ACORN ENERGY, INC. - Quarter Report: 2005 September (Form 10-Q)
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,
2005
|
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
|
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
|
|_|
Yes
|
|X|
No
|
Number
of
shares outstanding of the registrant’s common stock, as of November 10, 2005:
8,116,691
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
|
PART
I. Financial
Information
|
||
|
Item
1. Unaudited
Consolidated Financial Statements
|
||
|
Consolidated
Balance Sheets as of December 31, 2004 and September 30,
2005
|
1
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the nine
and three
month periods ended September 30, 2004 and 2005
|
2
|
|
|
Consolidated
Statement of Changes in Shareholders’ Equity for the nine month period
ended September 30, 2005
|
3
|
|
|
Consolidated
Statements of Cash Flows for the nine month periods ended September
30,
2004 and 2005
|
4
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
11
|
|
|
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
|
16
|
|
|
Item
4. Controls
and Procedures
|
16
|
|
| PART II. Other Information | ||
|
Item
1. Legal
Proceedings
|
17
|
|
|
Item
6. Exhibits
|
17
|
|
| Signatures |
18
|
|
Certain
statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as “we
expect”, “we anticipate”, “we believe”, “we estimate” and other phrases of
similar meaning. Whether such statements ultimately prove to be accurate depends
upon a variety of factors that may affect our business and operations. Many
of
these factors are described in our most recent Annual Report on Form 10-K as
filed with Securities and Exchange Commission.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(in
thousands, except share and per share data)
|
ASSETS
|
As
of
December 31, 2004 |
As
of
September
30,
2005
|
|||||
|
Current
assets:
|
(unaudited)
|
||||||
|
Cash
and cash equivalents
|
$
|
685
|
$
|
674
|
|||
|
Short-term
bank deposits
|
72
|
--
|
|||||
|
Restricted
cash
|
354
|
924
|
|||||
|
Accounts
receivable, net
|
6,069
|
4,960
|
|||||
|
Unbilled
work-in-process
|
533
|
487
|
|||||
|
Inventory
|
61
|
92
|
|||||
|
Other
current assets
|
540
|
978
|
|||||
|
Total
current assets
|
8,314
|
8,115
|
|||||
|
Property
and equipment, net
|
649
|
572
|
|||||
|
Other
assets
|
737
|
373
|
|||||
|
Funds
in respect of employee termination benefits
|
2,836
|
1,406
|
|||||
|
Restricted
cash - non-current
|
--
|
1,125
|
|||||
|
Goodwill
|
4,408
|
129
|
|||||
|
Other
intangible assets, net
|
81
|
58
|
|||||
|
Total
assets
|
$
|
17,025
|
$
|
11,778
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Short-term
bank credit
|
$
|
729
|
$
|
210
|
|||
|
Current
maturities of long-term debt
|
466
|
163
|
|||||
|
Trade
accounts payable
|
2,283
|
2,299
|
|||||
|
Accrued
payroll, payroll taxes and social benefits
|
1,735
|
922
|
|||||
|
Other
current liabilities
|
2,227
|
2,912
|
|||||
|
Total
current liabilities
|
7,440
|
6,506
|
|||||
|
Long-term
liabilities:
|
|||||||
|
Investment
in Comverge, net
|
1,444
|
1,824
|
|||||
|
Long-term
debt
|
201
|
119
|
|||||
|
Liability
for employee termination benefits
|
4,279
|
2,288
|
|||||
|
Other
liabilities
|
65
|
18
|
|||||
|
Total
long-term liabilities
|
5,989
|
4,249
|
|||||
|
Minority
interests
|
1,471
|
--
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Common
stock - $0.01 par value per share:
|
|||||||
|
Authorized
- 20,000,000 shares; Issued - 8,937,395 shares at
December
31, 2004 and September 30, 2005
|
88
|
88
|
|||||
|
Additional
paid-in capital
|
39,733
|
39,733
|
|||||
|
Warrants
|
461
|
461
|
|||||
|
Deferred
compensation
|
(59
|
)
|
(42
|
)
|
|||
|
Accumulated
deficit
|
(34,290
|
)
|
(35,428
|
)
|
|||
|
Treasury
stock, at cost -820,704 shares at December 31, 2004 and September
30,
2005
|
(3,791
|
)
|
(3,791
|
)
|
|||
|
Accumulated
other comprehensive income (loss)
|
(17
|
)
|
2
|
||||
|
Total
shareholders’ equity
|
2,125
|
1,023
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
17,025
|
$
|
11,778
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
1
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated
Statements of Operations and Comprehensive Loss (unaudited)
(in
thousands, except net loss per share data)
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2004
|
2005
|
2004
|
2005
|
||||||||||
|
Sales:
|
|||||||||||||
|
Products
|
$
|
13,157
|
$
|
13,479
|
$
|
4,764
|
$
|
4,426
|
|||||
|
Projects
and services
|
2,753
|
3,148
|
745
|
847
|
|||||||||
|
Total
sales
|
15,910
|
16,627
|
5,509
|
5,273
|
|||||||||
|
Cost
of sales:
|
|||||||||||||
|
Products
|
10,801
|
11,065
|
3,887
|
3,643
|
|||||||||
|
Projects
and services
|
1,936
|
2,267
|
642
|
657
|
|||||||||
|
Total
cost of sales
|
12,737
|
13,332
|
4,529
|
4,300
|
|||||||||
|
Gross
profit
|
3,173
|
3,295
|
980
|
973
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development expenses
|
--
|
42
|
--
|
16
|
|||||||||
|
Selling,
marketing, general and administrative expenses
|
5,333
|
5,298
|
2,112
|
1,764
|
|||||||||
|
Total
operating expenses
|
5,333
|
5,340
|
2,112
|
1,780
|
|||||||||
|
Operating
loss
|
(2,160
|
)
|
(2,045
|
)
|
(1,132
|
)
|
(807
|
)
|
|||||
|
Interest
income
|
68
|
10
|
--
|
7
|
|||||||||
|
Interest
expense
|
(82
|
)
|
(81
|
)
|
(25
|
)
|
(28
|
)
|
|||||
|
Other
income, net
|
232
|
38
|
6
|
(23
|
)
|
||||||||
|
Loss
before taxes on income
|
(1,942
|
)
|
(2,078
|
)
|
(1,151
|
)
|
(851
|
)
|
|||||
|
Taxes
