WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2004 |
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
incorporation
or organization) |
(I.R.S.
Employer 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
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.01 per share
Common
Stock Purchase Rights
(Title of
Class)
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. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes o No
x
The
aggregate market value of the common stock held by non-affiliates of the
registrant at June 30, 2004 was
approximately $13.3 million.
The aggregate market value was calculated by using the closing price of the
stock on that date on The Nasdaq SmallCap Market.
Number of
shares outstanding of the registrant’s common stock, as of March 31,
2005: 8,116,691
DOCUMENTS
INCORPORATED BY REFERENCE:
Certain
sections of the registrant’s Proxy Statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 within 120 days of the end of the
registrant’s fiscal year are incorporated by reference into Part III of this
Form 10-K.
TABLE
OF CONTENTS
PAGE
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PART
I |
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Item
1. |
Business |
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1 |
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Item
2. |
Properties |
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10 |
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Item
3. |
Legal
Proceedings. |
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10 |
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Item
4. |
Submission
of Matters to a Vote of Security Holders |
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10 |
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PART
II |
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Item
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
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11 |
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Item
6. |
Selected
Financial Data |
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11 |
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Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
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14 |
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Item
7A. |
Quantitative
and Qualitative Disclosures About Market Risk |
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26 |
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Item
8. |
Financial
Statements and Supplementary Data |
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26 |
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Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
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27 |
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Item
9A. |
Controls
and Procedures |
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27 |
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PART
III |
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Item
10. |
Directors
and Executive Officers of the Registrant |
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28 |
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Item
11. |
Executive
Compensation |
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28 |
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Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
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28 |
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Item
13. |
Certain
Relationships and Related Transactions |
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28 |
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Item
14. |
Principal
Accountant Fees and Services |
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28 |
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Part
IV |
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Item
15. |
Exhibits
and Financial Statement Schedules |
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29 |
Certain
statements contained in this report are forward-looking in nature. These
statements can be identified by the use of forward-looking terminology such as
“believes”, “expects”, “may”, “will”, “should” or “anticipates”, or the
negatives thereof, or comparable terminology, or by discussions of strategy. You
are cautioned that our business and operations are subject to a variety of risks
and uncertainties and, consequently, our actual results may materially differ
from those projected by any forward-looking statements. Certain of such risks
and uncertainties are discussed below under the heading “Item 1.
Business-Factors That May Affect Future Results.”
EasyBillTM
and
OncoProTM are
trademarks of our Endan IT Solutions Ltd subsidiary. Maingate® is a
registered trademark and PowerCampTM,
iNetTM and SuperstatTM are
trademarks of Comverge, Inc.
PART
I
ITEM
1. BUSINESS
OVERVIEW
We
currently operate in two reportable segments: software consulting and
development and computer hardware sales. As we no longer have control over our
formerly consolidated subsidiary Comverge Inc. (see Note 3 to the Consolidated
Financial Statements), effective as of the second quarter of 2003, we account
for our investment in Comverge by the equity method and no longer consolidate
Comverge's balances and operating activity into our consolidated balance sheets
and statements of operations. Comverge’s previously consolidated results
comprised our energy intelligence solutions segment.
| · |
Software
Consulting and Development—Providing
consulting and development services for computer software and systems,
primarily through our dsIT subsidiary. |
| · |
Computer
Hardware Sales—Serving
as an authorized dealer and a value-added-reseller (VAR) of computer
hardware, through our Databit subsidiary. |
SALES
BY ACTIVITY
The
following table shows, for the years indicated, the dollar amount and the
percentage of the sales attributable to each of the segments of our
operations.
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2002 |
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2003 |
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2004 |
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Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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Software
consulting and development |
|
$ |
14,202 |
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25 |
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$ |
12,156 |
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|
35 |
|
$ |
11,581 |
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|
39 |
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Computer
hardware sales |
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22,605 |
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|
41 |
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18,139 |
|
|
52 |
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18,468 |
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|
61 |
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Energy
intelligence solutions |
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19,023 |
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34 |
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4,700 |
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13 |
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|
-- |
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-- |
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Other |
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56 |
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-- |
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39 |
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|
-- |
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|
64 |
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-- |
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Total |
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55,886 |
|
|
100 |
|
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35,034 |
|
|
100 |
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30,113 |
|
|
100 |
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SOFTWARE
CONSULTING AND DEVELOPMENT
Services
Through
dsIT Technologies Ltd. (“dsIT”), we provide computer software and systems
consulting, development and integration services. dsIT is a systems and software
house, with significant capabilities in a wide range of application areas,
spanning military applications, security and public safety systems, telecom and
datacom systems, and command and control principal systems. Our technological
expertise includes state-of-the-art hardware with embedded real-time software
systems in a wide variety of applications: sonar, telecommunications, digital
signal processing, image processing, software testing and validation, electronic
warfare, simulation and electro-optics. In addition, we offer expertise and
solutions products for billing, healthcare and other IT
applications.
We
provide our services either on a time-and-materials or fixed-price basis. When
working on a time-and-materials basis, our engineers are generally sent to the
customer’s premises to perform design and development activities under the
customer’s direction. In these engagements, our personnel typically have no
specific obligation for product delivery. During 2002, 2003 and 2004, sales
attributable to services provided on a time-and-materials basis were $10.3
million $8.8 million and $8.8 million, respectively, accounting for
approximately 73%, 74% and 76% of segment sales for 2002, 2003 and 2004,
respectively.
When
working on a fixed-price basis, we undertake to deliver software or
hardware/software solutions to a customer’s specifications or requirements for a
particular project, accounting for these services on the
percentage-of-completion method. Since the profit margins on these projects are
primarily determined by our success in controlling project costs, margins on
these projects may vary substantially as a result of various factors, including
underestimating costs, difficulties associated with implementing new
technologies and economic and other changes that may occur during the term of
the contract. During 2002, 2003 and 2004, sales from fixed-price contracts were
$3.9 million, $3.2 million and $2.8 million, respectively, accounting for
approximately 27%, 26% and 24% of segment sales for 2002, 2003 and 2004,
respectively. Included in our fixed price projects are sales and maintenance of
our billing and healthcare proprietary software packages, totaling $0.6 million,
$1.1 million and $1.3 million, during 2002, 2003 and 2004,
respectively.
Customers
and Markets
Israel
has historically been the primary area of this segment’s operations, accounting
for 95%, 98% and 100% of segment sales in 2002, 2003 and 2004, respectively, and
we expect this to continue in the future. We have created significant
relationships with some of Israel’s largest companies in its banking, healthcare
and electronics industries. In addition, dsIT is investing considerable effort
to penetrate European and other markets in order to broaden its geographic sales
base. In December 2004 dsIT signed a $0.9 million contract for supplying one of
its sonar technology products to a European country. One customer accounted for
10% of segment sales in 2004 and in 2003.
Competition
Our
software consulting and development activity faces competition from numerous
competitors, both large and small, operating in the Israeli and United States
markets, some with substantially greater financial and marketing resources. We
believe that our wide range of experience and long-term relationships with large
corporations in Israel and the United States will enable us to compete
successfully and obtain future business.
Proprietary
Rights
The
customer, for whom the services are performed, generally owns the intellectual
property rights resulting from our consulting and development services. We own
two proprietary software packages: EasyBillTM, a
comprehensive customer service and billing system aimed at the low to middle end
application market; and OncoProTM, which
manages hospital medical files and has advanced applications for oncology
departments. These are licenses for use by customers, while we retain ownership
of the intellectual property.
COMPUTER
HARDWARE SALES
Products
and Services
Through
our Databit subsidiary, we sell and service PC-based computer hardware,
software, data storage, client/server and networking solutions to large and
midsize customers. Databit is a value-added-reseller and/or an authorized
service provider for equipment and software from such well-known industry
leaders as HP/Compaq, IBM, Microsoft, Oracle, 3Com, NEC, Acer, Apple and Dell.
We offer our customers a full range of systems integration services, including
design, implementation, hardware and software selection, and implementation of
local and wide area networks. In addition, we provide maintenance and service to
customers under extended service agreements. Our equipment and software sales
and other services are offered under separately negotiated and priced
agreements.
Databit
is also endeavoring to expand its business by offering solutions in the wireless
and software security solutions areas and has entered into VAR agreements in
these areas.
Customers
and Markets
Computer
hardware segment sales include sales to two major customers, Montefiore Medical
Center, a major New York medical center, which accounted for approximately 22%,
28% and 40% of segment sales and 9%, 15%, and 25% of consolidated sales in 2002,
2003 and 2004, respectively, and 48% and 67% of the segment’s receivables and
30% and 37% of consolidated receivables, at the end of 2003 and 2004,
respectively. A large law firm accounted for approximately 21% of segment sales
in 2002. No other customer accounted for more than 10% of segment sales. Most of
our sales are made in the New York City Metropolitan area, with sales in this
area accounting for 70%, 71% and 75% of segment revenues in 2002, 2003 and 2004,
respectively.
Competition
The
market for PCs and related peripheral hardware sales in which we operate is
characterized by severe competition in price-performance, breadth of product
line, financing capabilities, technical expertise, service and overall
reputation. Manufacturers have been increasing their direct sales efforts on the
Internet and otherwise reducing prices to end-users, which puts downward
pressure on profit margins for distributors and value-added-resellers such as
Databit. Our competitors include manufacturers, other VAR’s, large equipment
aggregators (some of whom also sell to us) and systems integrators. Many of our
competitors have longer operating histories, greater financial resources and
buying power and broader, more established customer bases. We compete by
offering attractive prices and flexible payment terms, and by helping our
customers evaluate their needs and tailoring solutions by offering other
value-added services such as configuration and on-site service.
ENERGY
INTELLIGENCE SOLUTIONS
Overview
Effective
as of the second quarter of 2003 and coincident to the successful placement of
private equity (see below) we ceased to own a controlling interest in Comverge.
Accordingly, Comverge’s financial results are no longer consolidated into ours.
However, we continue to own a significant minority interest in Comverge and its
financial results are included in our financial statements by utilization of the
equity method of accounting. Comverge continues to play a major role in our
corporate strategy, and Comverge continues to have a material effect on our
financial results.
Comverge
designs, develops and markets a full spectrum of products, services and turnkey
solutions to electric utilities and energy service companies and their
residential and commercial customers that provide energy intelligence solutions,
such as the optimal transfer and usage of energy during peak demand periods.
Comverge’s energy intelligence solutions bring to bear a combination of hardware
development and manufacturing capabilities and a suite of software products
which, together or separately, help investor-owned utilities, energy service
companies and other providers of electricity, as well as their customers,
address energy usage issues through load control, data communications and
analysis, real-time pricing and integrated billing and reporting. Comverge’s
load control solutions allow its customers to reduce usage or “shed load” during
peak usage periods, such as the summer air conditioning season, thereby reducing
or eliminating the need to buy costly additional power on the spot market, or
invest in new peaking generation capacity. This solution is both cost-effective
and environmentally superior to building new generation capabilities. Comverge’s
two-way data communications solutions allow utilities to gather, transmit,
verify and analyze real-time usage information, and can be used for automated
meter reading, support time-of-use metering, theft detection, remote
connect/disconnect and other value-added services.
During
2003, Comverge completed private equity placements of its Series A and A-2
Preferred Stock raising $18.6 million,
in the aggregate, and the finalized terms for a new credit arrangement of $5
million with a leading financial institution. In 2004, Comverge completed an
additional placement of shares of its Series A Preferred Stock in the amount of
$3 million and placed $13.6 million of its Series B Preferred Stock. Comverge’s
investors include Nth Power Management, EnerTech Capital Partners, Rockport
Capital Partners, Ridgewood Capital, E.ON Venture Partners, Shell Internet
Ventures, Emerson Venture Capital, Easton Hunt Capital Partners and Norsk Hydro
Technology Ventures. In conjunction with the 2003 equity financing, Comverge
also acquired certain assets, including the iNET™ software platform, from Sixth
Dimension, Inc.
Comverge’s
principal offices are located in East Hanover, New Jersey, from which its
Enterprise group operates, and in Atlanta, Georgia, where its Solutions Group is
headquartered. In addition, Comverge operates satellite offices in Newark,
California, Pensacola, Florida and Tel Aviv, Israel.
Products
and Services
Comverge
offers data communications and load control product solutions that address the
information and control needs of the global energy market through its power line
technology and expertise it developed, combined with its strategic acquisitions
of technology, personnel, contracts and customer base from Lucent,
Scientific-Atlanta and Sixth Dimension. Comverge’s technical expertise includes
load control, broadband, wireless and power line communications, as well as
Internet and home networking and automation.
Comverge
currently offers products and services in four product lines:
| · |
Real-time
usage information products; |
| · |
Gateway
products, which combine real-time information and control;
and |
| · |
PowerCAMPTM
Software products that allow utilities to conserve, analyze, monitor and
price electric usage. |
Real-Time
Usage Information Products. Comverge
markets the Maingate™ C&I, which is a meter-reading device for gathering and
transmitting real-time usage information and providing distributed generation
monitoring and control for commercial and industrial customers. The Maingate™
C&I uses Internet-based CDMA communications to transmit detailed information
regarding patterns of energy consumption and is targeted at industrial and
commercial customers, an important segment of the user market for energy
companies. The use of CDMA for data communication makes Comverge’s product
easier to install and less expensive to run than products that require a
dedicated telephone line. Comverge’s alliance with Verizon Wireless gives it a
national platform from which to market this product.
