage in any other hedging activities. As of September 30, 1996, virtually all of the Company's monetary assets and liabilities that were not denominated in dollars or dollar-linked NIS were denominated in NIS, and the net amount of such monetary assets and liabilities was not material. In the event that in the future the Company has material net monetary assets or liabilities that are not denominated in dollar-linked NIS, such net assets or liabilities would be subject to the risk of currency fluctuations. -11- DATA SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES PART II - Other information Item 1: Legal Proceedings Between June and September 1996, five suits were filed in the United States on behalf of a purported class of the shareholders of Tower, against Tower, its Co-chief Executive Officers, and its Chairman of the Board of Directors. Two of the actions were also brought against the Company. The complaints seek to certify a class of all persons who purchased or otherwise acquired Tower's ordinary shares between May 25, 1996 and June 10, 1996. The complaints allege, on behalf of the class, that the defendants made misstatements and omissions regarding (i) the relationship between Tower and a major customer and (ii) Tower's process development efforts in connection therewith, in violation of certain U.S. Federal securities laws. In November 1996, the court granted an order consolidating three of the actions and appointing lead plaintiffs and plaintiffs' counsel. Under the order, the plaintiffs are required to file an amended consolidated complaint before the end of 1996. The Company believes the aforementioned suits to be without merit and intends to vigorously defend itself against them. Tower has indemnified the defendants, up to the limits permitted by the Israel Companies Ordinance, from any liability arising out of the actions. The Company believes that it has sufficient insurance to cover the costs of defense of the actions and of any adverse determination or settlement. Other than as set forth above, the Company is not involved in any legal proceedings that management believes, individually or in the aggregate, may have a material adverse effect on the Company. Item 4: Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders (the "Meeting") was held on October 22, 1996. The following individuals were re-elected as directors of the Company at the Meeting: George Morgenstern Robert L. Kuhn Maxwell M. Rabb Harvey Eisenberg Allen L. Schiff Sheldon Krause No other matters were voted upon at the meeting. Item 6: Exhibits and Reports on Form 8-K Exhibits Exhibit 27.1 - Financial Data Schedule Reports on Form 8-K None 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 AND SOFTWARE INC. Dated: November 14, 1996 By: /s/ ------------------------------- Yacov Kaufman Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1996 SEP-30-1996 49,024 56,802 15,545 0 14,986 156,197 132,607 (25,222) 276,271 43,962 0 0 0 77 67,776 276,271 87,630 101,145 68,263 78,766 2,383 0 0 10,385 3,084 7,301 0 0 0 (109) ($0.01) ($0.02)
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