on income
|
(3
|
)
|
340
|
30
|
331
|
||||||||
|
Loss
from operations of the Company and its consolidated
subsidiaries
|
(1,939
|
)
|
(2,418
|
)
|
(1,181
|
)
|
(1,182
|
)
|
|||||
|
Share
of losses in Comverge
|
(1,066
|
)
|
(380
|
)
|
(382
|
)
|
--
|
||||||
|
Gain
on sale of shares of Comverge
|
705
|
--
|
705
|
--
|
|||||||||
|
Minority
interests
|
(59
|
)
|
(73
|
)
|
(11
|
)
|
(14
|
)
|
|||||
|
Net
loss from continuing operations
|
(2,359
|
)
|
(2,871
|
)
|
(869
|
)
|
(1,196
|
)
|
|||||
|
Net
income from discontinued operations, net of tax
|
1,499
|
818
|
397
|
154
|
|||||||||
|
Gain
on sale of discontinued operations, net of tax
|
--
|
915
|
--
|
915
|
|||||||||
|
Net
loss
|
(860
|
)
|
(1,138
|
)
|
(472
|
)
|
(127
|
)
|
|||||
|
Other
comprehensive income (loss), net of tax:
|
|||||||||||||
|
Differences
from translation of financial statements of subsidiaries
|
(159
|
)
|
19
|
11
|
204
|
||||||||
|
Comprehensive
income (loss)
|
$
|
(1,019
|
)
|
$
|
(1,119
|
)
|
$
|
(461
|
)
|
$
|
77
|
||
|
Basic
and diluted net income (loss) per share:
|
|||||||||||||
|
Loss
per share from continuing operations
|
$
|
(0.30
|
)
|
$
|
(0.35
|
)
|
$
|
(0.11
|
)
|
$
|
(0.15
|
)
|
|
|
Discontinued
operations
|
0.19
|
0.10
|
0.05
|
0.02
|
|||||||||
|
Gain
on sale of discontinued operations
|
--
|
0.11
|
--
|
0.11
|
|||||||||
|
Basic
and diluted net income (loss) per share
|
$
|
(0.11
|
)
|
$
|
(0.14
|
)
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
|
|
Weighted
average number of shares outstanding:
|
|||||||||||||
|
Basic
and diluted
|
7,927
|
8,117
|
7,936
|
8,117
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
2
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated
Statement of Changes in Shareholders’ Equity (unaudited)
Nine
months ended September 30, 2005
(in
thousands)
|
Number
of Shares
|
Common
Stock
|
Additional
Paid-In
Capital
|
Warrants
|
Stock-Based
Deferred Compensation
|
Accumulated
Deficit
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Total
|
||||||||||||||||||||
|
Balances
as of
December
31, 2004 (audited)
|
8,937
|
$
|
88
|
$
|
39,733
|
$
|
461
|
$
|
(59
|
)
|
$
|
(34,290
|
)
|
$
|
(3,791
|
)
|
$
|
(17
|
)
|
$
|
2,125
|
|||||||
|
Amortization
of stock-based deferred compensation
|
-
|
-
|
-
|
-
|
17
|
-
|
-
|
-
|
17
|
|||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(1,138
|
)
|
-
|
-
|
(1,138
|
)
|
|||||||||||||||||
|
Differences
from translation of financial statements of subsidiaries
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
19
|
19
|
|||||||||||||||||||
|
Balances
as of
September
30, 2005
|
8,937
|
$
|
88
|
$
|
39,733
|
$
|
461
|
$
|
(42
|
)
|
$
|
(35,428
|
)
|
$
|
(3,791
|
)
|
$
|
2
|
$
|
1,023
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
3
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (unaudited)
(dollars
in thousands)
|
Nine
months ended September 30,
|
|||||||
|
2004
|
2005
|
||||||
|
Cash
flows used in operating activities:
|
|||||||
|
Net
loss
|
$
|
(860
|
)
|
$
|
(1,138
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities - Appendix A:
|
318
|
(199
|
)
|
||||
|
Net
cash used in operating activities
|
(542
|
)
|
(1,337
|
)
|
|||
|
Cash
flows provided by (used in) investing activities:
|
|||||||
|
Restricted
cash (current and non-current)
|
--
|
(1,426
|
)
|
||||
|
Amounts
funded for employee termination benefits
|
(257
|
)
|
(46
|
)
|
|||
|
Maturity
of short-term deposits
|
72
|
||||||
|
Proceeds
from sale of Comverge shares
|
975
|
--
|
|||||
|
Proceeds
from sale of property and equipment
|
52
|
122
|
|||||
|
Acquisitions
of property and equipment
|
(99
|
)
|
(183
|
)
|
|||
|
Business
disposition - Appendix B
|
--
|
2,927
|
|||||
|
Net
cash provided by investing activities
|
671
|
1,466
|
|||||
|
Cash
flows provided by (used in) financing activities:
|
|||||||
|
Short-term
debt borrowings (repayments), net
|
--
|
182
|
|||||
|
Proceeds
from note payable to a related party
|
--
|
425
|
|||||
|
Repayment
of note payable to a related party
|
--
|
(425
|
)
|
||||
|
Proceeds
from long-term debt
|
--
|
90
|
|||||
|
Repayments
of long-term debt
|
(481
|
)
|
(412
|
)
|
|||
|
Exercise
of options
|
35
|
--
|
|||||
|
Net
cash used in financing activities
|
(446
|
)
|
(140
|
)
|
|||
|
Net
decrease in cash and cash equivalents
|
(317
|
)
|
(11
|
)
|
|||
|
Cash
and cash equivalents at beginning of period
|
1,213
|
685
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
896
|
$
|
674
|
|||
|
Supplemental
cash flow information:
|
|||||||
|
Cash
paid during period for interest
|
$
|
113
|
$
|
127
|
|||
|
Cash
paid during period for income taxes
|
$
|
35
|
$
|
41
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
4
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (unaudited)
(dollars
in thousands)
|
Nine
months ended September 30,
|
|||||||
|
2004
|
2005
|
||||||
|
Appendix
A
|
|||||||
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
$
|
177
|
$
|
198
|
|||
|
Minority
interests
|
59
|
73
|
|||||
|
Share
in losses of Comverge
|
1,066
|
380
|
|||||
|
Change
in deferred taxes
|
(9
|
)
|
311
|
||||
|
Increase
in liability for employee termination benefits
|
367
|
49
|
|||||
|
Gain
on disposition of property and equipment
|
(4
|
)
|
(33
|
)
|
|||
|
Gain
on sale of dsIT Technologies
|
--
|
(915
|
)
|
||||
|
Gain
on sale of Comverge shares
|
(705
|
)
|
--
|
||||
|
Stock
and stock-based compensation
|
75
|
17
|
|||||
|
Other
|
(33
|
)
|
(62
|
)
|
|||
|
Change
