Business Context and Reporting Period
Company: Data Systems & Software Inc. (DSSI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: DSSI provides consulting and development services for computer software, acts as a value-added reseller (VAR) of computer hardware, and provides data communications solutions for utilities. The Company also holds an equity investment in Tower Semiconductor Ltd. ("Tower"), which is accounted for using the equity method as DSSI does not hold voting control.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 1999 | Three Months Ended Sep 30, 1999 |
|---|---|---|
| Total Sales | $25,158,000 | $9,217,000 |
| Gross Profit | $5,214,000 (21% margin) | $1,735,000 (19% margin) |
| Operating Loss | $(4,405,000) | $(1,641,000) |
| Net Loss | $(8,892,000) | $(3,104,000) |
| Net Loss Per Share (Basic/Diluted) | $(1.20) | $(0.42) |
| Cash and Cash Equivalents | $467,000 | $467,000 |
| Short-Term Debt | $7,699,000 | $7,699,000 |
| Working Capital | $(3,198,000) | $(3,198,000) |
Note: All figures in thousands except per share data. Working capital calculated as Current Assets ($12,873) minus Current Liabilities ($16,071).
Material Changes vs. Prior Period
- Revenue: Nine-month sales decreased 15% to $25.2 million compared to $29.6 million in 1998, driven by lower VAR hardware sales and the sale of the help desk segment. However, the third quarter saw a 13% increase in sales year-over-year due to growth in data communications and VAR hardware.
- Profitability: Net loss for the nine months ended September 30, 1999, increased significantly to $8.9 million from $3.9 million in the prior year. This deterioration is primarily attributed to the absence of a $6.0 million non-recurring gain from the sale of a division in 1998 and increased equity losses from Tower Semiconductor.
- Debt and Liquidity: Short-term debt surged from $470,000 in December 1998 to $7.7 million in September 1999. This increase funded the acquisition of Scientific-Atlanta's Control Systems division and a tender offer for a foreign subsidiary. The Company reported negative working capital of $3.2 million.
- Acquisitions: In Q3 1999, DSSI acquired the Control Systems division of Scientific-Atlanta for approximately $4.2 million, financed via short-term debt and warrant issuance.
Outlook, Risks, and Management Commentary
- Liquidity Strategy: Management intends to fund operations and debt service through existing cash, credit lines (utilized at $1.4 million of a $2.2 million line), and potential asset sales. The Company is actively seeking long-term financing for its data communications segment.
- Subsequent Financing: In October 1999, the Company completed a private placement of $2.0 million in 0% Convertible Subordinated Debentures and issued warrants. These debentures are convertible at a price potentially lower than the current market price, posing dilution risks.
- Year 2000 Compliance: The Company believes its internal systems are compliant. Tower Semiconductor estimates total Y2K costs at $1.5 million, with $1.1 million already expended. Risks remain regarding vendor compliance for embedded fab machinery.
- Legal Contingencies: Tower Semiconductor faces patent infringement allegations from two parties. One license was secured without royalty; negotiations continue with the second party. The financial impact is currently indeterminable.
- Segment Performance: The "Data Multimedia" segment (multimedia entertainment software) suspended operations. The "Computer VAR" and "Data Communications" segments showed growth in Q3, while "Computer Consulting" in Israel declined.
Investor Verification Checklist
- Debt Maturity: Verify the repayment schedule for the $7.7 million in short-term debt, specifically the $5.9 million term note due August 2000.
- Convertible Debt Dilution: Assess the potential dilution from the $2.0 million convertible debentures issued in October 1999, noting the conversion price mechanism (lower of $3.06625 or 85% of average closing bid).
- Tower Semiconductor Exposure: Review Tower's standalone financials, as DSSI's net loss is heavily influenced by Tower's operating losses (equity loss of $4.4 million for the nine months).
- Acquisition Integration: Monitor the integration and revenue contribution of the Scientific-Atlanta Control Systems division to determine if it offsets the increased debt burden.
- Patent Litigation: Track the resolution of the patent infringement claims against Tower to assess potential royalty obligations or injunctions.