SEC Filing Summary: Data Systems & Software Inc. (10-Q)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for Data Systems & Software Inc. (DSSI). The company operates in three reportable segments: Computer Consulting and Development Services, Utility Solutions, and Computer Hardware. The filing includes unaudited consolidated financial statements and management discussion regarding the impact of the hi-tech industry downturn and the September 11th events on its New York-based hardware operations.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2001 | Three Months Ended Sep 30, 2001 |
|---|---|---|
| Total Sales | $36.2 million | $10.4 million |
| Gross Profit | $8.3 million (23% margin) | $2.5 million (24% margin) |
| Net Loss | $(6.6) million | $(2.6) million |
| Operating Loss | $(7.1) million | $(2.9) million |
| Cash and Equivalents | $2.9 million (as of Sep 30, 2001) | |
| Working Capital | $11.4 million | |
| Total Debt (Short & Long Term) | $7.2 million | |
| Net Cash Used in Operating Activities | $(6.3) million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 21% for the nine months ended September 30, 2001, compared to the same period in 2000. The three-month period saw a 31% decline.
- Segment Performance:
- Computer Consulting: Sales dropped significantly due to the hi-tech downturn, particularly in Israel.
- Computer Hardware: Sales fell 40% in the third quarter, attributed to the slower economy post-September 11th in the New York area.
- Utility Solutions: Sales decreased year-over-year, though gross margins improved due to the completion of previously loss-incurring projects.
- Profitability: The company reported a net loss of $6.6 million for the nine-month period, a stark contrast to the net income of $1.7 million in the prior year period. This shift is largely due to the absence of a $4.2 million gain from the sale of discontinued operations (Tower) recorded in 2000 and increased operating expenses.
- Expense Increases: Research and Development (R&D) expenses surged 217% year-over-year for the nine-month period due to product integration efforts in the Utility Solutions segment. SG&A expenses also rose, driven by new management hiring costs.
- Liquidity: Cash and cash equivalents decreased from $10.9 million at year-end 2000 to $2.9 million at September 30, 2001. A $6 million term loan was reclassified from long-term to short-term debt as it matures in February 2002.
Guidance, Outlook, and Risks
- Outlook: Management does not expect the hi-tech downturn to improve in the next few quarters. However, they anticipate that the Utility Solutions segment will eventually generate positive cash flows as it matures.
- Acquisition Activity: In October 2001, the company signed a Memorandum of Understanding (MOU) to acquire Endan IT Solutions Ltd., an Israeli firm specializing in billing and healthcare IT. The deal involves cash, stock, and a loan, with closing expected by November 2001.
- Accounting Changes: The company must adopt FASB Statements 141 and 142 (Goodwill and Intangibles) effective January 1, 2002. This will require testing goodwill for impairment rather than amortization. The impact of potential transitional impairment losses is currently indeterminable.
- Risks: Key risks include the prolonged downturn in the hi-tech industry, the competitive nature of the hardware market, and the uncertainty of converting pending proposals in the utility sector into sales.
Investor Verification Checklist
- Verify the status and closing conditions of the proposed acquisition of Endan IT Solutions Ltd.
- Monitor the company's ability to refinance or repay the $6 million term loan maturing in February 2002 given the current cash balance of $2.9 million.
- Assess the impact of the upcoming adoption of FASB Statement 142 on the company's balance sheet, specifically regarding potential goodwill impairment charges.
- Review the progress of the Utility Solutions segment in converting pending proposals into revenue to offset losses in other segments.
- Confirm the extent of the impact of the September 11th events on the Computer Hardware segment's recovery in the New York market.