in operating assets and liabilities, net of effect of
disposition:
|
|||||||
|
Increase
in accounts receivable, unbilled work-in-process and other current
and
other assets
|
658
|
164
|
|||||
|
(Decrease)
increase in inventory
|
1
|
(31
|
)
|
||||
|
Decrease
in accounts payable and other liabilities
|
(1,334
|
)
|
(350
|
)
|
|||
|
Total
|
$
|
318
|
$
|
(199
|
)
|
||
|
Appendix
B
|
||||
|
Assets/liabilities
disposed of in disposition of dsIT Technologies:
|
||||
|
Current
assets
|
$
|
679
|
||
|
Non-current
assets
|
1,134
|
|||
|
Goodwill
|
4,301
|
|||
|
Short-term
debt
|
(701
|
)
|
||
|
Current
liabilities
|
(327
|
)
|
||
|
Other
liabilities
|
(1,455
|
)
|
||
|
Minority
interests
|
(1,552
|
)
|
||
|
Unpaid
transaction costs in disposition of dsIT Technologies
|
(67
|
)
|
||
|
Gain
on the sale of dsIT Technologies
|
915
|
|||
|
Net
cash provided by business disposition
|
$
|
2,927
|
||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
5
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
(dollars
in thousands)
Note
1: Basis of Presentation
The
accompanying unaudited consolidated financial statements of Data Systems &
Software Inc. (“DSSI”) and subsidiaries (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and with the instructions to Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation
have
been included. Operating results for the three and nine month periods ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2004. Certain
reclassifications have been made to the Company’s consolidated financial
statements for prior periods to conform to the consolidated financial statement
presentation for the current period.
As
further described in Note 3, in August 2005, the Company completed the sale
of
the outsourcing consulting business of the Company’s subsidiary, dsIT
Technologies Ltd. The transferred operation is reflected as a discontinued
operation for all periods presented.
Note
2: Financing of Operations
As
of
September 30, 2005, the Company had working capital of $1,609, including $674
in
non-restricted cash and cash equivalents. Net cash used in the first nine months
of 2005 was $11. Net cash of $469 was used in operating activities during the
first nine months of 2005. The net loss for the nine-month period ended
September 30, 2005 of $1,138, was primarily due to corporate expenses of $1,250,
losses of $565 from the continuing operations of the software consulting and
development segment and the Company’s share of unconsolidated losses of Comverge
of $380. These losses were partially offset by the gain of $915 on the sale
of
the outsourcing consulting business and net income from those discontinued
operations of $818. The Company's use of cash in operating activities of $1,337
during the first nine months of 2005 was primarily due to the aforementioned
gain of $915 and to reductions in accounts payable and other liabilities of
$186
and the cash operating loss. Net cash of $1,466 was provided from investing
activities, primarily as the net result of the cash provided by the sale of
the
outsourcing consulting business of $2,927 less increases in restricted cash
of
$1,426. Net cash of $140 used in financing activities was for the repayment
of
long-term debt. .
Of
the
total working capital at September 30, 2005, approximately $380 was in the
Company’s majority owned dsIT Solutions Ltd. subsidiary (dsIT). Due to bank
covenants, as well as the significant minority interest in dsIT, such working
capital and cash flows from dsIT’s operations are not readily available to
finance U.S. activities.
dsIT
is
utilizing approximately $210 of its $240 line of credit as of September 30,
2005. dsIT's line of credit is denominated in NIS and bears an interest rate
of
the Israeli prime rate plus 3.05% per annum. The Israeli prime rate fluctuates
and as of September 30, 2005 is 5.0%. In October 2005, dsIT opened a new line
of
credit of approximately $90 with another Israeli bank. The new line of credit
is
denominated in NIS; the interest rate is currently being negotiated.
-
6
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
(in
thousands, except per share data)
On
August
18, 2005, the Company closed a transaction consummating the sale of the
outsourcing consulting business of the Company’s subsidiary, dsIT Technologies
Ltd., initially receiving approximately $3,143 on account of its share of the
gross proceeds paid at closing. Upon receiving these proceeds, in accordance
with the CEO’s employment contract, the Company set aside $1,425, to secure
finance for this agreement. As a result of the segregation of these funds,
unrestricted cash in the US will not be required in future periods to finance
corporate compensation expenses. Immediately after the sale of the consulting
business, dsIT began a process for refocusing its activities, initiating
measures to improve the results from its remaining operations and its liquidity
based on these operations. There is no assurance these measures will be
successful and the Company may need to provide supplementary financing, or
sell
all or part of that business. The Company believes that the unrestricted cash
available at September 30, 2005, approximately $400 of restricted cash released
in November 2005 and anticipated profits from US operations will provide more
than sufficient liquidity to finance DSSI’s activities for the foreseeable
future and for the next 12 months in particular.