Load
Control Products.
Electricity generation and distribution companies use Comverge’s load control
products to reduce peak electrical demand, avoiding the need to buy costly
electricity on the spot market or to build new peaking generation facilities.
Generators and distributors can use load control products to free capacity
during high cost periods for resale to others. Comverge offers its customers two
major load control products: digital control units, also known as DCUs, and
thermostats, trademarked as SuperStats™. The DCU is a switch that can be
connected to any appliance, such as an air conditioner or water heater, and that
permits the user to turn appliances on and off from a remote location utilizing
wireless communications. Comverge’s SuperStat™ product combines a programmable
thermostat with a wireless communication module to provide cooling systems
direct load control, allowing customers to choose when and how much energy to
use, while giving the utility the ability to control air conditioning systems
through the thermostat during peak usage periods.
Gateway
Products.
MaingateTM Home,
Comverge’s gateway product, is a system designed around a communications
“gateway,” or bridge, which permits two-way real-time communications between a
local area network (LAN) (such as a “network” of appliances and other devices
within a home or a network of meters at multiple users) and a wide area network
(WAN) (such as cable, telephone or CDPD). Maingate provides information and load
control functionality to both the electricity provider and its customers and can
significantly reduce the customer’s electricity bills. When fully integrated
with Comverge’s PowerCAMPTM
software,
MaingateTM Home
provides its customers with a comprehensive solution for their diverse energy
management requirements.
MaingateTM provides
two-way real time metering, time-of-use pricing, load control and whole house
surge suppression for residential users. In the typical configuration, the
central air conditioning system, controlled by a SuperStat™ thermostat, the
water heater and up to one additional appliance within the home, are fitted with
power line communication (“PLC”) based load control devices. The load control
devices and the SuperStat™ are networked, and linked via the Maingate gateway to
the WAN. MaingateTM allows
the customer to automatically respond to energy price variations to minimize
their usage during high priced periods. Rollout of MaingateTM Home is
being deployed for Florida’s Gulf Power under a contract that provides for the
installation of MaingateTM into
40,000 homes.
PowerCAMPTM
Software Products. PowerCAMPTM is an
extensive suite of software developed by Comverge’s engineers and deployed in
several countries. The software used in PowerCAMPTM has been
subject to extensive field-testing and customer interaction and has been the
backbone for monitoring and analyzing utility meter reading and load management
programs using Comverge products. Comverge has taken this software and packaged
and modularized it as a suite of stand-alone software editions for utilities and
their residential, commercial and industrial customers. PowerCAMPTM can also
serve those customers through a web-based Application Service Provider, or ASP,
model. With the acquisition of the iNET™ software platform, Comverge has added
technology for upstream monitoring and control of capital assets by offering
comprehensive monitoring and control of power generation and substation
assets.
Customers
and Markets
Comverge’s
energy intelligence solutions business has over 500 customers in eight countries
and has an installed base of approximately 5,000,000 end-point installations
worldwide. The global market for energy intelligence solutions is immature and
still emerging. Reliable information as to the current size of the market it
serves or its rate of growth is not readily available. The anticipated growth in
Comverge’s market will be driven by the following factors:
| · |
Increasing
worldwide demand for electricity and volatility of electricity prices;
|
| · |
Anticipated
market and regulatory incentives to manage peak usage periods in an
economically efficient and environmentally friendly manner; and
|
| · |
Continued
deregulation of the electric utility industry in the United States and
resulting increased competition among electric service companies.
|
Although
the effects of the current trend toward deregulation in the United States and
overseas are not certain, we anticipate that the new, more competitive
environment, combined with expected government incentives and mandates, will
result in continued growth in the demand for products designed to gather
information and manage electricity usage.
Comverge’s
customers are generally domestic electric utilities, electric service companies
or prime contractors that serve electric utilities. Comverge’s largest customer
is Florida’s Gulf Power, which purchased approximately $2.8 million in products
and services in 2004. Comverge has demonstrated that its CDC and SuperStat™
products generally work well in small-scale deployments, and as its track record
grows, Comverge expects to expand its sales to its existing customers to
full-scale deployments. In addition to expanding relationships with existing
customers, Comverge’s strategy is to take advantage of the relationships with
these customers to extend its sales to their affiliates, many of whom are owned
by large utility holding companies with several owned utilities. Comverge has
also formed joint marketing partnerships with Verizon Wireless, Schlumberger and
Honeywell, and continues to plan to expand on these relationships. In
September 2004, Comverge signed a five-year agreement with Landis+Gyr, a leading
meter manufacturer, to jointly market and develop commercial and industrial
metering solutions.
Competition
Within
the emerging energy intelligence solutions market, Comverge faces competition
from a variety of companies and products, each of which is trying to garner a
larger market share. Key competitors include Itron and Mainstreet Networks with
respect to Comverge’s gateway products, Itron and Smartsynch with respect to
Comverge’s commercial and industrial AMR products, and Cannon Technologies,
Regency and Corporate Systems with respect to Comverge’s load control products.
Comverge believes that its products offer significant competitive advantages
because they:
| · |
have
been proven in the field; |
| · |
offer
significant technological advantages over competing products; and/or
|
| · |
cost
less than many of its competitors’ products.
|
However,
some of Comverge’s competitors have more resources, better market recognition, a
larger sales force or can offer features not offered by our products. In
addition, certain of its competitors manufacture and sell electric meters or
back-end billing or other software systems to utilities, possibly providing them
an advantage in marketing their utility solution products. Comverge cannot be
certain that its products will win market acceptance or that it will be able to
capture a significant segment of the market.
Proprietary
Rights
Comverge
holds 14 patents and has one patent pending. Comverge attempts to vigorously
protect all of its proprietary rights. Certain products that Comverge has
developed and is developing incorporate or are derived from intellectual
property owned by third parties under license to Comverge.
In
Comverge’s product development activities, Comverge relies on a combination of
nondisclosure agreements and technical measures to establish and protect its
proprietary rights, if any, in its products. Comverge believes that as a result
of the rapid pace of technological change in the software and real-time system
industries, legal protection for its products, if any, will be less significant
to its prospects than the knowledge, ability and expertise of its management and
technical personnel.
BACKLOG
As of
December 31, 2004, our backlog of work to be completed was $1.6 million, all of
which related to our software consulting and development segment. We estimate
that we will perform substantially all of our backlog work in 2005.
EMPLOYEES
At
December 31, 2004, we employed a total of 206 people, including 163 persons in
engineering and technical support, 17 in marketing and sales, and 26 in
management, administration and finance. A total of
181 of our employees are based in Israel. We consider our relationship with our
employees to be satisfactory.
We have
no collective bargaining agreements with any of our employees. However, with
regard to our Israeli activities, certain provisions of the collective
bargaining agreements between the Israeli Histadrut (General Federation of Labor
in Israel) and the Israeli Coordination Bureau of Economic Organizations
(including the Industrialists Association) are applicable by order of the
Israeli Ministry of Labor. These provisions mainly concern the length of the
workday, contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. We generally provide our Israeli employees with
benefits and working conditions beyond the required minimums. Israeli law
generally requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Furthermore, Israeli employees and
employers are required to pay specified amounts to the National Insurance
Institute, which administers Israel’s social security programs. The payments to
the National Insurance Institute include health tax and are approximately 5% of
wages (up to a specified amount), of which the employee contributes
approximately 70% and the employer approximately 30%.
SEGMENT
INFORMATION
For
additional financial information regarding our operating segments, foreign and
domestic operations and sales, see “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and Note 15 to our
Consolidated Financial Statements included in this Annual Report.
FACTORS
WHICH MAY AFFECT FUTURE RESULTS
We may
from time to time make written or oral statements that contain forward-looking
information. However, our actual results may differ materially from our
expectations, statements or projections. The following risks and uncertainties
could cause actual results to differ from our expectations, statements or
projections.
GENERAL
FACTORS
We
have a history of operating losses and decreasing cash available for
operations.
We have a
history of operating losses, although these losses and our use of cash to fund
our operating activities have decreased over the years. In 2002, 2003 and 2004,
we had operating losses of $8.2 million, $3.6 million and $0.9 million,
respectively. Cash used in operations in 2002, 2003 and 2004 was $6.3 million,
$1.0 million and $0.1 million, respectively.
Although
our operating results and cash from operations continue to improve, almost
achieving breakeven in 2004, the balance of cash on hand as of the end of 2004
may not be sufficient to fund our operating activities for the next 12 months,
particularly as we expect to require additional resources to fund anticipated
growth in our operating segments in 2005. We believe that the balance of cash
available, lines of credit available to our dsIT subsidiary and profits from our
subsidiaries should provide sufficient
liquidity to fund all our activities for at least the next 12 months in both our
US and Israeli operations.
We intend
to fund our US activities with the cash available and anticipated profits from
our US operations. However, we continue to consider various restructuring,
merger or acquisition and/or additional financing transactions, which would give
us additional liquidity. We recently announced an agreement in principle to sell
our dsIT subsidiary. This transaction, if and when consummated, would provide
significant additional liquidity to the US companies. There is no assurance that
such transaction will be completed. Should we need additional liquidity to
finance our US activities and should we be unsuccessful in completing a timely
transaction providing the necessary liquidity, and dsIT be unable to allocate
funds to paying its debt to us, we may not have sufficient funds to finance our
US activities. In such event, we might need to sell additional Comverge
shares.
For
additional discussion of our liquidity position and factors that may affect our
future liquidity, see the
discussion under the captions “Recent Developments” and “Liquidity and Capital
Resources” in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Loss
of the services of a few key employees could harm our operations.
We depend
on our key management and technical employees. The loss of certain managers
could diminish our ability to develop and maintain relationships with customers
and potential customers. The loss of certain technical personnel could harm our
ability to meet development and implementation schedules. Most of our
significant employees are bound by confidentiality and non-competition
agreements. We do not maintain a “key man” life insurance policy on any of our
executives or employees. Our future success also depends on our continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. If we fail to attract or retain highly qualified technical
and managerial personnel in the future, our business could be
disrupted.
RISKS
RELATED TO THE SOFTWARE CONSULTING AND DEVELOPMENT SEGMENT
Failure
to accurately forecast costs of fixed-priced contracts could reduce our
margins.
When
working on a fixed-price basis, we undertake to deliver software or integrated
hardware/software solutions to a customer’s specifications or requirements for a
particular project. The profits from these projects are primarily determined by
our success in correctly estimating and thereafter controlling project costs.
Costs may in fact vary substantially as a result of various factors, including
underestimating costs, difficulties with new technologies and economic and other
changes that may occur during the term of the contract. If, for any reason, our
costs are substantially higher than expected, we may incur losses on fixed-price
contracts.
Hostilities
in the Middle East region may slow down the Israeli hi-tech market and may harm
our Israeli operations; our Israeli operations may be negatively affected by the
obligations of our personnel to perform military service.
A
substantial part of our software consulting and development services segment is
conducted in Israel. Accordingly, political, economic and military conditions in
Israel may directly affect this segment of our business. Any increase in
hostilities in the Middle East involving Israel could further weaken the Israeli
hi-tech market, which may result in a significant deterioration of the results
of our Israeli operations. In addition, an increase in hostilities in Israel
could cause serious disruption to our Israeli operations if acts associated with
such hostilities result in any serious damage to our offices or those of our
customers or harm to our personnel.
Many of
our employees in Israel are obligated to perform military reserve duty. In the
event of severe unrest or other conflict, individuals could be required to serve
in the military for extended periods of time. In the past, there were numerous
call-ups of military reservists to active duty, and it is possible that there
will be additional call-ups in the future.
Our
Israeli operations could be disrupted by the absence for a significant period of
time of one or more of our key employees or a significant number of our other
employees due to military service. Such disruption could harm our Israeli
operations.
Exchange
rate fluctuations could increase the cost of our Israeli
operations.
Most of
the sales in this segment stem from our Israeli operations and a significant
portion of those sales are in New Israeli Shekels (“NIS”). In addition, many
transactions that are linked to the dollar are settled in NIS. The dollar value
of the revenues of our operations in Israel will decrease if the dollar is
devalued in relation to the NIS during the period from the invoicing of a
transaction to its settlement. In addition, significant portions of our expenses
in those operations are in NIS, so that if the dollar is devalued in relation to
the NIS, the dollar value of these expenses will increase.
One
of our major customers has a history of operating deficits and may implement
cost-cutting measures that may have a material adverse effect on
us.
In 2004,
9% of the software consulting and development segment’s sales (12% and
9% in 2003
and 2002, respectively) and 11% of its billed receivables and unbilled
work-in-process at December 31, 2004 (14% at December 31, 2003) were related to
the Clalit Health Fund. The Clalit Health Fund is the largest HMO in Israel and
one of the largest in the world. The fund has a history of running at a deficit,
which in the past has required numerous cost cutting plans and periodic
assistance from the Israeli government. Should the fund have to institute
additional cost cutting measures in the future, which may include restructuring
of its terms of payment, this could have a material adverse effect on the
performance of this segment.
RISKS
RELATED TO THE COMPUTER HARDWARE SALES SEGMENT
We
face low margin and mass marketing competition.
