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, 2003, for Data Systems & Software Inc. (DSSI). The company operates in three segments: Software Consulting and Development, Energy Intelligence Solutions, and Computer Hardware. A significant structural change occurred in Q2 2003 when the company lost control of its subsidiary, Comverge Inc., due to private equity financing. Consequently, Comverge is no longer consolidated but accounted for using the equity method. Additionally, the company's independent auditor, KPMG LLP, resigned on October 9, 2003, and the interim financial statements have not yet been reviewed by a new auditor.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 | Three Months Ended Sep 30, 2003 | Three Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Total Revenue | $26.8 million | $36.9 million | $6.7 million | $11.3 million |
| Gross Profit | $5.6 million (21% margin) | $7.9 million (22% margin) | $1.2 million (18% margin) | $2.4 million (21% margin) |
| Operating Loss | $(3.0) million | $(8.8) million | $(0.8) million | $(4.6) million |
| Net Loss | $(6.2) million | $(8.4) million | $(1.7) million | $(4.3) million |
| Cash & Equivalents | $0.7 million | $1.2 million (Dec 31, 2002) | $0.7 million | $1.6 million (Dec 31, 2002) |
| Working Capital | $1.0 million | $2.8 million (Dec 31, 2002) | $1.0 million | $2.8 million (Dec 31, 2002) |
| Total Debt (Current + Long-term) | $2.2 million | $10.0 million (Dec 31, 2002) | $2.2 million | $10.0 million (Dec 31, 2002) |
Note: Revenue and profit comparisons are impacted by the deconsolidation of Comverge starting April 1, 2003.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 27% for the nine-month period and 41% for the quarter. This is primarily due to the deconsolidation of Comverge, which contributed $12.7 million in revenue for the nine months of 2002.
- Improved Operating Loss: Despite lower revenue, the operating loss improved significantly (66% reduction for nine months) due to cost-cutting measures and the absence of Comverge's operating losses in the consolidated statement.
- Equity Loss: The company recorded a non-cash equity loss of $2.1 million for the nine months ended September 30, 2003, representing its share of Comverge's net losses under the equity method.
- Debt Reduction: Total debt decreased from $10.0 million at year-end 2002 to $2.2 million at September 30, 2003, driven by debt repayments and the conversion of intercompany loans to equity in Comverge.
- Goodwill: Goodwill decreased from $4.9 million to $4.4 million due to the deconsolidation of Comverge's goodwill ($0.5 million). No new impairments were recorded in 2003.
Guidance, Outlook, and Risks
- Liquidity: Management believes it has sufficient liquidity to finance US-based operations for the next 12 months using cash on hand and operating cash flows. The Israeli subsidiary (dsIT) has negative working capital but sufficient lines of credit ($1.6 million total, $1.2 million utilized).
- Comverge Status: Comverge has raised approximately $18.6 million in private equity and no longer requires funding from DSSI. DSSI holds a restricted deposit of $1.5 million securing a Comverge term loan, expected to be released in two installments starting December 31, 2003.
- Segment Outlook:
- Software Consulting: Market remains weak; company is implementing cost cuts. A new $4 million contract with Clalit Health Services is expected to generate revenue starting Q4 2003.
- Computer Hardware: Sales remain below expectations but show signs of improvement. The company is diversifying into value-added software to reduce dependency on hardware.
- Management Changes: CEO George Morgenstern intends to retire from full-time employment on December 31, 2003, transitioning to a consultant role. The company is evaluating restructuring or potential mergers.
- Risks:
- Auditor Resignation: KPMG resigned; financial statements are unaudited and unreviewed by a new auditor.
- Currency Risk: Exposure to Israeli Shekel (NIS) fluctuations on debt and operations.
- Related Party Transactions: Significant payments to related parties, including the CEO's son and a law firm owned by the CEO's son-in-law.
Investor Verification Checklist
- Auditor Status: Verify the appointment of a new independent auditor and the status of the review for the Q3 2003 financial statements.
- Comverge Valuation: Monitor the release of the $1.5 million restricted deposit and the valuation of DSSI's remaining equity stake in Comverge.
- Cash Burn Rate: Assess the sustainability of the $0.7 million unrestricted cash balance against the $1.0 million working capital and ongoing operating losses.
- CEO Transition: Review the terms of the CEO's retirement and consulting agreement, including the $1.6 million in future contractual obligations.
- Related Party Fees: Scrutinize the $306,000 in legal fees paid to a firm owned by the CEO's son-in-law during the nine-month period.