Note
3: Discontinued Operations
On
August
18, 2005, the Company completed the sale of the outsourcing consulting business
of the Company’s subsidiary, dsIT Technologies Ltd., to Taldor Computer Systems
(1986) Ltd. (Taldor). The operations that were sold are comprised of dsIT's
business of providing computer software and systems professionals on a time
and
materials basis to clients in Israel. Together with the sale transaction, the
Company issued to Taldor a warrant to purchase 10% of dsIT Solutions. The fair
value of the warrant was estimated using the Black-Scholes model to be of an
immaterial amount. As a result, the Company recorded a gain from the sale of
discontinued operations of $915, net of tax.
Profit
and loss of the discontinued operations associated with dsIT were as
follows:
|
Nine
months ended
September 30, |
Three
months ended
September 30, |
||||||||||||
|
2004
|
2005
|
2004
|
2005
|
||||||||||
|
Sales
|
$
|
6,127
|
$
|
5,219
|
$
|
1,973
|
$
|
916
|
|||||
|
Cost
of sales
|
4,768
|
4,111
|
1,497
|
723
|
|||||||||
|
Gross
profit
|
1,359
|
1,109
|
476
|
193
|
|||||||||
|
Income
from operations
|
1,196
|
1,022
|
420
|
186
|
|||||||||
|
Interest
expense, net
|
32
|
59
|
12
|
19
|
|||||||||
|
Net
income from discontinued operations, net of income taxes
|
$
|
1,151
|
$
|
818
|
$
|
397
|
$
|
154
|
|||||
-
7
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
(in
thousands, except per share data)
Note
4: Investment in Comverge
Comverge’s
summary results of operations for the three and nine month periods ended
September 30, 2005 is as follows:
|
Results
of Operations
|
Nine
months ended
|
Three
months ended
|
|||||
|
September
30, 2005
|
|||||||
|
Sales
|
$
|
13,214
|
$
|
5,380
|
|||
|
Gross
profit
|
5,468
|
2,159
|
|||||
|
Net
loss
|
(8,934
|
)
|
(2,819
|
)
|
|||
The
change in the Company’s Comverge investment, during the nine months ended
September 30, 2005 is as follows:
|
Common
stock
|
Preferred
stock
|
Net
investment in Comverge
|
||||||||
|
Balances
as of December 31, 2004
|
$
|
(1,824
|
)
|
$
|
380
|
$
|
(1,444
|
)
|
||
|
Equity
loss in Comverge
|
--
|
(380
|
)
|
(380
|
)
|
|||||
|
Balances
as of September 30, 2005
|
$
|
(1,824
|
)
|
$
|
--
|
$
|
(1,824
|
)
|
||
As
the
Company’s share of losses attributable to its Comverge preferred stock has
equaled its investment in Comverge’s preferred stock, the Company ceased
recording equity losses in Comverge. In the future, equity income will be
recorded to the Company’s preferred stock investment (the Company currently owns
approximately 7% of Comverge’s preferred stock), only once Comverge’s equity
reaches the level it was when the Company ceased recording equity losses. As
at
September 30, 2005, the Company has a provision for unrecognized losses in
Comverge of $240. As at September 30, 2005, the Company will record equity
income from its preferred investment in Comverge, if and when Comverge’s records
net income in excess of approximately $3,450. Equity income from the Company’s
preferred investment may be recorded up to the Company’s original $3,644
preferred
share investment in Comverge, and thereafter to its investment in Comverge’s
common shares, of which the Company currently owns approximately
76%.
Note
5--Goodwill and Other Intangible Assets
The
entire balance of goodwill was in the software consulting and development
segment. As a result of the Taldor transaction, goodwill of $4,380 associated
with the transferred business was eliminated, with only the $50 associated
with
dsIT’s continuing business remaining on the books. An additional $79 of goodwill
was created as a result of the increase in the Company’s holdings in dsIT
Solutions from 68% to 80%.
The
Company’s amortizable intangible assets consisted of software licenses, with a
gross carrying amount of $260 and $66, and accumulated amortization of $179
and
$8, as of December 31, 2004 and September 30, 2005, respectively. All
intangibles assets are being amortized over their estimated useful lives, which
averaged five years and the amortization
expense for each of the nine months ended September 30, 2004 and 2005 amounted
to $24. Amortization expense of the remaining balance is estimated to be $32,
and $26, for the years ending September 30, 2006, and 2007,
respectively.
Note
6: Warranty Provision
The
Company grants its customers one-year product warranty. No provision was made
in
respect of warranties based on the Company’s previous history.
-
8
-
Note
7: Stock-Based
Compensation
The
Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting
for Stock Issued to Employees” and the related interpretations in accounting for
its stock option grants to employees and directors, with the disclosure
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB
No. 25, compensation expense is computed under the intrinsic value method of
accounting to the extent that the fair value of the underlying shares on the
date of the grant exceed the exercise price of the share option, and thereafter
amortized on a straight-line basis against income over the expected service
period.
Had
compensation cost for the Company’s option plans been determined based on the
fair value at the grant dates of awards, consistent with the method prescribed
in SFAS No. 123, the Company’s net loss and loss per share would have been
changed to the pro forma amounts indicated below:
|
Nine
months ended
September
30,
|
Three
months ended
September 30, |
||||||||||||
|
|
2004
|
2005
|
2004
|
2005
|
|||||||||
|
Net
income (loss) as reported
|
$
|
(860
|
)
|
$
|
(1,138
|
)
|
$
|
(472
|
)
|
$
|
(127
|
)
|
|
|
Plus:
Stock-based employee and director compensation expense
included in
reported net loss
|
75
|
17
|
75
|
5
|
|||||||||
|
Less:
Total stock-based employee compensation expense determined
under fair
value based method for all awards
|
136
|
242
|
75
|
80
|
|||||||||
|
Pro
forma net income (loss)
|
$
|
(921
|
)
|
$
|
(1,363
|
)
|
$
|
(472
|
)
|
$
|
(202
|
)
|
|
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
and diluted - as reported
|
$
|
(0.11
|
)
|
$
|
(0.14
|
)
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
|
|
Basic
and diluted - pro forma
|
$
|
(0.12
|
)
|
$
|
(0.17
|
)
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
|
|
|
|||||||||||||
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.
The
Company accounts for stock-based compensation issued to non-employees on a
fair
value basis in accordance with SFAS No. 123 and EITF Issue No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and related
interpretations.
