Business Context and Reporting Period
Company: Data Systems & Software Inc. (DSSI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 a significant equity investment in Tower Semiconductor Ltd. ("Tower"), which is accounted for using the equity method.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1999 | Six Months Ended June 30, 1998 |
|---|---|---|
| Total Sales | $15,941,000 | $21,451,000 |
| Gross Profit | $3,479,000 (22% margin) | $4,845,000 (23% margin) |
| Operating Loss | $(2,764,000) | $(3,669,000) |
| Net Loss | $(5,788,000) | $632,000 (Net Income) |
| Net Loss Per Share (Basic) | $(0.78) | $0.09 |
| Cash and Cash Equivalents | $510,000 | $1,003,000 (Dec 31, 1998) |
| Working Capital | $707,000 | $5,719,000 (Dec 31, 1998) |
| Short-Term Debt | $2,520,000 | $470,000 (Dec 31, 1998) |
| Net Cash Used in Operating Activities | $(2,806,000) | $(5,218,000) |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 26% year-over-year to $15.9 million, primarily driven by a reduction in VAR computer hardware sales. This was partially offset by growth in the data communications solutions for utilities segment.
- Profitability Shift: The Company reported a net loss of $5.8 million compared to a net income of $0.6 million in the prior year. The 1998 income included a non-recurring gain of $6.0 million from the sale of the help desk division, which did not occur in 1999.
- Equity Losses: The loss in affiliates (Tower Semiconductor) increased significantly to $3.3 million (net of minority interests) from $1.6 million in the prior year, due to decreased sales and capacity utilization at Tower.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 27% to $5.7 million, largely due to the sale of the help desk segment and the suspension of the multimedia entertainment software segment.
- Liquidity and Debt: Short-term debt increased to $2.5 million from $0.5 million to finance a tender offer for a foreign subsidiary and general operations. Cash and cash equivalents declined to $0.5 million.
Guidance, Outlook, and Risks
- Acquisition Activity: DSSI agreed to acquire the Control Systems division of Scientific-Atlanta, Inc. for approximately $5.0 million. Closing is expected in the third quarter of 1999.
- Financing Needs: Management is seeking additional financing for the data communications segment and considering asset sales. If resources are insufficient, the Company may curtail or discontinue certain activities.
- Year 2000 Compliance: Remediation efforts are approximately 90% complete, with completion expected by the end of the third quarter of 1999. Tower Semiconductor estimates total Y2K costs of $1.5 million, with $1.1 million already expended.
- Legal Contingencies: Tower Semiconductor faces patent infringement allegations from two parties. One license was secured without royalty; discussions continue with the second party. The outcome is uncertain.
- Market Risk: The market value of the investment in Tower ($26.8 million) is below its carrying value ($27.7 million), though management views this decline as temporary.
Investor Verification Checklist
- Liquidity Sufficiency: Verify if the $0.5 million cash balance and $1.4 million utilized credit line are sufficient to fund operations and the pending $5.0 million acquisition without further dilution or distress.
- Tower Semiconductor Performance: Assess the sustainability of Tower's losses and the impact of its equity losses on DSSI's consolidated bottom line.
- Acquisition Integration: Confirm the closing conditions and financial impact of the Scientific-Atlanta Control Systems division acquisition.
- Patent Litigation: Monitor the resolution of the patent infringement claims against Tower to determine potential royalty obligations or operational restrictions.
- Revenue Mix: Evaluate the trend of VAR hardware sales versus the growth in the data communications segment to understand future revenue stability.