The
market for PCs and related peripheral hardware sales in which we operate is
characterized by severe competition in price-performance and financing
capabilities. Manufacturers and on-line Internet vendors have been increasing
their direct sales efforts on the Internet and otherwise, reducing prices to
end-users, which reduce profit margins for distributors and value added
resellers such as our Databit subsidiary. Should this trend continue, it could
make our method of sales uneconomical and bring into question the long-term
viability of the business model used by Databit.
Concentration
of sales
The
segment’s concentration of sales has increased both geographically and by
customer. An increasingly large portion of our sales is from a major
medical center, which accounted for approximately 40% of segment sales in 2004
(28% in 2003). Should this customer significantly reduce its orders for computer
hardware, in general or from us in particular, for any reason, this could have a
significant negative effect on operations.
In
addition, computer
hardware sales in the greater New York City metropolitan area represented 70%,
71% and 75% of the total segment sales for the years ended December 31, 2002,
2003 and 2004, respectively. Furthermore, most of the sales force for the
segment is based in Manhattan and northern New Jersey.
RISKS
RELATED TO OUR COMVERGE INVESTMENT
Although
we no longer control Comverge, we have invested in it significantly and it
continues to have a material effect on our consolidated results. Comverge’s
revenues have fluctuated significantly from quarter to quarter and it has to
date operated at a loss. Comverge’s activities are subject to many risks,
including the following:
The
market for its energy intelligence solutions is subject to rapid technological
change; if it fails to keep pace, we will have difficulty developing and
maintaining a market for its products and services.
Comverge’s
market is characterized by rapid technological change. Communications and
networking technologies are continuously changing and it will need to invest in
continued product development, both hardware and software, in order to keep pace
with these changing technologies. Although Comverge has been successful in
raising significant financing, over the long term, Comverge may not have
adequate resources to invest in development and accordingly, its development
efforts may not be successful.
The
pace of utility deregulation has been slow; the ultimate regulatory structure of
the utility industry may not provide mandates or incentives to purchase our
products.
The
electric utility industry is undergoing significant deregulation. The pace of
deregulation appears to have slowed due to the uncertainty about deregulation in
the wake of the energy crisis in California in 2000 and the Enron
reorganization. Market observers expect deregulation to include energy choice
and time-of-use pricing requirements, which will mandate, or favor
implementation by utilities of, load control programs and the use of automated
meter reading and data distribution. However, the pace of deregulation has not
been as rapid as expected and to date only a limited number of utilities have
made purchase commitments for automated meter reading and data distribution
systems. Many utilities have also deferred the purchase of load control systems,
pending resolution of broader industry and regulatory developments. The results
of deregulation are uncertain and may not result in the mandates or incentives
for the types of services, which require AMR systems. If state and federal
regulation does not provide these requirements or incentives, the market for its
products may not develop as we expect.
Comverge
must compete with other utility solution providers for market acceptance and
customers.
While
Comverge believes that the systems it offers have advantages over competing load
control and data communications solutions, there are alternative solutions, and
it cannot predict what share of the market it will obtain. In addition, some of
its competitors have more sales and marketing resources, better brand
recognition and/or technologies that offer alternative advantages. If its
potential customers do not adopt its solutions or do so less rapidly than it
expects, Comverge’s future financial results and its ability to achieve positive
cash flow or profitability will be harmed.
Comverge
may encounter difficulties in implementing its technology, products and
services.
Problems
may occur in the implementation of Comverge’s technology, products or services,
and it may not successfully complete the commercial implementation of its
technology on a wide scale. Future advances may render its technology obsolete
or less cost effective than competitive systems. Consequently, it may be unable
to offer competitive services or offer appropriate new technologies on a timely
basis or on satisfactory terms.
Delays,
quality control and price problems could arise due to its reliance on
third-party manufacturers of certain components.
Comverge
uses a limited number of outside parties to manufacture components of some of
its products. Its reliance on third party manufacturers exposes it to risks
relating to timeliness, quality control and pricing. Comverge has experienced
certain delays and quality control problems from third-party manufacturers in
the past and it may experience such problems with its current manufacturers.
Implementing these new product offerings could cause some transitional delays
and the diversification could have a negative impact on price and quality
control. Such delays, price increases and/or quality control problems at
Comverge’s third-party manufacturers could harm its relationships with its
customers, its operating results and cash flow.
ITEM
2. PROPERTIES
Our
corporate headquarters and the principal offices for our computer hardware sales
segment are located in Mahwah, New Jersey in approximately 5,000 square feet of
office space, at a rate of $85,000 per annum (plus annual CPI adjustments),
under a lease that expires in September 2006. We also rent offices of
approximately 3,500 square feet in New York City, at a current rate of $119,000
per annum, under a lease that expires in November 2008. Our West Coast sales
office for our computer hardware sales segment consists of 500 square feet
located in Los Angeles, California at a rate of $11,000 per annum, under a lease
that expired in March 2004. We continue to lease the premises on a
month-to-month basis. We also lease a 600 square foot sales office in southern
New Jersey at a current rent of $9,000 per annum under a lease that expires in
December 2005.
Our
Israeli activities are conducted in approximately 18,000 square feet of office
space in the Tel Aviv metropolitan area under a lease that expires in August
2009. The annual rent is approximately $298,000. These
facilities are used for the Israeli operations of the software consulting and
development segment.
ITEM
3. LEGAL PROCEEDINGS
In March
2005, the Jerusalem District Court returned a decision in our favor in a suit
against Israel Discount Bank. See “Item 7 - Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Recent Developments.”
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our
Company’s Annual Meeting of Stockholders was held on December 21, 2004. The
holders of 7,287,232 shares of common stock out of 8,116,691 shares of common
stock were present either in person or by proxy and were entitled to vote on all
matters. The following matters were voted on at the meeting;
1. Proposal
1: Election of five members to the Board of Directors. Holders of our common
stock entitled to vote on this matter, voted as follow:
| |
|
For |
|
Withheld |
|
|
George
Morgenstern |
|
|
4,849,739 |
|
|
2,445,993 |
|
|
Avi
Kerbs |
|
|
4,884,869 |
|
|
2,508,863 |
|
|
Elihu
Levine |
|
|
4,776,847 |
|
|
2,510,885 |
|
|
Shane
Yurman |
|
|
4,778,869 |
|
|
2,508,863 |
|
|
Samuel
M. Zentman |
|
|
4,884,619 |
|
|
2,403,113 |
|
2. Proposal
2: Amendment of the 1994 Stock Incentive Plan. Holders of our common stock
entitled to vote on this matter, voted as follows:
|
Shares
Voted For |
|
|
523,567 |
|
|
Shares
Voted Against |
|
|
2,677,771 |
|
|
Shares
Voted Abstain |
|
|
192,175 |
|
|
Broker
Non-Votes |
|
|
3,894,219 |
|
Proposal
No. 2 was not adopted.
|
3.
|
Proposal
3: Amendment of the 1995 Stock Option Plan for Nonmanagement Employees.
Holders of our common stock entitled to vote on this matter, voted as
follows: |
|
Shares
Voted For |
|
|
560,992 |
|
|
Shares
Voted Against |
|
|
2,662,946 |
|
|
Shares
Voted Abstain |
|
|
169,575 |
|
|
Broker
Non-Votes |
|
|
3,894,219 |
|
Proposal
No. 3 was not adopted.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
Common Stock is currently traded on the OTC Bulletin
Board (“OTCBB”) under the
symbol “DSSI”. Prior to January 26, 2005, our Common Stock traded on The Nasdaq
SmallCap Market and prior to March 3, 2003, it traded on The Nasdaq National
Market System. The following table sets forth, for the periods indicated, the
high and low reported sales prices per share of our Common Stock on The Nasdaq
SmallCap Market and The Nasdaq National Market System (as applicable).
| |
|
High |
|
Low |
|
|
2003: |
|
|
|
|
|
|
First
Quarter |
|
$ |
2.79 |
|
$ |
0.91 |
|
|
Second
Quarter |
|
|
2.79 |
|
|
1.80 |
|
|
Third
Quarter |
|
|
3.39 |
|
|
2.25 |
|
|
Fourth
Quarter |
|
|
3.45 |
|
|
2.45 |
|
| |
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
First
Quarter |
|
|
4.05 |
|
|
2.76 |
|
|
Second
Quarter |
|
|
3.14 |
|
|
1.43 |
|
|
Third
Quarter |
|
|
1.90 |
|
|
0.64 |
|
|
Fourth
Quarter |
|
|
1.47 |
|
|
0.75 |
|
As of
April 12, 2005, the last reported sales price of our common stock on the OTCBB
was $1.32, there were 82 record holders of our common stock and we
estimate that
there were approximately 1,500 beneficial owners of our common stock.
We paid
no dividends in 2003 or 2004 and presently do not intend to pay any dividends in
2005.
The
following table provides information about our equity compensation plans as of
December 31, 2004, including both stockholder approved plans and non-stockholder
approved plans.
|
Plan
Category |
|
|
Number of Securities to
be
Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and Rights
(a) |
|
Weighted-average
Exercise
Price of
Outstanding
Options, Warrants
and
Rights
(b) |
|
|
Number of Securities
Remaining Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column
(a))
(c) |
|
|
Equity
Compensation Plans Approved by Security Holders |
|
|
1,220,250 |
|
$ |
2.67 |
|
|
-- |
|
|
Equity
Compensation Plans Not Approved by Security Holders(1) |
|
|
470,185 |
|
$ |
3.53 |
|
|
220,242 |
|
|
Total |
|
|
1,690,435 |
|
$ |
2.91 |
|
|
220,242 |
|
(1) The 1995
Stock Option Plan for Nonmanagement Employees is an integral part of our
stock-based compensation structure and has been successfully used for grants to
retain long-term non-management employees who have been crucial in supporting
our senior executives. The plan gives the Board of Directors authority to grant
stock options to our employees and non-executive officers, including those of
our subsidiaries (which includes any subsidiary that is accounted for by the
equity method) as well as other individuals who perform services for us,
including consultants, who can make substantial contributions to our successful
performance. Future option grants and the terms thereof will be determined by
the Board of Directors in accordance with the terms of the plan. No award may be
granted under the plan after April 18, 2005.
ITEM
6. SELECTED FINANCIAL DATA
The
selected consolidated statement of operations data for the years ended December
31, 2002, 2003 and 2004 and consolidated balance sheet data as of December 31,
2003 and 2004 has been derived from our audited Consolidated Financial
Statements included in this Annual Report. The selected consolidated statement
of operations data for the years ended December 31, 2000 and 2001 and the
selected consolidated balance sheet data as of December 31, 2000, 2001 and
2002 has been derived from our unaudited consolidated financial statements not
included herein.
This data
should be read in conjunction with our Consolidated Financial Statements and
related notes included herein and “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Selected
Consolidated Statement of Operations Data:
| |
|
For
the Years Ended December 31, |
|
| |
|
2000** |
|
2001** |
|
2002* |
|
2003* |
|
2004* |
|
| |
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
|
| |
|
(in
thousands, except per share data) |
|
|
Sales |
|
$ |
55,246 |
|
$ |
44,551 |
|
$ |
55,886 |
|
$ |
35,034 |
|
$ |
30,113 |
|
|
Cost
of sales |
|
|
43,737 |
|
|
36,562 |
|
|
42,971 |
|
|
27,976 |
|
|
23,587 |
|
|
Gross
profit |
|
|
11,509 |
|
|
7,989 |
|
|
12,915 |
|
|
7,058 |
|
|
6,526 |
|
|
Research
and development expenses |
|
|
928 |
|
|
2,284 |
|
|
1,526 |
|
|
153 |
|
|
30 |
|
|
Selling,
marketing, general and administrative expenses |
|
|
15,258 |
|
|
15,743 |
|
|
16,689 |
|
|
10,498 |
|
|
7,369 |
|
|
Impairment
of goodwill and investment |
|
|
-- |
|
|
227 |
|
|
2,850 |
|
|
-- |
|
|
-- |
|
|
Gain
on issuance of shares in subsidiary |
|
|
-- |
|
|
397 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Operating
loss |
|
|
(4,677 |
) |
|
(9,868 |
) |
|
(8,150 |
) |
|
(3,593 |
) |
|
(873 |
) |
|
Interest
income |
|
|
1,753 |
|
|
1,104 |
|
|
253 |
|
|
61 |
|
|
84 |
|
|
Interest
expense |
|
|
(704 |
) |
|
(408 |
) |
|
(1,212 |
) |
|
(788 |
) |
|
(175 |
) |
|
Loss
on early redemption of debt |
|
|
(943 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Other
income (loss), net |
|
|
(88 |
) |
|
(32 |
) |
|
113 |
|
|
(475 |
) |
|
197 |
|
|
Loss
from operations before taxes on income |
|
|
(4,659 |
) |
|
(9,204 |
) |
|
(8,996 |
) |
|
(4,795 |
) |
|
(767 |
) |
|
Taxes
on income |
|
|
164 |
|
|
(16 |
) |
|
28 |
|
|
(1 |
) |
|
126 |
|
|
Loss
from operations of the Company and its consolidated
subsidiaries |
|
|
(4,823 |
) |
|
(9,188 |
) |
|
(9,024 |
) |
|
(4,794 |
) |
|
(893 |
) |
|
Share
of losses in Comverge |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(1,752 |
) |
|
(1,242 |
) |
|
Gain
on sale of shares in Comverge |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
705 |
|
|
Minority
interests, net of tax |
|
|
-- |
|
|
-- |
|
|
880 |
|
|
264 |
|
|
(90 |
) |
|
Loss
from continuing operations |
|
|
(4,823 |
) |
|
(9,188 |
) |
|
(8,144 |
) |
|
(6,282 |
) |
|
(1,520 |
) |
|
Income
(loss) from discontinued operations, net of income taxes |
|
|
(431 |
) |
|
(607 |
) |
|
-- |
|
|
-- |
|
|
348 |
|
|
Gain
on sale of discontinued operations, net of income taxes |
|
|
5,366 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Net
income (loss) |
|
$ |
112 |
|
$ |
(9,795 |
) |
$ |
(8,144 |
) |
$ |
(6,282 |
) |
$ |
(1,172 |
) |
|
Basic
and diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations |
|
$ |
(0.64 |
) |
$ |
(1.32 |
) |
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.19 |
) |
|
Discontinued
operations |
|
|
0.66 |
|
|
(0.09 |
) |
|
-- |
|
|
-- |
|
|
0.04 |
|
|
Net
income (loss) per share (basic and diluted) |
|
$ |
0.02 |
|
$ |
(1.41 |
) |
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.15 |
) |
|
Weighted
average number of shares
outstanding
- basic and diluted |
|
|
7,422 |
|
|
6,970
|
|
|
7,349 |
|
|
7,738 |
|
|
7,976 |
|
* Since the
latter part of 2003, we have not recorded revenues from our US-based consulting
business. During the second quarter of 2004, we decided to discontinue our
efforts to reestablish this business as it was previously conducted. As a
result, in the year ended December 31, 2004, we recorded a gain from
discontinued operations of $348,000 net of tax. The
selected consolidated statement of operations data for the years ended December
31, 2002 and 2003 has not been restated for the discontinued operations as the
effect is immaterial (see Note 17 to our Consolidated Financial
Statements).