-
9
-
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
(in
thousands except per share data)
Note
8: Segment Information
|
Software
Consulting and Development
|
Computer
Hardware
|
Other
(*)
|
Total
|
||||||||||
|
Nine
months ended September 30, 2005:
|
|||||||||||||
|
Revenues
from external customers
|
$
|
2,966
|
$
|
13,637
|
$
|
24
|
$
|
16,627
|
|||||
|
Intersegment
revenues
|
--
|
15
|
--
|
15
|
|||||||||
|
Segment
gross profit
|
774
|
2,497
|
24
|
3,295
|
|||||||||
|
Segment
income (loss)
|
(1,400
|
)
|
118
|
17
|
(1,265
|
)
|
|||||||
|
Nine
months ended September 30, 2004:
|
|||||||||||||
|
Revenues
from external customers
|
$
|
2,549
|
$
|
13,335
|
$
|
26
|
$
|
15,910
|
|||||
|
Intersegment
revenues
|
--
|
--
|
--
|
--
|
|||||||||
|
Segment
gross profit
|
697
|
2,450
|
26
|
3,173
|
|||||||||
|
Segment
income (loss)
|
(943
|
)
|
231
|
6
|
(706
|
)
|
|||||||
|
Three
months ended September 30, 2005:
|
|||||||||||||
|
Revenues
from external customers
|
$
|
779
|
$
|
4,491
|
$
|
3
|
$
|
5,273
|
|||||
|
Intersegment
revenues
|
--
|
--
|
--
|
--
|
|||||||||
|
Segment
gross profit
|
149
|
821
|
3
|
973
|
|||||||||
|
Segment
income (loss)
|
(799
|
)
|
33
|
1
|
(765
|
)
|
|||||||
|
Three
months ended September 30, 2004:
|
|||||||||||||
|
Revenues
from external customers
|
$
|
702
|
$
|
4,806
|
$
|
1
|
$
|
5,509
|
|||||
|
Intersegment
revenues
|
--
|
--
|
--
|
--
|
|||||||||
|
Segment
gross profit
|
86
|
893
|
1
|
980
|
|||||||||
|
Segment
loss
|
(374
|
)
|
(60
|
)
|
(1
|
)
|
(435
|
)
|
|||||
___________
(*) Represents
VAR software operations in Israel that did not meet the quantitative thresholds
of SFAS No. 131.
Reconciliation
of Segment Loss to Consolidated Net Loss
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2004
|
2005
|
2004
|
2005
|
||||||||||
|
Total
loss for reportable segments
|
$
|
(712
|
)
|
$
|
(1,282
|
)
|
$
|
(434
|
)
|
$
|
(766
|
)
|
|
|
Other
operational segment income (loss)
|
6
|
17
|
(1
|
)
|
1
|
||||||||
|
Total
operating loss
|
(706
|
)
|
(1,265
|
)
|
(435
|
)
|
(765
|
)
|
|||||
|
Net
loss of corporate headquarters
|
(1,292
|
)
|
(1,226
|
)
|
(773
|
)
|
(431
|
)
|
|||||
|
Share
of losses in Comverge
|
(1,066
|
)
|
(380
|
)
|
(382
|
)
|
--
|
||||||
|
Gain
on sale of shares of Comverge
|
705
|
--
|
705
|
--
|
|||||||||
|
Gain
on sale of discontinued operations
|
--
|
915
|
--
|
915
|
|||||||||
|
Discontinued
operations income
|
1,499
|
818
|
413
|
154
|
|||||||||
|
Total
consolidated net income (loss)
|
$
|
(860
|
)
|
$
|
(1,138
|
)
|
$
|
(472
|
)
|
$
|
(127
|
)
|
|
-
10
-
Data
Systems & Software Inc.
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 in this report and in “Item 1. Description of Business-Factors
That May Influence Future Results” in our Annual Report on Form 10-K for the
year ended December 31, 2004.
Overview
and Trend Information
During
the periods included in this report, we operated in two reportable segments:
software consulting and development and computer hardware. The following
analysis should be read together with the segment information provided in Note
7
to the interim unaudited consolidated financial statements included in this
quarterly report, which information is hereby incorporated by reference into
this Item 2.
Software
Consulting and Development
On
August
18, 2005 we closed on the previously announced sale of dsIT's outsourcing
consulting business. These operations accounted for approximately two-thirds
of
this segment’s revenues during recent quarters and as a result, revenues in the
coming quarters will be greatly decreased from the levels previously reported.
dsIT has begun a restructuring process to adapt its operations and
infrastructure to its continuing operations which it expects to complete during
the next few months.
Since
the
sale, segment revenues will be generated almost entirely from dsIT’s project
development services and solutions activities, both defense and commercial,
dsIT’s defense solutions focus particularly on sonar technology and
include:
| · |
Diver
Detection Sonar (DDS);
|
| · |
Mobile
Acoustic Range (MAR);
|
| · |
Harbor
Surveillance System (HSS); and
|
| · |
Generic
sonar simulator solutions, sonar system upgrades and underwater navigation
systems.
|
dsIT’s
commercial IT solutions include:
| · |
OncoPro™,
a cutting edge solution for chemotherapy treatment, integrating patient
data with medical knowledge bases, and enabling simplified management
of
daily ward functions and creation of complex protocols,
and;
|
| · |
EasyBill,
a customer care and billing system for small and midsize
companies.
|
dsIT
has
initiated discussions for strategic alliances for marketing its sonar technology
products and its OncoPro™ product. We expect some of these discussions to come
to fruition already during the next quarter.
Computer
Hardware Sales
Computer
hardware sales and gross profit margins this quarter were higher than those
in
previous quarters, although still below those of the third quarter last year.
We
believe this improvement will continue in the fourth quarter of this year and
into next year.
We
currently expect the increase in the coming quarters of 2005 to come also from
new VAR activity in the area of integrated hardware/software security solutions
for computer LAN and WAN networks and related services, leveraging our existing
VAR customer base.
-
11
-
Energy
Intelligence Solutions
We
continue to account for Comverge on the equity method; however since our losses
to date exceed our investment, Comverge’s losses no longer affect our
consolidated results.
Comverge
has recently formed a strategic alliance with, Cellnet Technology, Inc.
(Cellnet®), a leading provider of real-time fixed network solutions to the
utility industry, for implementing full-scale AMI and Demand Response systems
over a fixed network.
Under
the
agreement, Cellnet will integrate and resell Comverge’s solutions for smart
thermostats, load control, and sub-metering, and Comverge will in turn deploy
solutions that use the Cellnet mesh network radio technology. The companies
are
working collaboratively on R&D projects to bring the first components of a
combined solution to the utility market.
In
addition, Comverge has worked on and enhanced its existing alliances. In
September, it completed development of the Maingate® S4e endpoint, a combination
of Comverge’s under-glass AMR Gateway and Landis+Gyr’s S4e meter platform, with
commercial release scheduled for the fourth quarter, as well as release of
a
demand response capable thermostat platform for electric utility peak load
management programs together with Emerson Climate TechnologiesTM,
a
business of Emerson Electric Company (NYSE: EMR).
Due
to
the structure of its largest VPC contract, Comverge’s results continue to suffer
from revenue recognition constraints. Based on the conditions of that contract,
recognition of revenues is dependent on the results of certain tests, which
can
only be performed in the summer months. These tests were performed during the
second half of the third quarter, with initial positive results and they
currently expect to recognize a significant portion of the deferred revenue
and
resulting gross profit in the next quarter. Total deferred revenue and gross
profits at September 30, 2005 were approximately $8.5 million and $6.3 million,
respectively.
Comverge’s
continued marketing, installation and development of product require significant
financial resources. To the extent required, it intends to utilize and further
increase its bank credit lines and seek additional investor
financing.
Corporate
During
this quarter we completed the sale of dsIT’s consulting division. The sale
provided us with a significant injection of cash, allowing us to fund certain
required payments and giving us the ability to continue to pursue other parts
of
our business. This sale, in addition to previous attempted transactions which
were not consummated, resulted in considerable professional fees and other
transaction costs which impacted the results for the third quarter of 2005.
We
expect these professional fees to be significantly reduced in the near future.
In addition, we expect that our corporate compensation expense to be
significantly reduced as a result of the recently announced resignation of
our
CFO.
-
12
-
Results
of Operations
The
following table sets forth certain information with respect to the consolidated
results of operations of the Company for the three and nine months ended
September 30, 2004 and 2005, including the percentage of total revenues during
each period attributable to selected components of the operations statement
data
and for the period-to-period percentage changes in such components. Since we
sold dsIT’s consulting business in August 2005, the activity in this business
has been reclassified and consolidated on one line as net income from
discontinued operations, after tax.
|
Nine
months ended September 30,
|
Three
months ended September 30,
|
||||||||||||||||||||||||||||||
|
2004
|
2005
|
Change
|
2004
|
2005
|
Change
|
||||||||||||||||||||||||||
|
($,000)
|
%
of sales
|
($,000)
|
%
of sales
|
%
from 2004
|
($,000)
|
%
of sales
|
($,000)
|
%
of sales
|
%
from 2004
|
||||||||||||||||||||||
|
Sales
|
$
|
15,910
|
100
|
%
|
$
|
16,627
|
100
|
%
|
5
|
%
|
$
|
5,509
|
100
|
5,273
|
100
|
(4
|
)%
|
||||||||||||||
|
Cost
of sales
|
12,737
|
80
|
13,332
|
80
|
5
|
4,529
|
82
|
4,300
|
82
|
(5
|
)
|
||||||||||||||||||||
|
Gross
profit
|
3,173
|
20
|
3,295
|
20
|
4
|
980
|
18
|
973
|
18
|
(1
|
)
|
||||||||||||||||||||
|
R&D
expenses
|
--
|
--
|
42
|
0
|
--
|
--
|
16
|
0
|
|||||||||||||||||||||||
|
SMG&A
expenses
|
5,333
|
34
|
5,298
|
32
|
(1
|
)
|
2,112
|
38
|
1,764
|
33
|
(16
|
)
|
|||||||||||||||||||
|
Operating
loss
|
(2,160
|
)
|
(14
|
)
|
(2,045
|
)
|
(12
|
)
|
(5
|
)
|
(1,132
|
)
|
(21
|
)
|
(807
|
)
|
(15
|
)
|
(29
|
)
|
|||||||||||
|
Interest
expense, net
|
(14
|
)
|
0
|
(71
|
)
|
0
|
407
|
(25
|
)
|
0
|
(21
|
)
|
0
|
(16
|
)
|
||||||||||||||||
|
Other
income, net
|
232
|
1
|
38
|
0
|
(84
|
)
|
6
|
0
|
(23
|
)
|
0
|
(483
|
)
|
||||||||||||||||||
|
Loss
before taxes on income
|
(1,942
|
)
|
(12
|
)
|
(2,078
|
)
|
(12
|
)
|
7
|
(1,151
|
)
|
(21
|
)
|
(851
|
)
|
(16
|
)
|
(26
|
)
|
||||||||||||
|
Taxes
on income
|
(3
|
)
|
0
|
340
|
2
|
30
|
1
|
331
|
6
|
||||||||||||||||||||||
|
Loss
from operations of the Company and its consolidated
subsidiaries
|
(1,939
|
)
|
(12
|
)
|
(2,418
|
)
|
(15
|
)
|
25
|
(1,181
|
)
|
(21
|
)
|
(1,182
|
)
|
(22
|
)
|
0
|
|||||||||||||
|
Gain
on sale of shares of Comverge
|
705
|
4
|
--
|
--
|
705
|
13
|
--
|
--
|
|||||||||||||||||||||||
|
Share
in losses of Comverge
|
(1,066
|
)
|
(7
|
)
|
(380
|
)
|
(2
|
)
|
(64
|
)
|
(382
|
)
|
(7
|
)
|
--
|
--
|
|||||||||||||||
|
Minority
interests
|
(59
|
)
|
0
|
(73
|
)
|
0
|
24
|
(11
|
)
|
0
|
(14
|
)
|
0
|
27
|
|||||||||||||||||
|
Net
loss from continuing operations
|
(2,359
|
)
|
(15
|
)
|
(2,871
|
)
|
(17
|
)
|
22
|
(869
|
)
|
(16
|
)
|
(1,196
|
)
|
(23
|
)
|
38
|
|||||||||||||
|
Gain
on sale of discontinued operations, net of tax
|
--
|
--
|
915
|
6
|
--
|
--
|
915
|
17
|
|||||||||||||||||||||||
|
Net
income from discontinued operations, net of tax
|
1,499
|
9
|
818
|
5
|
(45
|
)
|
397
|
7
|
154
|
3
|
(61
|
)
|
|||||||||||||||||||
|
Net
income (loss)
|
$
|
(860
|
)
|
(5
|
)%
|
$
|
(1,138
|
)
|
(7
|
)%
|
32
|
%
|
$
|
(472
|
)
|
(9
|
)%
|
$
|
(127
|
)
|
(2
|
)%
|
(73
|
)%
|
|||||||
Sales.