**
The
selected consolidated statements of operations data for the years ended December
31, 2000 and 2001 has been restated for the discontinued operations of our
US-based consulting business and are unaudited.
Selected
Consolidated Balance Sheet Data:
| |
|
As
of December 31, |
|
| |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
| |
|
(in
thousands) |
|
|
Working
capital |
|
$ |
18,178 |
|
|
$ |
6,809 |
|
|
$ |
2,845 |
|
|
$ |
729 |
|
|
$ |
874 |
|
|
|
Total
assets |
|
|
42,157 |
|
|
|
39,244 |
|
|
|
33,347 |
|
|
|
17,784 |
|
|
|
17,025 |
|
|
|
Short-term
and long-term debt |
|
|
6,606 |
|
|
|
8,681 |
|
|
|
10,033 |
|
|
|
2,259 |
|
|
|
1,396 |
|
|
|
Minority
interests |
|
|
40 |
|
|
|
2,530 |
|
|
|
1,609 |
|
|
|
1,367 |
|
|
|
1,471 |
|
|
|
Total
shareholders’ equity |
|
|
22,581 |
|
|
|
14,362 |
|
|
|
7,128 |
|
|
|
3,200 |
|
|
|
2,125 |
|
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RECENT
DEVELOPMENTS
Agreement
in Principle to Sell dsIT
In March
2005, we and the other shareholders of dsIT entered into an agreement in
principle for the sale of all the outstanding shares of dsIT to Matrix IT Ltd.
Matrix is listed on the Tel Aviv Stock Exchange and is part of the Formula
Group, which is listed on The Nasdaq National Market. Under the terms of the
agreement in principle, the total consideration to be paid for the shares would
be $9 million, to be paid in cash and in Matrix ordinary shares. A portion of
the consideration is subject to adjustment based on dsIT’s performance against
certain operating goals to be set forth in the definitive agreement. The
agreement in principle includes a “no-shop” agreement for a period of 45 days to
allow Matrix to perform its due-diligence investigation.
The
consummation of the above transaction is subject to (i) satisfactory completion
by Matrix of its due diligence investigation of dsIT, (ii) negotiation and
execution of a definitive agreement, and (iii) the receipt of all necessary
corporate and other approvals. The actual consideration to be paid by Matrix for
the dsIT shares, and the amount that we may receive in connection with the
transaction, is subject to adjustment. There is no assurance that the
transaction will be consummated on the terms described above or at all.
IDB
Litigation
In March
2005, a Jerusalem District Court rendered a decision in our favor in our suit
against Israel Discount Bank (“IDB”) and has awarded us damages, legal fees and
other costs of approximately $2.2 million.
Our case
against IDB was commenced in March 1999 and had alleged that IDB had wrongfully
retained control of our shares in Decision System Israel Ltd. (now known as dsIT
Technologies Ltd.). Our action also sought a declaratory judgment that we were
not liable to IDB on a guarantee made on behalf of a former equity affiliate. In
September 2001 the District Court decided against us on all claims. We appealed
the decision to the Israel Supreme Court, which in June 2004 upheld the decision
of the District Court on the guarantee but reversed the District Court on the
shares and held that IDB had wrongfully retained the shares. The Supreme Court
remanded the case to the District Court to determine the damages payable to us
by IDB. The decision in March 2005 was rendered on the remand from the Israel
Supreme Court. The District Court decision is subject to appeal by IDB, which we
understand it intends to file. There is no assurance that the decision in our
favor will be upheld on appeal.
In
accordance with generally accepted accounting principles, any gain contingency
associated with the decision in our favor will not be recognized as income until
the earlier of the exhaustion of all appeals or settlement of the
action.
OVERVIEW
AND TREND INFORMATION
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 “Item 1. Business-Factors Which May Affect Future Results.”
We
operate in two reportable segments: software consulting and development, and
computer hardware sales. Until
March 31, 2003, we included the results of Comverge in our energy intelligence
solutions segment. Since March 31, 2003, we no longer consolidate the results of
Comverge (see Note 3 to our
Consolidated Financial Statements included in this report) and
therefore no longer include their results in our segment reporting.
The
following analysis should be read together with the segment information provided
in Note 15 to our Consolidated Financial Statements included in this
report.
Software
Consulting and Development
Segment
revenues remained relatively stable in 2004 compared to 2003, with the decrease
in project and fixed price revenues being offset by an increase in
time-and-material consulting revenues. The improved cost structure facilitated a
significant increase in this segment’s gross profits and operating income,
despite the slight decrease in revenues. We currently expect the trend of
growing profitability to continue in 2005, as a result of our improved cost
structure and anticipated steady growth in sales.
The
projected growth in sales is expected to come primarily from fixed price
development projects in general and our sonar technology products in particular.
An indication of this, can be found in a contract signed with a European
shipyard in December 2004 for one of our sonar related products, for a total
contract price of €710,000
(approximately $950,000 as of March 16, 2005) most of which we expect will be
recognized in 2005. In addition, we expect the consulting market to continue to
be stable, with possible marginal growth.
dsIT has
been successful in bidding (together with our Databit subsidiary) for certain
combined hardware/software solutions for the Israeli Ministry of Defense (MoD)
and we expect this cooperation to produce increased revenues in
2005.
As
described above in “Recent Developments,” in March 2005, we, together with the
other shareholders of dsIT, entered into an agreement in principle for the sale
of all the outstanding shares of dsIT to Matrix IT Ltd. If the sale is
consummated, we would no longer have any continuing operations in this
segment.
Computer
Hardware Sales
Sales in
2004 were marginally higher than in 2003, although the improved gross profit
margin caused gross profit to increase by more than 15%. The segment’s
dependency on sales to a particular customer has increased and we are investing
significant efforts to diversify our sales base.
To offset
the concentration and volatility in the hardware resale market, we continue to
seek to diversify our revenue base and have initiated efforts to augment with
more value added software products and services. We currently expect sales to
increase in 2005, primarily due to 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. These activities,
together with continuing joint marketing efforts with dsIT for Israeli Ministry
of Defense projects, are intended to reduce Databit’s dependency on the computer
hardware markets in the future and the concentration of its revenue
base.
Energy
Intelligence Solutions
During
2004, Comverge signed another two Virtual Peaking Capacity™ (“VPC”)
agreements bringing its total VPC programs under contract to more than 190
Megawatts. Under the Virtual Peaking Capacity™ program, Comverge installs, owns
and operates a demand-side load management system marketed to small commercial
and residential energy consumers. This fully outsourced service solution allows
utilities and ISOs to call upon needed capacity reduction that can be dispatched
within minutes, throughout the designated service territory.
In
addition, Comverge has strengthened its strategic alliances with equipment
providers such as Landis+Gyr, White-Rogers and others, broadening the spectrum
of solutions offered.
To
continue to provide the much needed financing required to strengthen its market
position and support further growth and development in its Demand Response, Load
Management, AMR, and VPC solution-based offerings, in October 2004, Comverge
completed a Series B Preferred Share financing round, raising approximately
$13.6 million. This
brought the total capital raised by Comverge in 2003 and 2004 to approximately
$32 million. The investing group supporting Comverge includes, in addition to
us, Rockport Capital Partners, Nth Power Management, EnerTech Capital Partners,
NorskHydro Ventures, and Ridgewood Capital. As a result of the most recent
financing round, in which we did not participate, we currently own approximately
7% of Comverge’s preferred shares and 76% of its common shares, representing
approximately 25% of its total equity.
Corporate
Comverge
has been successful in raising approximately $32 million and establishing bank
credit lines and other alternative financing, so that we do not need to further
fund Comverge operations. Although George Morgenstern, our Chairman and Chief
Executive Officer, had announced his retirement from full-time employment,
initiating his consulting contract as of January 1, 2004, he has made himself
available on a full time basis during 2004, and will continue to fill other
appropriate positions the Board may desire. In light of our reduced involvement
with Comverge, the independent management in place at our dsIT and Databit
subsidiaries and our CEO’s semi-retirement, we continued to evaluate our
corporate activities and structure. This evaluation has included exploration of
restructuring, acquisitions or mergers and/or other strategic alternatives. To
this end, in April 2004, we signed a letter agreement with Kardan Communications
Ltd. (“Kardan”), a subsidiary of Kardan N.V., for a strategic transaction with
Kardan or an affiliate thereof. In July 2004, Kardan informed us that it no
longer intended to proceed with the transaction. Since that time, we have
continued to consider other strategic alternatives, which could include possible
restructuring, merger or acquisition and/or financing transactions. For
disclosure regarding our recently announced agreement in principle for the sale
of dsIT, see “Recent Developments” above.
CRITICAL
ACCOUNTING POLICIES
The
Securities and Exchange Commission (“SEC”) defines “critical accounting
policies” as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
The
following discussion of critical accounting policies represents our attempt to
report on those accounting policies which we believe are critical to our
consolidated financial statements and other financial disclosure. It is not
intended to be a comprehensive list of all of our significant accounting
policies, which are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements included in this Annual Report. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles, with no need for management's judgment
in their application. There are also areas in which the selection of an
available alternative policy would not produce a materially different
result.
We have
identified the following as critical accounting policies affecting our company:
principles of consolidation and investments in associated companies; revenue
recognition; foreign currency transactions; income taxes; goodwill and other
long-lived assets; and stock-based compensation.
Principles
of Consolidation and Investments in Associated Companies
Our
consolidated financial statements include the accounts of all majority-owned
subsidiaries. All intercompany balances and transactions have been eliminated.
Minority interests in net losses are limited to the extent of their equity
capital. Losses in excess of minority interest equity capital are charged
against us in our consolidated statements of operations.
Investments
in associated companies are accounted for by the equity method. Our Comverge
investment is comprised of both common and preferred stock. As of December 31,
2004 the balance of our investment was a net liability of $1.4 million,
comprised from negative investment in common shares of $1.8 million, partially
offset by our investment in preferred shares of $0.4 million. We currently
record equity losses in Comverge only against our preferred investment based on
our current 7% holding in Comverge’s preferred shares, and will continue to do
so only until the balance of our preferred share investment is zero. Should we
begin to record equity income on our investment in Comverge, we would record
that 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%.
Revenue
recognition
Revenue
from time-and-materials service contracts, maintenance agreements and other
services is recognized as services are provided. Revenue on the sale of products
and software is recognized when substantial evidence of an arrangement exists,
the price is fixed and determinable, delivery or shipment has occurred and there
is reasonable assurance of collection of the sales proceeds. Such revenue
generally does not involve difficult, subjective or complex judgments, nor does
it contain multiple elements undelivered at the date of sale.
In 2004,
we derived $2.8 million of revenues from fixed-price contracts, all of which are
attributable to our software and consulting development segment, representing
approximately 9% of consolidated sales in 2004 ($3.2 million and 9%, and $3.9
million and 7%, in 2003 and 2002, respectively), which require the accurate
estimation of the cost, scope and duration of each engagement. Revenue and the
related costs for these projects are recognized for a particular period, using
the percentage-of-completion method as costs (primarily direct labor) are
incurred, with revisions to estimates reflected in the period in which changes
become known. If we do not accurately estimate the resources required or the
scope of work to be performed, or do not manage our projects properly within the
planned periods of time or satisfy our obligations under the contracts, then
future revenue and consulting margins may be significantly and negatively
affected and losses on existing contracts may need to be recognized. Any such
resulting changes in revenues and reductions in margins or contract losses could
be material to our results of operations.
In
addition, a significant portion of Comverge’s revenues is subject to a sample
testing of possible load shedding facilitated by its VPC program. This sampling
takes place once a year and Comverge does not recognize the revenues and profits
subject to completion of this test and positive verification of the possible
load shedding. As of December 31, 2004 Comverge did not recognize $1.7 million
in revenues and $1.4 million in gross profits.
Foreign
currency transactions
The
currency of the primary economic environment in which our corporate headquarters
and our U.S. subsidiaries operate is the United States dollar (“dollar”).
Accordingly, the Company and all of its U.S. subsidiaries use the dollar as
their functional currency.
Our dsIT
Israeli subsidiary accounts for approximately 39% of our net revenues for the
year ended December 31, 2004 (34% for the year ended December 31, 2003), and 71%
of our assets and 39% of our total liabilities as of December 31, 2004 (55% of
our assets and 53% of our total liabilities as of December 31,
2003). dsIT’s
functional currency is the New Israeli Shekel (“NIS”) and its financial
statements have been translated using the exchange rates in effect at the
balance sheet date. Statements of operations amounts have been translated using
the exchange rate at date of transaction. In 2002 and 2003 the resulting
translation adjustments were not reported. All exchange gains and losses
denominated in non-functional currencies are reflected in other income (loss),
net in the consolidated statement of operations when they arise.
Income
taxes
We have a
history of unprofitable operations due to losses incurred in a number of our
operations. These losses generated sizeable state, federal and foreign tax net
operating loss (“NOL”) carryforwards, which as of December 31, 2004 were
approximately $6.4 million, $8.7 million and $9.4 million,
respectively.
Generally
accepted accounting principles require that we record a valuation allowance
against the deferred income tax asset associated with these NOL carryforwards
and other deferred tax assets if it is “more likely than not” that we will not
be able to utilize them to offset future income taxes. Due to our history of
unprofitable operations, we only recognize net deferred tax assets in those
subsidiaries in which we believe that it is “more likely than not” that we will
be able to utilize them to offset future income taxes in the future. We
currently provide for income taxes only to the extent that we expect to pay cash
taxes on current income or disallowed expenses.
It is
possible, however, that we could be profitable in the future at levels which
cause management to conclude that it is more likely than not that we will
realize all or a portion of the NOL carryforwards and other deferred tax assets.
Upon reaching such a conclusion, we would immediately record the estimated net
realizable value of the deferred tax assets at that time and would then provide
for income taxes at a rate equal to our combined federal and state effective
rates or foreign rates. Subsequent revisions to the estimated net realizable
value of the deferred tax assets could cause our provision for income taxes to
vary significantly from period to period.
Goodwill
and other long-lived assets
We review
the carrying value of our long-lived assets held for use whenever circumstances
indicate there may be an impairment. For all assets excluding goodwill, the
carrying value of a long-lived asset is considered impaired if the sum of the
undiscounted cash flows is less than the carrying value of the asset. If this
occurs, an impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its fair value. The fair value is
determined by applying a market-rate multiple to the estimated near-term future
revenue stream expected to be produced by the segment. SFAS No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” We no
longer amortize our goodwill and are required to complete an annual impairment
test. For the purpose of implementing SFAS No. 142, we have designated the
fourth quarter as the period of the annual test and determined that we have two
reporting units, which are the same as our two reportable segments. In 2002 we
came to the conclusion that due to the slow down in the hi-tech markets, we
recognized an expense for the impairment of goodwill and acquired software of
$3.0 million ($2.4 million net of minority interests). No impairment was found
in the annual assessment for the years ended December 31, 2003 or
2004.
As of
December 31, 2004, we had an aggregate of $4.4 million of goodwill, all of which
relates to our software consulting and development segment. Additionally, at
December 31, 2004, we had $0.1 million net book value of other identifiable
intangible assets.
Stock-based
compensation
In
December 2002, the FASB issued SFAS No.148--Accounting for Stock-Based
Compensation--Transition and Disclosure (“FAS 148”). This statement amends SFAS
No. 123--Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. We elected to
continue to account for stock-based compensation plans using the intrinsic
value-based method of accounting prescribed by APB No. 25, Accounting for Stock
Issued to Employees (“APB No. 25”), and related interpretations. Under the
provisions of APB No. 25, compensation expense is measured at the grant date for
the difference between the fair value of the stock and the exercise price. In
December 2004, the Financial Accounting Standards Board (“FASB”) issued the
revised Statement of Financial Accounting Standards (“FAS”) No. 123,
“Share-Based Payment” (“FAS 123R”), which addresses the accounting for
share-based payment transactions in which we obtain employee services in
exchange for (a) our equity instruments or (b) liabilities that are based on the
fair value of our equity instruments or that may be settled by the issuance of
such equity instruments. This statement eliminates the ability to account for
employee share-based payment transactions using APB No. 25 and requires instead
that such transactions be accounted for using the grant-date fair value based
method. For us, this statement will be effective as of July 1, 2005 and
we expect
to apply the modified prospective application transition method, as permitted by
the statement. We
estimate
that the cumulative effect of adopting FAS 123R as of July 1, 2005, our adoption
date, based on the awards outstanding as of December 31, 2004, will be
approximately $158,000. This
estimate does not include the impact of additional awards, which may be granted,
or forfeitures, which may occur subsequent to December 31, 2004 and prior to our
adoption of FAS 123R.
We
account 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. We use
the Black-Scholes valuation method to estimate the fair value of
warrants.
RESULTS
OF OPERATIONS
The
following table sets forth selected consolidated statement of operations data as
a percentage of our total sales:
| |
|
Year
Ended December 31, |
|
| |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
|
|
Sales |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
Cost
of sales |
|
|
79 |
|
|
82 |
|
|
77 |
|
|
80 |
|
|
78 |
|
|
Gross
profit |
|
|
21 |
|
|
18 |
|
|
23 |
|
|
20 |
|
|
22 |
|
|
Research
and development expenses |
|
|
2 |
|
|
5 |
|
|
3 |
|
|
-- |
|
|
-- |
|
|
Selling,
marketing, general and administrative expenses |
|
|
28 |
|
|
35 |
|
|
30 |
|
|
30 |
|
|
24 |
|
|
Impairment
of goodwill and investment |
|
|
-- |
|
|
(1 |
) |
|
5 |
|
|
-- |
|
|
-- |
|
|
Gain
on issuance of shares in subsidiary |
|
|
-- |
|
|
1 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Operating
loss |
|
|
(8 |
) |
|
(22 |
) |
|
(15 |
) |
|
(10 |
) |
|
(3 |
) |
|
Interest
income (expense), net |
|
|
2 |
|
|
2 |
|
|
(1 |
) |
|
(2 |
) |
|
-- |
|
|
Loss
on early redemption of debt |
|
|
(2 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Other
income (loss), net |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(1 |
) |
|
1 |
|
|
Loss
from operations before taxes on income |
|
|
(8 |
) |
|
(21 |
) |
|
(16 |
) |
|
(14 |
) |
|
(3 |
) |
|
Taxes
on income |
|
|
1 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Loss
from operations of the Company and its consolidated
subsidiaries |
|
|
(9 |
) |
|
(21 |
) |
|
(16 |
) |
|
(14 |
) |
|
(3 |
) |
|
Share
of losses in Comverge |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(5 |
) |
|
(4 |
) |
|
Gain
on sale of shares in Comverge |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
2 |
|
|
Minority
interests, net of tax |
|
|
-- |
|
|
-- |
|
|
1 |
|
|
1 |
|
|
-- |
|
|
Loss
from continuing operations |
|
|
(9 |
) |
|
(21 |
) |
|
(15 |
) |
|
(18 |
) |
|
(5 |
) |
|
Income
(loss) from discontinued operations, net of income taxes |
|
|
-- |
|
|
(1 |
) |
|
-- |
|
|
-- |
|
|
1 |
|
|
Gain
on sale of discontinued operations, net of income taxes |
|
|
9 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Net
income (loss) |
|
|
-- |
% |
|
(22 |
)% |
|
(15 |
)% |
|
(18 |
)% |
|
(4 |
)% |
The
following table sets forth certain information with respect to revenues and
profits of our two reportable business segments for the years ended December 31,
2002, 2003 and 2004, including the percentages of revenues attributable to such
segments. Until March 31, 2003, we included the results of Comverge in our
energy intelligence solutions segment. Since March 31, 2003, we no longer
consolidate the results of Comverge and no longer include their results in
segment reporting (see Note 3 to our consolidated financial statements). The
column marked “Other” aggregates information relating to miscellaneous operating
segments, which may be combined for reporting under applicable accounting
principles.
| |
|
Software
Consulting
and Development |
|
Energy
Intelligence
Solutions |
|
Computer
Hardware |
|
Other |
|
Total |
|
| |
|
(dollars
in thousands) |
|
|
Year
ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers |
|
$ |
11,581 |
|
$ |
-- |
|
$ |
18,468 |
|
$ |
64 |
|
$ |
30,113 |
|
|
Percentage
of total revenues from external customers |
|
|
39 |
% |
|
-- |
|
|
61 |
% |
|
-- |
|
|
100 |
% |
|
Gross
profit |
|
|
2,718 |
|
|
-- |
|
|
3,744 |
|
|
64 |
|
|
6,526 |
|
|
Segment
income |
|
|
209 |
|
|
-- |
|
|
15 |
|
|
38 |
|
|
262 |
|
| |
|
|
|
Year
ended December 31, 2003: |
|
|
|
Revenues
from external customers |
|
$ |
12,156 |
|
$ |
4,700 |
|
$ |
18,139 |
|
$ |
39 |
|
$ |
35,034 |
|
|
Percentage
of total revenues from external customers |
|
|
35 |
% |
|
13 |
% |
|
52 |
% |
|
-- |
|
|
100 |
% |
|
Gross
profit |
|
|
2,581 |
|
|
1,313 |
|
|
3,125 |
|
|
39 |
|
|
7,058 |
|
|
Segment
loss |
|
|
(849 |
) |
|
(1,422 |
) |
|
(199 |
) |
|
(17 |
) |
|
(2,487 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers |
|
$ |
14,202 |
|
$ |
19,023 |
|
$ |
22,605 |
|
$ |
56 |
|
$ |
55,886 |
|
|
Percentage
of total revenues from external customers |
|
|
25 |
% |
|
34 |
% |
|
41 |
% |
|
-- |
|
|
100 |
% |
|
Gross
profit |
|
|
2,674 |
|
|
6,087 |
|
|
4,098 |
|
|
56 |
|
|
12,915 |
|
|
Impairment
of goodwill and investments |
|
|
2,850 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
2,850 |
|
|
Segment
income (loss) |
|
$ |
(4,503 |
) |
$ |
(2,161 |
) |
$ |
15 |
|
$ |
(2 |
) |
$ |
(6,651 |
) |
2004
COMPARED TO 2003
Sales. The
decrease in sales in 2004, as compared to 2003, was due almost entirely to the
inclusion of Comverge's sales of $4.7 million in the first quarter of 2003;
commencing the second quarter of 2003, we no longer consolidated Comverge's
operations. Sales in our consolidated segments remained relatively
stable.
Gross
profit. The
decrease in gross profits in 2004, as compared to 2003, was entirely
attributable to the inclusion of Comverge's gross profit of $1.3 million in the
first quarter of 2003. This decrease was net of an increase in gross profit in
both of our consolidated segments, as a result of improved gross profit margins.
In the software consulting and development segment the gross profit margin
increased to 23%, from 21% in 2003, and in the computer hardware sales segment,
gross profit margin increased to 20%, from 17% in 2003. The improved gross
profit margins in our consolidated segments more than offset the detraction of
Comverge’s higher gross profit margin.
Research
and development expenses (“R&D”). The
decrease in R&D expenses was primarily due to our company no longer
consolidating Comverge’s operations since the second quarter of
2003.
Selling,
marketing, general and administrative expenses (“SMG&A”). The
decrease in SMG&A in 2004, as compared to 2003, was primarily attributable
to the fact that SMG&A in the 2003 period included $2.2 million of
Comverge's SMG&A and, since the second quarter of 2003, we no longer
consolidate Comverge's operations. The remaining decrease in SMG&A was due
to a decrease in SMG&A in our software consulting and development segment as
well as decreased corporate G&A.
Interest
income (expense), net. The
decrease in net finance expenses is attributable in part to completing the
accretion of discounts and the amortization of related costs in connection with
convertible debt and warrants in the first few months of 2003, which accounted
for almost one-half of these expenses in 2003. Finance expense has also
decreased as a result of the continued reduction of our outstanding balances of
bank debt as well as reductions in interest rates throughout 2003 and 2004.
Other
income, net. During
the second quarter of 2004, we received a decision from the Israeli Supreme
Court in our dispute with an Israeli bank. In its decision, the Court reversed
the district court’s award for costs in favor of the bank for which we had
previously accrued. The courts also remanded to the district court our claims
against the bank for a determination as to the amount of damages. As a result of
the decision we recorded other income of approximately $0.2
million.
Share
of Losses in Comverge. Our
share of Comverge's $9.3 million and $8.0 million of net losses in 2004 and
2003, respectively, was $1.2 million and $1.8 million,
respectively. Comverge's increased losses during 2004 were primarily due to
increased SG&A expenses, primarily attributable to the marketing expenses
associated with its new VPC programs.