Sales in
the first nine months of 2005 increased by $0.7 million, from $15.9 million
in
the first nine months of 2004, to $16.6 million in 2005. This increase was
due
to increased sales in both segments, particularly in the first quarter of this
year. Sales in the third quarter of 2005 decreased by $0.2M, in comparison
to
those in the third quarter of 2004. The decrease in sales was due to a $0.3
million decrease in computer hardware sales, partially offset by a $0.1 million
increase in software development sales.
Gross
profit.
Gross
profit
in the
first nine months of 2005 increased by $0.1 million, compared to the first
nine
months of 2004, due to increased gross profit in both segments, resulting
primarily from the increase in sales in the first quarter of this year. Gross
profit in the third quarter of 2005 remained virtually unchanged, despite the
decrease in sales during that period, as a result of improved gross profit
margins in the software development segment.
Selling,
marketing, general and administrative expenses (“SMG&A”). SMG&A
in the first nine months
of
2005 decreased marginally, due the decrease in the third quarter of 2005.
SMG&A decreased $0.3 million, from $2.1 million in the third quarter of
2004, to $1.8 million in the third quarter of 2005. The decrease was primarily
due to a decrease in corporate professional fees, as well as compensation
expenses in the computer hardware segment, both of which were extraordinarily
high in the third quarter of 2004.
-
13
-
Taxes
on Income. The
income tax expense in the third quarter of 2005 and in the first nine months
of
2005, was primarily due to a one-time expense due to the reorganization of
business at dsIT, as a result of which, previously recognized foreign income
tax
assets were expensed.
Share
of losses in Comverge. In
the
second quarter of 2005, the carrying value of our investment in Comverge's
common stock and preferred stock was reduced to zero. As such, Comverge had
no
effect on our results in the third quarter of 2005. Our
share
of Comverge's $8.9 million of net losses in the first nine months of 2005,
was
$0.4 million. In the future, when Comverge begins to show profit, after it
has
reached the level of equity at which we ceased recording equity losses, we
will
record 7% of that income as equity income to our preferred investment up to
our
original $3.6 million preferred share investment in Comverge, and thereafter
to
our investment in Comverge’s common shares, of which we currently own
approximately 76%.
Gain
on sale of shares in Comverge.
During
the third quarter of 2004, we sold a portion of our investment in Comverge,
as a
result which we recorded a capital gain of approximately $0.7
million.
Gain
on sale of discontinued operations, net of tax. This
gain
resulted from the sale of dsIT’s consulting business during the third quarter of
2005.
Net
income from discontinued operations, net of tax. As
a
result of the aforementioned sale, all the activity stemming from software
consulting business in Israel was reclassified in the current periods and all
prior periods and the condensed result of these operations are presented as
net
income from discontinued operations. The decrease is entirely attributable
to
the fact that the third quarter of 2005 included activity only up to the date
of
the sale, which occurred in the middle of the quarter.
Liquidity
and Capital Resources
As
of
September 30, 2005, we had working capital of $1.6 million, including $0.7
million in non-restricted cash and cash equivalents. Net cash used in the first
nine months of 2005 was $0.0 million. Net cash of $0.5 million was used in
operating activities during the first nine months of 2005. The net loss for
the
nine-month period ended September 30, 2005 of $1.1 million was primarily due
to
corporate expenses of $1.3 million, losses of $0.6 million from the continuing
operations of the software, consulting and development segment and our share
of
unconsolidated losses of Comverge of $0.4 million. These losses were partially
offset by the gain of $0.9 million on the sale of the outsourcing consulting
business and net income from those discontinued operations of $0.8 million.
Our
use of cash in operating activities during the first nine months of 2005 was
primarily due to the aforementioned gain of $0.9 million and increases in
accounts receivables, unbilled work-in-process and other current assets as
well
as reductions in accounts payable and other liabilities of $0.2 million, net.
Net cash of $1.5 million was provided from investing activities, primarily
as
the net result of the cash provided by the sale of the outsourcing consulting
business of $2.9 million less increases in restricted cash of $1.4 million.
Net
cash of $0.1 million used in financing activities was from the repayment of
debt, net.
Of
the
total working capital at September 30, 2005, approximately $0.4 million was
in
our majority owned dsIT Solutions Ltd. subsidiary (dsIT). Due to Israeli tax
and
company law constraints, as well as the significant minority interest in dsIT,
such working capital and cash flows from dsIT’s operations are not readily
available to finance U.S. activities.
As
of
October 31, 2005 our wholly owned US operations (i.e., excluding dsIT and
Comverge) had an aggregate of $0.5 million in unrestricted cash and cash
equivalents, reflecting a $0.2 million decrease from the balance as of December
31, 2004.
On
August
18, 2005, we closed a transaction consummating the sale of the outsourcing
consulting business of the our dsIT subsidiary receiving at closing
approximately $3.1 million as our share of the gross proceeds paid at
closing.
-
14
-
Upon
receiving these proceeds, in accordance with the CEO’s employment contract, the
Company set aside $1.4 million, to secure finance for this agreement. As a
result, the segregation of these funds, unrestricted cash in the US will not
be
required in future periods to finance corporate compensation expenses.