Gain
on sale of shares in Comverge. In the
third quarter of 2004, we signed an agreement with certain other shareholders of
Comverge’s Preferred Stock for the sale by us to other shareholders of
480,769 shares
of Comverge Preferred Stock for approximately $1.0 million, resulting in a gain
of $0.7 million.
Minority
interests. Minority
interests reflect the minority interests in income generated by our dsIT
subsidiary.
Discontinued
operations. Since the
latter part of 2003, we have not recorded revenues from our US based consulting
business. During the second quarter of 2004, we decided to discontinue our
efforts to reestablish this business as it was previously conducted. As a
result, in 2004 we recorded a gain from discontinued operations of $0.3 million.
2003
COMPARED TO 2002
Sales. Of the
$20.9 million decrease in sales in 2003 compared to 2002, $14.3 million was due
to Comverge, which, since the second quarter of 2003, is no longer fully
consolidated. Sales decreased in the computer hardware sales segment by $4.5
million, primarily due to the non-recurrence of the extraordinarily high segment
sales in the fourth quarter of 2002. In the software consulting and development
segment, sales decreased by $2.0 million, primarily due to the decrease in the
number of consultants and development projects in 2003. This decrease was
primarily attributable to the downturn in the high-tech market in general and
the software consulting and development market in particular.
Gross
profit. The
decrease in gross profit and gross profit margin in 2003 as compared to 2002 was
also primarily due to our company no longer fully consolidating Comverge’s
operations since the second quarter of 2003. This accounted for $4.8 million of
the $5.9 million decrease. In addition, as Comverge’s gross profit margin was
higher than that of our two continuing operating subsidiaries, ceasing to
consolidate its operations caused a decrease in our consolidated gross profit
margin. Gross profit in the computer hardware sales segment decreased in 2003 by
$1.0 million, primarily due to the aforementioned decrease in sales. In the
software consulting and development segment, despite the significant decrease in
sales, gross profit remained relatively stable, with gross profit margin
improving from 19%
in 2002 to 21% in 2003, due to the
improved cost structure achieved as a result of cost cutting measures
implemented over the last two years, and the completion of most of the projects
running at lower profit margins in previous periods.
Research
and development expenses (“R&D”). The
decrease in R&D expenses was primarily due to our no longer consolidating
Comverge’s operations since the second quarter of 2003.
Selling,
marketing, general and administrative expenses (“SMG&A”). The
discontinued full consolidation of Comverge’s operations since the second
quarter of 2003 accounted for $4.3 million of the $6.2 million decrease in
SMG&A expenses in 2003 as compared to 2002. However, SMG&A decreased in
all our other activities as well. In the software consulting and development
segment, SMG&A decreased by $0.6 million, or 17%, as a result of cost
cutting measures begun in 2002 and continuing through 2003. SMG&A in our
computer hardware sales segment also decreased by $0.5 million, primarily due to
reduced commissions on reduced sales. Finally, corporate SMG&A also
decreased primarily due to reduced professional fees and compensation expense.
Interest
income (expense), net. The
decrease in net finance expenses is attributable to completing the accretion of
discounts and the amortization of related costs in connection with convertible
debt and warrants in 2002 and the first few months of 2003, which accounted for
approximately half the interest expense in 2002.
Other
loss, net. The
other loss in 2003 was primarily attributable to the write-off of a
stockholder’s note received from Comverge’s CEO.
Share
of Losses in Comverge. We
began to account for Comverge on an equity basis as of the second quarter of
2003 (see Note 3 of our Consolidated Financial Statements). Our share of
Comverge's $7.9 million net losses during the period from April 1, 2003 to
December 31, 2003 was $1.8 million. Comverge's increased losses in 2003 of $9.3
million, compared to $2.2 million in 2002, was primarily attributable to a
decrease in sales, particularly those related to Comverge’s family of DCU and
SuperstatTM products
as well as those stemming from its Gulf Power contract, where shipments have
been suspended. In addition, SMG&A in Comverge increased primarily due to
increased advertising and marketing expenses, particularly those related to
front-end marketing and advertising costs related to its new Utah - PacifiCorp
VPN program.
Minority
interests. Minority
interests reflect the minority interests in losses generated by our dsIT
subsidiary.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2004, we had working capital of $0.9 million, including $0.7
million in cash and cash equivalents. Operating activities in 2004 were almost
breakeven, with net cash used in operating activities in 2004 of $0.1 million.
This was a result of our controlled operating entities having positive cash flow
from operations of $1.3 million, almost fully offsetting the cash used to
finance corporate expenses totaling $1.5 million.
Of the
total working capital at December 31, 2004, $0.3 million was in our
majority-owned dsIT subsidiary. Due to Israeli tax and company law constraints,
the significant minority interest in dsIT and dsIT’s own cash and finance needs,
such working capital and cash flows from dsIT’s operations are not readily
available to finance U.S. activities. As at December 31, 2004, dsIT was
utilizing $0.7 million of its $1.2 million line of credit. dsIT's line of credit
is denominated in NIS and bears interest at a rate equal to the Israeli prime
rate plus 2.6% per annum. The Israeli prime rate fluctuates and as of December
31, 2004, was 5.2%. We believe that dsIT will have sufficient liquidity to
finance its activities from cash flow from its own operations over the next 12
months. This is based on continued utilization of its line of credit and
improved operating results stemming from continued cost reductions as well as
anticipated growth in sales.
Our
operating results and cash from operations continue to improve, almost achieving
breakeven in 2004. The cash balance in our US operations as of the end of 2004
was $732,000, and as of March 29, 2005 was $92,000. Management currently
projects continued growth in the revenues of our computer hardware sales segment
and reduction of corporate expenses. Based on these projections, we expect this
balance and cash generated from our computer hardware sales segment to provide
sufficient liquidity for at least the next 12 months, though Databit’s growth
may require additional short-term lines of credit. However, management has
formulated contingency plans in the event we do not meet these
projections.
As
described above under "Recent Developments", in March 2005, we, together with
the other shareholders of our dsIT subsidiary, entered into an agreement in
principle for the sale of all the outstanding shares of dsIT to Matrix IT Ltd.
Under the terms of the agreement, assuming an agreed upon net asset value, the
total consideration to be paid for the shares would be approximately $9 million,
to be paid in cash and in Matrix ordinary shares. A portion of the consideration
is subject to adjustment based on dsIT’s performance against certain operating
goals to be set forth in the definitive agreement. Should we
not succeed in closing a definitive agreement for the sale of dsIT, we expect
dsIT to continue generating profits at a level similar to that of the last
quarter of 2004. Although dsIT will need to utilize its profits to fund this
growth, we expect that completion of certain projects and accumulated profits
will enable dsIT to repay a portion of its loan from DSSI, beginning in August
of 2005, thus providing additional liquidity to the US operations. In
addition, we believe that should we need additional liquidity , we will be able
to sell a portion of our Comverge Preferred shares, as we did in September
2004.
Based on
our expectations and contingency plans described above, all of the above are
expected to provide more than sufficient liquidity for DSSI’s foreseeable future
and the next 12 months in particular.
Contractual
Obligations and Commitments
The table
below provides information concerning obligations under certain categories of
our contractual obligations as of December 31, 2004 :
| |
|
|
Ending
December 31, |
|
| |
|
|
(in
thousands) |
|
| Cash
Payments due to Contractual Obligations |
|
|
Total |
|
|
2005 |
|
|
2006-2007 |
|
|
2008-2009 |
|
|
2010
and thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt related to Israeli operations |
|
$ |
667 |
|
|
466 |
|
|
201 |
|
|
-- |
|
$ |
-- |
|
|
Contingent
performance of bank guarantees (1) |
|
|
410 |
|
|
410 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Operating
leases |
|
|
3,608 |
|
|
1,240 |
|
|
1,761 |
|
|
607 |
|
|
-- |
|
|
Potential
severance obligations to Israeli employees (2) |
|
|
4,279 |
|
|
2 |
|
|
70 |
|
|
29 |
|
|
4,178 |
|
|
Consulting
agreement with CEO (3) |
|
|
1,650 |
|
|
300 |
|
|
600 |
|
|
450 |
|
|
300 |
|
|
Purchase
commitments |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
10,614 |
|
|
2,418 |
|
|
2,632 |
|
|
1,086 |
|
|
4,478 |
|
|
Other
long-tem liabilities reflected on balance sheet in accordance with GAAP
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations |
|
$ |
10,614 |
|
|
2,418 |
|
|
2,632 |
|
|
1,086 |
|
$ |
4,478 |
|
We expect
to finance these contractual commitments in 2005 from cash currently on hand and
cash generated from operations.
(1)
Previously, we accrued a loss for contingent performance of bank guarantees, the
balance of which was $0.4 million at December 31, 2004, included in other
current liabilities. A portion of these guarantees was collateralized by means
of a deposit of $0.2 million as of December 31, 2004.
(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
December 31, 2004, we accrued a total of $4.3 million for potential severance
obligations which is included in long term liabilities, of which approximately
$2.8 million was funded with cash to insurance companies.
(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 CEO has agreed to allow us not to so fund such amounts
until the earlier of (i) March 31, 2006, (ii) his termination as CEO, or (ii)
the closing of a transaction with gross proceeds to us of at least $1.5 million.
Certain
Information Concerning Off-Balance Sheet Arrangements.
Our
Israeli subsidiary provided various performance, advance and tender guarantees
as required in the normal course of its operations. As of December 31, 2004,
such guarantees totaled approximately $0.2 million and are due to expire through
October 2005.
We have
certain obligations to pay consulting fees to our CEO over the next seven years
as described above in Note 3 to the table included under Contractual Obligations
and Commitments.
Under the
employment agreement with the Chief Executive Officer of Databit, if his
employment is not renewed after the initial term or any renewal term, he will be
entitled to receive a lump sum payment equal to one year’s salary and the bonus
he would have earned for the calendar year in which the non-renewal occurred (in
a lump sum payment). If his employment is terminated by us other than for cause
and certain other circumstances, then he will be entitled to 2.9 times both his
annual salary then in effect and the average bonus paid during the three
preceding years (or such shorter period if the termination occurred before the
third year). His current salary is $250,000.
Impact
of Inflation and Currency Fluctuations
A
majority of our sales are denominated in dollars. The remaining portion is
either in NIS or denominated in NIS, linked to the dollar. Such sales
transactions are negotiated in dollars; however, for the convenience of the
customer they are settled in NIS. These transaction amounts are linked to the
dollar between the date the transactions are entered into until the date they
are effected and billed. From the time these transactions are effected and
billed through the date of settlement, amounts are primarily unlinked. The
majority of our expenses in Israel are in NIS, while a portion is in dollars or
dollar-linked NIS.
The
dollar cost of our operations in Israel may be adversely affected in the future
by a revaluation of the NIS in relation to the dollar, should it be
significantly different from the rate of inflation. In 2004 the appreciation of
the NIS against the dollar was 1.6%, whereas in 2003 the appreciation of the NIS
against the dollar was 7.6%.
Inflation in Israel was 1.2% in 2004 and -1.9% during 2003. During the first two
months of 2005, the NIS was devalued against the dollar by 1.1% and inflation
during this period was -0.4%.
As of
December 31, 2004, virtually all of our monetary assets and liabilities that
were not denominated in dollars or dollar-linked NIS were denominated in NIS. In
the event that in the future we have material net monetary assets or liabilities
that are not denominated in dollar-linked NIS, such net assets or liabilities
would be subject to the risk of currency fluctuations.
Payments
to Related Parties
We have
engaged certain of our directors and former directors to render professional
services to us. One of our former directors, who is also the son-in-law of our
Chief Executive Officer, is principal of a law firm that we engage to perform
legal services for us. We paid to this firm legal fees and out-of-pocket
disbursements (which includes fees and expenses of special counsel hired on our
behalf) of approximately $630,000, $403,000 and $479,000 for the years ended
December 31, 2002, 2003 and 2004, respectively. The chief executive officer of
the Company’s Israeli subsidiary has a loan from the subsidiary that was
acquired in 2001. The loan balance and accrued interest at December 31, 2003 and
2004 was $52,000 and $112,000, respectively. The loan has no defined maturity
date, is denominated in NIS, is linked to the Israeli Consumer Price Index and
bears interest at 4% per annum.