Immediately after the sale of the consulting business, dsIT began a process
for
refocusing its activities, initiating measures to improve the results from
its
remaining operations and its liquidity based on these operations. There is
no
assurance these measures will be successful and we may need to provide
supplementary financing, or sell all or part of that business. We believe that
unrestricted cash available together with the approximately $0.4 million of
restricted cash released in November 2005 and anticipated profits from US
operations will provide more than sufficient liquidity to finance DSSI’s
activities for the foreseeable future and for the next 12 months in
particular.
The
proceeds from the transaction will provide more than sufficient liquidity for
our activities for the foreseeable future and the next 12 months in particular.
Contractual
Obligations and Commitments
Our
contractual obligations and commitments at September 30, 2005, excluding certain
severance arrangements described below, principally include obligations
associated with our outstanding indebtedness, future minimum operating lease
obligations and contractual obligations to our CEO for payments for his
post-retirement consulting services to us, are as set forth in the table below.
|
Cash
Payments Due During Year Ending September 30,
|
||||||||||||||||
|
(amounts
in thousands)
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
2006
|
2007-2008
|
2009-2010
|
2011
and thereafter
|
|||||||||||
|
Long-term
debt
|
$
|
208
|
$
|
147
|
$
|
61
|
$
|
--
|
$
|
--
|
||||||
|
Contingent
performance of bank guarantees (1)
|
410
|
410
|
--
|
--
|
--
|
|||||||||||
|
Operating
leases
|
2,142
|
776
|
1,073
|
293
|
--
|
|||||||||||
|
Potential
severance obligations to Israeli employees (2)
|
2,871
|
584
|
70
|
29
|
2,188
|
|||||||||||
|
Consulting
agreement with CEO (3)
|
1,425
|
1,425
|
--
|
--
|
--
|
|||||||||||
|
Purchase
commitments
|
--
|
--
|
--
|
--
|
--
|
|||||||||||
|
Other
long-term liabilities reflected on the balance sheet in accordance
with
GAAP
|
--
|
--
|
--
|
--
|
--
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
7,056
|
$
|
3,342
|
$
|
1,204
|
$
|
322
|
$
|
2,188
|
||||||
We
expect
to finance these contractual commitments from cash on hand, cash from the sale
of dsIT’s outsourcing consulting business and cash generated from operations.
(1)
Previously, we accrued a loss for contingent performance of bank guarantees.
Our
remaining commitment under these guarantees is $0.4 million at September 30,
2005. We have collateralized a portion of these guarantees by means of a deposit
of $0.2 million as of September 30, 2005. The obligation is presented as a
current liability, though it is uncertain as to when actual payment may be
made.
(2)
Under
Israeli law and labor agreements, dsIT is required to make severance payments
to
dismissed employees and to employees leaving employment under 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.
As of
September 30, 2005, we accrued a total of $2.9 million for potential severance
obligations which is included in long term liabilities ($2.3 million) and in
other current liabilities ($0.6 million), of which approximately $1.8 million
was funded with cash to insurance companies of which $0.4 million is included
in
other current assets.
-
15
-
(3)
Under
the terms of his employment agreement with us, as amended, we have an obligation
to continue to pay our Chief Executive Officer consulting fees over a seven-year
period starting January 1, 2005. As a result, during the coming four years,
through 2008, we have to pay our CEO $240,000 per year, equal to 50% of his
salary in effect as of December 31, 2003. From 2009 through 2011, we must pay
$120,000 per year, equal to 25% of that salary. In addition, we must pay
contributions to a non-qualified defined contribution retirement plan equal
to
25% of the consulting fee. In accordance with the employment contract, we are
obliged to fund amounts payable for the term of the consulting period by the
purchase of an annuity or similar investment product at the beginning of the
consulting period. The funding of the consulting agreement is reflected in
the
balance sheet in restricted cash ($0.3 million) and in restricted cash -
non-current ($1.1 million).
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
In
the
normal course of business, we are exposed to fluctuations in interest rates
on
lines-of-credit incurred to finance our operations in Israel, currently $0.2
million. Additionally, our monetary assets and liabilities (net liability of
approximately $0.1 million) in Israel are exposed to fluctuations in exchange
rates. We do not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate or foreign currency exchange
rate exposures.
Item
4.
Controls and Procedures
Evaluation
of Controls and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the design
and
operation of our disclosure controls and procedures (as such term is defined
in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act’)). Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level at end of the period covered
by
this report to ensure that the information required to be disclosed by
us in the
reports we file or submit under the Exchange Act is (i) accumulated and
communicated to our management (including our Chief Executive Officer and
Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.
Changes
in Controls and Procedures
There
was
no change in our internal controls over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, internal controls over
financial reporting.
-
16
-
PART
II - Other information
Item
1. Legal Proceedings
None
Item
6. Exhibits
|
4.1
|
Warrant
Certificate of Endan IT Solutions Ltd. (filed as Exhibit 99.2 to
the
Current Report on Form 8-K, dated August 18, 2005, filed with the
U.S.
Securities and Exchange Commission on August 24, 2005 (the “August 18,
2004 Form 8-K”), and incorporated herein by
reference).
|
|
10.1
|
Share
Purchase Agreement by and among Data Systems & Software Inc., Kardan
Communication Ltd., Neuwirth Investments Ltd., Meir Givon, dsIT
Technologies Ltd. and Taldor Computer Systems (1986) Ltd. dated as
of July
27, 2005 (filed as Exhibit 99.1 to the August 18, 2004 Form 8-K,
and
incorporated herein by reference).
|
|
10.2
|
Unconditional
Guaranty of Endan IT Solutions Ltd. dated as of July 26, 2005 (filed
as
Exhibit 99.3 to the August 18, 2004 Form 8-K, and incorporated herein
by
reference)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
99.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
99.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
-
17
-
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.
| Dated: November 17, 2005 | DATA SYSTEMS & SOFTWARE INC. | |
| |
|
|
| By: | /s/ Yacov Kaufman | |
|
Yacov Kaufman Vice President and Chief Financial Officer |
||
-
18
-