SUMMARY
QUARTERLY FINANCIAL DATA (Unaudited)
The
following table sets forth certain of our unaudited quarterly consolidated
financial information for the years ended December 31, 2003 and 2004. This
information should be read in conjunction with our Consolidated Financial
Statements and the notes thereto.
| |
|
|
2003* |
|
|
2004 |
|
| |
|
|
First
Quarter |
|
|
Second
Quarter |
|
|
Third
Quarter |
|
|
Fourth
Quarter |
|
|
First
Quarter |
|
|
Second
Quarter |
|
|
Third
Quarter |
|
|
Fourth
Quarter |
|
| |
|
|
(in
thousands, except per share amounts) |
|
|
Sales |
|
$ |
12,868 |
|
$ |
7,285 |
|
$ |
6,684 |
|
$ |
8,197 |
|
$ |
7,255 |
|
$ |
7,300 |
|
$ |
7,482 |
|
$ |
8,076 |
|
|
Cost
of sales |
|
|
9,799 |
|
|
5,994 |
|
|
5,481 |
|
|
6,702 |
|
|
5,705 |
|
|
5,774 |
|
|
6,026 |
|
|
6,082 |
|
|
Gross
profit |
|
|
3,069 |
|
|
1,291 |
|
|
1,203 |
|
|
1,495 |
|
|
1,550 |
|
|
1,526 |
|
|
1,456 |
|
|
1,994 |
|
|
Research
and development expenses |
|
|
153 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
30 |
|
|
Selling,
marketing, general and administrative expenses |
|
|
4,302 |
|
|
2,108 |
|
|
1,984 |
|
|
2,104 |
|
|
1,830 |
|
|
1,498 |
|
|
2,168 |
|
|
1,873 |
|
|
Operating
income (loss) |
|
|
(1,386 |
) |
|
(817 |
) |
|
(781 |
) |
|
(609 |
) |
|
(280 |
) |
|
28 |
|
|
(712 |
) |
|
91 |
|
|
Interest
income (expense), net |
|
|
(332 |
) |
|
(291 |
) |
|
(56 |
) |
|
(48 |
) |
|
(55 |
) |
|
46 |
|
|
(37 |
) |
|
(45 |
) |
|
Other
income (loss), net |
|
|
(14 |
) |
|
(151 |
) |
|
(243 |
) |
|
(67 |
) |
|
101 |
|
|
136 |
|
|
2 |
|
|
(42 |
) |
|
Income
(loss) before taxes on income |
|
|
(1,732 |
) |
|
(1,259 |
) |
|
(1,080 |
) |
|
(724 |
) |
|
(234 |
) |
|
210 |
|
|
(747 |
) |
|
4 |
|
|
Taxes
on income |
|
|
12 |
|
|
22 |
|
|
(27 |
) |
|
(8 |
) |
|
(7 |
) |
|
(13 |
) |
|
37 |
|
|
109 |
|
|
Income
(loss) from operations of the Company and its consolidated
subsidiaries |
|
|
(1,744 |
) |
|
(1,281 |
) |
|
(1,053 |
) |
|
(716 |
) |
|
(227 |
) |
|
223 |
|
|
(784 |
) |
|
(105 |
) |
|
Minority
interests, net of tax |
|
|
(17 |
) |
|
121 |
|
|
35 |
|
|
125 |
|
|
(15 |
) |
|
(33 |
) |
|
(11 |
) |
|
(31 |
) |
|
Gain
on sale of shares in Comverge |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
705 |
|
|
-- |
|
|
Share
of loss in Comverge |
|
|
-- |
|
|
(550 |
) |
|
(611 |
) |
|
(591 |
) |
|
(353 |
) |
|
(331 |
) |
|
(382 |
) |
|
(176 |
) |
|
Net
loss from continuing operations |
|
|
(1,761 |
) |
|
(1,710 |
) |
|
(1,629 |
) |
|
(1,182 |
) |
|
(595 |
) |
|
(141 |
) |
|
(472 |
) |
|
(312 |
) |
|
Net
income from discontinued operations, net of tax |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
348 |
|
|
-- |
|
|
-- |
|
|
Net
income (loss) |
|
$ |
(1,761 |
) |
$ |
(1,710 |
) |
$ |
(1,629 |
) |
$ |
(1,182 |
) |
$ |
(595 |
) |
$ |
207 |
|
$ |
(472 |
) |
$ |
(312 |
) |
|
Basic
and diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share from continuing operations |
|
$ |
(0.24 |
) |
$ |
(0.22 |
) |
$ |
(0.21 |
) |
$ |
(0.15 |
) |
$ |
(0.08 |
) |
$ |
(0.01 |
) |
$ |
(0.06 |
) |
$ |
(0.04 |
) |
|
Discontinued
operations |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
0.04 |
|
|
-- |
|
|
-- |
|
|
Net
income (loss) per share |
|
$ |
(0.24 |
) |
$ |
(0.22 |
) |
$ |
(0.21 |
) |
$ |
(0.15 |
) |
$ |
(0.08 |
) |
$ |
0.03 |
|
$ |
(0.06 |
) |
$ |
(0.04 |
) |
|
Weighted
average number of shares outstanding - basic |
|
|
7,345 |
|
|
7,792 |
|
|
7,894 |
|
|
7,902 |
|
|
7,920 |
|
|
7,922 |
|
|
7,936 |
|
|
8,117 |
|
|
Weighted
average number of shares outstanding - diluted |
|
|
7,345 |
|
|
7,792 |
|
|
7,894 |
|
|
7,902 |
|
|
7,920 |
|
|
7,964 |
|
|
7,936 |
|
|
8,117 |
|
* The
summary quarterly financial data, for the first through fourth quarters of 2003
have not been restated to reflect the discontinued operation as the effect is
immaterial (see Note 17 to our Consolidated Financial Statements).
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are
required to make certain disclosures regarding our financial instruments,
including derivatives, if any.
A
financial instrument is defined as cash, evidence of an ownership interest in an
entity, or a contract that imposes on one entity a contractual obligation either
to deliver or receive cash or another financial instrument to or from a second
entity. Examples of financial instruments include cash and cash equivalents,
trade accounts receivable, loans, investments, trade accounts payable, accrued
expenses, options and forward contracts. The disclosures below include, among
other matters, the nature and terms of derivative transactions, information
about significant concentrations of credit risk, and the fair value of financial
assets and liabilities.
Foreign
Currency Risk
The
translation of the balance sheets of our Israeli operations from NIS into U.S.
dollars is sensitive to changes in foreign currency exchange rates. These
translation gains or losses are recorded either as cumulative translation
adjustments (“CTA) within stockholders’ equity, or foreign exchange gains or
losses in the statement of operations. In 2004 the NIS strengthened in relation
to the U.S. dollar by 1.6%. To test the sensitivity of these operations to
fluctuations in the exchange rate, the hypothetical change in CTA and foreign
exchange gains and losses is calculated by multiplying the net assets of these
non-U.S. operations by a 10% change in the currency exchange rates.
As of
December 31, 2004, a 10% unfavorable change in the exchange rate of the U.S.
dollar against the NIS would have reduced stockholders’ equity by approximately
$260,000 (arising from a CTA adjustment of approximately $318,000 net exchange
gains of approximately $58,000). These hypothetical changes are based on
increasing the December 31, 2004 exchange rates by 10%.
We do not
employ specific strategies, such as the use of derivative instruments or
hedging, to manage exchange rate exposures.
Fair
Value of Financial Instruments
Fair
values of financial instruments included in current assets and current
liabilities are estimated to approximate their book values due to the short
maturity of such investments. Fair value for long-term debt and long-term
deposits are estimated based on the current rates offered to us for debt and
deposits with similar terms and remaining maturities. The fair value of our
long-term debt and long-term deposits are not materially different from their
carrying amounts.
Concentrations
of Credit Risk
Financial
instruments, which potentially subject us to concentrations of credit risk,
consist principally of cash and cash equivalents, short and long-term bank
deposits, and trade receivables. The counterparty to a majority of our cash
equivalent deposits as well as our short and long-term bank deposits is a major
financial institution of high credit standing. We do not believe there is
significant risk of non-performance by this counterparty. Approximately 37% of
the trade accounts receivable at December 31, 2004 was due from a U.S. customer
that pays its trade receivables over usual credit periods. Credit risk with
respect to the balance of trade receivables is generally diversified due to the
large number of entities comprising our customer base.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Furnished
at the end of this report commencing on page F-1.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Controls and Procedures
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.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2004, our disclosure controls and
procedures were effective for gathering, analyzing and disclosing the
information we are required to disclose in the reports we file with the SEC
under the Securities Exchange Act of 1934, within the time periods specified in
the SEC's rules and forms.
Changes
in Controls and Procedures
There
have been no significant changes in our internal controls or in other factors
that could significantly affect disclosure controls and procedures subsequent to
the date of our most recent evaluation.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
information relating to each of our directors and nominees for director and the
information relating to our executive officers will appear under the captions
“Election of Directors - Certain Information Regarding Directors and Officers”
and “Compliance with Section 16(a) of the Securities and Exchange Act of 1934”
in our definitive proxy statement for the 2005 Annual Meeting of Stockholders
(the “2005 Proxy Statement”), and is hereby incorporated by
reference.
The
information required by this Item pursuant to Item 401(h) and 401(i) of
Regulation S-K relating to an audit committee financial expert and
identification of the Audit Committee of our Board of Directors will appear
under the heading “Corporate Governance” in the 2005 Proxy Statement, and is
hereby incorporated by reference.
We have
adopted a written code of ethics that applies to our principal executive
officer, principal financial officer, and principal accounting officer or
controller, and/or persons performing similar functions. Our code of ethics is
being filed with this Annual Report as an exhibit hereto.
ITEM
11. EXECUTIVE COMPENSATION
The
information relating to compensation of directors and executive officers will
appear under the captions “Executive and Director Compensation - Compensation of
Directors”, “Executive and Director Compensation - Compensation Committee
Interlocks and Insider Participation”, “Executive and Director Compensation -
Employment Arrangements”, “Executive and Director Compensation - Executive
Compensation” and “Compensation Report of the Board of Directors” in the 2005
Proxy Statement, and is hereby incorporated by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information relating to security ownership will appear under the caption “Stock
Ownership of Certain Beneficial Owners and Management” in the 2005 Proxy
Statement, and
is hereby
incorporated by reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information relating to certain relationships and transactions will appear under
the caption “Executive
and Director Compensation - Certain
Related Party Transactions” in the 2005 Proxy Statement, and is hereby
incorporated by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information relating to principal accountant fees and services and audit
committee pre-approval policies and procedures will appear under the caption
“Principal Accountant Fees and Services” in the
2005 Proxy Statement, and is hereby incorporated by reference.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
List of Financial Statements of the Registrant
Report of
Kesselman and Kesselman
Report of
KPMG LLP
Consolidated
Balance Sheets as of December 31, 2003 and 2004
Consolidated
Statements of Operations for the years ended December 31, 2002, 2003 and
2004
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December 31,
2002, 2003 and
2004
Consolidated
Statements of Cash Flows for the years ended December 31, 2002, 2003 and
2004
Notes to
Consolidated Financial Statements
(a)(2)
List of Financial Statement Schedules
Separate
Financial Statements of 50 Percent or Less Owned Persons:
Consolidated
Financial Statements of Comverge, Inc.:
Report of
PricewaterhouseCoopers LLP
Consolidated
Balance Sheets as of December 31, 2004 and 2003
Consolidated
Statements of Operations for the years ended December 31, 2004 and
2003
Consolidated
Statement of Changes in Shareholders’ Equity for the years ended December 31,
2004 and
2003
Consolidated
Statements of Cash Flows for the years ended December 31, 2004 and
2003
Notes to
Consolidated Financial Statements
(a)(3)
List of Exhibits
|
No.
|
|
|
|
3.1 |
|
Certificate
of Incorporation of the Registrant, with amendments thereto (incorporated
herein by reference to Exhibit 3.1 to the Registrant’s Registration
Statement on Form S-1 (File No. 33-70482) (the “1993 Registration
Statement”)). |
|
3.2 |
|
By-laws
of the Registrant (incorporated herein by reference to Exhibit 3.2 to the
Registrant’s Registration Statement on Form S-1 (File No. 33-44027) (the
“1992 Registration Statement”)). |
|
3.3 |
|
Amendments
to the By-laws of the Registrant adopted December 27, 1994 (incorporated
herein by reference to Exhibit 3.3 of the Registrant’s Current Report on
Form 8-K dated January 10, 1995). |
|
4.1 |
|
Specimen
certificate for the Common Stock (incorporated herein by reference to
Exhibit 4.2 to the 1992 Registration Statement). |
|
4.2 |
|
Warrant
to Purchase Common Stock of the Registrant, dated October 12, 1999
(incorporated herein by reference to Exhibit 4.4 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000
10-K”)). |
|
4.3 |
|
Securities
Purchase Agreement, dated as of June 11, 2002, by and among the
Registrant, Databit, Inc. and Laurus Master Fund, Ltd. (“Laurus”)
(including the forms of convertible note and warrant) (incorporated herein
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K dated June 11, 2002). |
|
4.4 |
|
Purchase
and Security Agreement, dated as of December 4, 2002, made by and between
Comverge (“Comverge”) and Laurus (incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December
5, 2002 (the “December 2002 8-K”)). |
|
4.5 |
|
Convertible
Note, dated December 4, 2002, made by and among Comverge, Laurus and, as
to Articles III and V only, the Registrant (incorporated herein by
reference to Exhibit 10.2 to the December 2002 8-K). |
|
4.6 |
|
Common
Stock Purchase Warrant, dated December 5, 2002, issued by the Registrant
to Laurus (incorporated herein by reference to Exhibit 10.3 to the
December 2002 8-K). |
|
4.7 |
|
Registration
Rights Agreement, dated as of December 4, 2002, by and between the
Registrant and Laurus (incorporated herein by reference to Exhibit 10.4 to
the December 2002 8-K). |
|
10.1 |
|
Employment
Agreement between the Registrant and George Morgenstern, dated as of
January 1, 1997 (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
1997 (the “1997 10-K”)).* |
|
10.2 |
|
Employment
Agreement between the Registrant and Yacov Kaufman, dated as of January 1,
1999 (incorporated herein by reference to Exhibit 10.22 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 1999 (the “1999
10-K”)).* |
|
10.3 |
|
1991
Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the
1992 Registration Statement).* |
|
#10.4 |
|
1994
Stock Incentive Plan, as amended.* |
|
10.5 |
|
1994
Stock Option Plan for Outside Directors, as amended (incorporated herein
by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the year
ended December 31, 1995 (the “1995 10-K”)).* |
|
#10.6 |
|
1995
Stock Option Plan for Non-management Employees, as amended.
|
|
10.7 |
|
Agreement
dated January 26, 2002, between the Registrant and Bounty Investors LLC
(incorporated herein by reference to Exhibit 10.12 to the 2000
10-K). |
|
10.8 |
|
Lease
Agreement, dated February 5, 2002, between Duke-Weeks Realty Limited
Partnership and Comverge, (incorporated herein by reference to Exhibit
10.13 to the 2000 10-K). |
|
10.9 |
|
Stock
Option Agreements, dated as of October 1, 1999, between Powercom Control
Systems Ltd. and George Morgernstern, Yacov Kaufman and Harvey E.
Eisenberg (and related promissory notes) (incorporated herein by reference
to Exhibit 10.14 to the 2000 10-K).* |
|
10.10 |
|
Share
Purchase Agreement, dated as of November 29, 2001, by and among the
Registrant, Decision Systems Israel Ltd., Endan IT Solutions Ltd., Kardan
Communications Ltd., Neuwirth Investments
Ltd., Jacob Neuwirth (Noy) and Adv. Yossi Avraham, as Trustee for Meir
Givon (incorporated herein
by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
dated December 13, 2001). |
|
10.11 |
|
Registration
Rights Agreement, dated as of December 13, 2002, by and among the
Registrant, Kardan Communications Ltd. and Adv. Yossi Avraham, as Trustee
for Meir Givon (incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K dated December 13,
2002). |
|
10.12 |
|
Employment
Agreement, dated as of September 1, 2002, by and between Comverge and
Robert M. Chiste (incorporated
herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30,
2002).* |
|
10.13 |
|
Restricted
Stock Purchase Agreement, dated as of September 1, 2002, by and between
the Registrant and Robert M. Chiste (incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30,
2002).* |
|
10.14 |
|
Option
Agreement, dated as of September 1, 2002, by and between Comverge and
Robert M. Chiste (incorporated
herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30,
2002).* |
|
10.15 |
|
Contract
for Asset Management Services between the Registrant and Malley Associates
Capital Management, Inc. (incorporated herein by reference to Exhibit 10.1
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002). |
|
10.16 |
|
Employment
Agreement dated as of March 30, 2002 between Comverge and Joseph D.
Esteves (incorporated
herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002).* |
|
10.17 |
|
Agreement,
dated as of January 31, 2002, between Comverge and Bank Leumi USA
(incorporated herein by reference to Exhibit 10.21 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001
10-K”). |
|
10.18 |
|
$6,000,000
Term Note of Comverge dated as of January 31, 2002, payable to Bank Leumi
USA (incorporated
herein by reference to Exhibit 10.22 to the 2001 10-K).
|
|
10.19 |
|
First
Amendment to Employment Agreement, dated as of May 17, 2002, by and
between the Registrant and George Morgenstern (incorporated
herein by reference to Exhibit 10.23 to the 2001 10-K).* |
|
10.20 |
|
Agreement,
dated as of January 31, 2003, between Comverge and Bank Leumi USA
(including form of $6,000,000 Term Note of
Comverge dated as of January 31, 2003, payable to Bank Leumi
USA)
(incorporated herein by reference to Exhibit 10.24 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002
10-K”). |
|
10.21 |
|
Agreement,
dated as of February 25, 2003, between the Registrant and J.P. Turner
& Company, L.L.C. (incorporated herein by reference to Exhibit 10.25
to the 2002 10-K). |
|
10.22 |
|
Second
Amendment to Employment Agreement, dated as of March 12, 2002, between the
Registrant and George Morgenstern (incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).* |
|
10.23 |
|
Amendment
to Employment Agreement, dated as of June 1, 2002, between the Registrant
and Yacov Kaufman (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2002).* |
|
10.24 |
|
Guaranty,
dated December 4, 2002, made by the Registrant in favor of Laurus
(incorporated herein by reference to Exhibit 10.5 to the December
2002 8-K). |
|
10.25 |
|
Preferred
Stock Purchase Agreement, dated as of April 7, 2003, by and among
Comverge, the Registrant and the other investors named therein
(incorporated herein by reference to Exhibit 10.29 to the 2002
10-K). |
|
10.26 |
|
Investors’
Rights Agreement, dated as of April 7, 2003, by and among Comverge, the
Registrant and the investors and Comverge management named therein
(incorporated herein by reference to Exhibit 10.30 to the 2002
10-K). |
|
10.27 |
|
Co-Sale
and First Refusal Agreement, dated as of April 7, 2003, by and among
Comverge, the Registrant and the investors and stockholders named therein
(incorporated herein by reference to Exhibit 10.31 to the 2002
10-K). |
|
10.28 |
|
Voting
Agreement, dated as of April 7, 2003, by and among Comverge, the
Registrant and the other investors named therein (incorporated herein by
reference to Exhibit 10.32 to the 2002 10-K). |
|
10.29 |
|
Letter
Agreement, dated as of April 1, 2003, by and between the Registrant and
Laurus (incorporated herein by reference to Exhibit 10.33 to the 2002
10-K). |
|
10.30 |
|
Employment
Agreement dated as of August 19, 2004 and effective as of January 1,
2004 by
and between the Registrant and Shlomie Morgenstern (incorporated
herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004).* |
|
10.31 |
|
Restricted
Stock Award Agreement dated as of August 19, 2004, by and between the
Registrant and Shlomie Morgenstern (incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).* |
|
10.32 |
|
Stock
Option Agreement dated as of August 19, 2004, by and between Shlomie
Morgenstern and the Registrant (incorporated herein by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).* |
|
10.33 |
|
Second
Amended and Restated Co-Sale And First Refusal Agreement dated as of
October 26, 2004, by and among Comverge, Inc., the Registrant and other
persons party thereto (incorporated herein by reference to Exhibit 10.4 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004). |
|
#
10.34 |
|
Third
Amendment to Employment Agreement, dated as of December 30, 2004, between
the Registrant and George Morgenstern.* |
|
#
10.35 |
|
Form
of Stock Option Agreement to employees under the 1994 Stock Incentive
Plan. |
|
#
10.36 |
|
Form
of Stock Option Agreement under the 1994 Stock Option Plan for Outside
Directors. |
|
#
10.37 |
|
Form
of Stock Option Agreement under the 1995 Stock Option Plan for
Nonmanagement Employees. |
|
#
10.38 |
|
Stock
Option Agreement dated as of December 30, 2004 by and between George
Morgenstern and the Registrant.* |
|
#
10.39 |
|
Stock
Option Agreement dated as of December 30, 2004 by and between Yacov
Kaufman and the Registrant.* |
|
#
10.40 |
|
Stock
Option Agreement dated as of December 30, 2004 by and between Sheldon
Krause and the Registrant.* |
|
14.1 |
|
Code
of Ethics of the Registrant (incorporated
herein by reference to Exhibit 14.1 to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2003). |
|
#21.1 |
|
List
of subsidiaries. |
|
#23.1 |
|
Consent
of KPMG LLP. |
|
#23.2 |
|
Consent
of Kesselman & Kesselman CPA. |
|
#23.3 |
|
Consent
of PricewaterhouseCoopers
LLP. |
|
#31.1 |
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
#31.2 |
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
#32.1 |
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
#32.2 |
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
________________
|
* |
This
exhibit includes a management contract, compensatory plan or arrangement
in which one or more directors or executive officers of the Registrant
participate. |
|
# |
This
Exhibit is filed or furnished herewith. |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Mahwah, State of
New Jersey, on April 14, 2005.
| |
|
|
| |
Data
Systems & Software Inc. |
|
|
|
|
By: |
/s/ George
Morgenstern |
| |
George Morgenstern |
| |
Chairman
of the Board, President and
Chief Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant, in the capacities
and on the dates indicated.
Signature |
|
Title |
|
Date |
| |
|
|
|
|
|
/s/
George Morgenstern |
|
Chairman
of the Board; President; Chief |
|
April
14, 2005 |
|
George
Morgenstern |
|
Executive
Officer; and Director |
|
|
| |
|
|
|
|
| |
|
|
|
|
|
/s/ Yacov
Kaufman |
|
Vice
President, Chief Financial Officer |
|
April
14, 2005 |
|
Yacov
Kaufman |
|
(Principal
Financial Officer and Principal
Accounting Officer) |
|
|
| |
|
|
|
|
| |
|
|
|
|
|
/s/ Shane
Yurman |
|
Director,
Chairman of the Audit |
|
April
14, 2005 |
| Shane
Yurman |
|
Committee |
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
Director,
Member of the Audit Committee |
|
April
14, 2005 |
| Elihu
Levine |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
Director,
Member of the Audit Committee |
|
April
14, 2005 |
|
Samuel
Zentman |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
Director |
|
|
|
Avi
Kerbs |
|
|
|
|
| |
|
|
|
|
DATA
SYSTEMS & SOFTWARE INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONSOLIDATED
FINANCIAL STATEMENTS OF DATA SYSTEMS & SOFTWARE
INC.: |
| |
|
Report
of Kesselman and Kesselman |
|
F-2 |
| |
|
|
|
Report
of KPMG LLP |
|
F-3 |
| |
|
|
|
Consolidated
Balance Sheets as of December 31, 2003 and December 31,
2004 |
|
F-4 |
| |
|
|
|
Consolidated
Statements of Operations for the years ended December 31,
2002,
December 31, 2003 and December 31, 2004 |
|
F-5 |
| |
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December
31, 2002,
December 31, 2003 and December 31, 2004 |
|
F-6 |
| |
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31,
2002,
December 31, 2003 and December 31, 2004 |
|
F-7 |
| |
|
|
|
Notes
to Consolidated Financial Statements. |
|
F-9 |
| |
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS OF COMVERGE, INC.: |
|
Report
of Report Of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
Data
Systems & Software Inc.
We have
audited the consolidated balance sheets of Data Systems & Software Inc. (the
“Company”) and its subsidiaries as of December 31, 2003 and 2004, and the
related consolidated statements of operations, changes in shareholders’ equity
and cash flows for each of the two years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company’s Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and auditing standards generally
accepted in Israel, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company’s Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2004 and the results of their
operations, changes in shareholders’ equity and their cash flows for each of the
two years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
April 12,
2005
/s/
Kesselman & Kesselman
Certified
Public Accountants
A member
of PricewaterhouseCoopers International Limited
Tel-Aviv,
Israel
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Data
Systems & Software Inc.:
We have
audited the accompanying consolidated statements of operations, changes in
shareholders’ equity, and cash flows of Data Systems & Software Inc. and
subsidiaries for the year ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Data
Systems & Software Inc. and subsidiaries for the year ended December 31,
2002 in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangibles”, effective January 1, 2002.
/s/ KPMG
LLP
Short
Hills, New Jersey
March 7,
2003, except as to
the first
paragraph of Note 3
and the third and fourth sentences
of the second
paragraph of Note 8(a),
which are as of April 10, 2003
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
ASSETS |
|
As
of December 31, |
|
|
|
|
2003 |
|
2004 |
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
1,213 |
|
$ |
685 |
|
|
Short-term
bank deposits |
|
|
-- |
|
|
72 |
|
|
Restricted
cash |
|
|
351 |
|
|
354 |
|
|
Accounts
receivable, net |
|
|
6,425 |
|
|
6,069 |
|
|
Unbilled
work-in-process |
|
|
628 |
|
|
533 |
|
|
Inventory |
|
|
88 |
|
|
61 |
|
|
Other
current assets |
|
|
661 |
|
|
540 |
|
|
Total
current assets |
|
|
9,366 |
|
|
8,314 |
|
|
Investment
in Comverge |
|
|
68 |
|
|
- |
|
|
Property
and equipment, net |
|
|
814 |
|
|
649 |
|
|
Other
assets |
|
|
613 |
|
|
737 |
|
|
Funds
in respect of employee termination benefits |
|
|
2,379 |
|
|
2,836 |
|
|
Goodwill |
|
|
4,430 |
|
|
4,408 |
|
|
Other
intangible assets, net |
|
|
114 |
|
|
81 |
|
|
Total
assets |
|
$ |
17,784 |
|
$ |
17,025 |
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Short-term
bank credit |
|
$ |
968 |
|
$ |
729 |
|
|
Current
maturities of long-term debt |
|
|
659 |
|
|
466 |
|
|
Trade
accounts payable |
|
|
2,586 |
|
|
2,283 |
|
|
Accrued
payroll, payroll taxes and social benefits |
|
|
1,451 |
|
|
1,735 |
|
|
Other
current liabilities |
|
|
2,973 |
|
|
2,227 |
|
|
Total
current liabilities |
|
|
8,637 |
|
|
7,440
|
|
|
Long-term
liabilities: |
|
|
|
|
|
|
|
|
Investment
in Comverge |
|
|
- |
|
|
1,444 |
|
|
Long-term
debt |
|
|
632 |
|
|
201 |
|
|
Liability
for employee termination benefits |
|
|
3,721 |
|
|
4,279 |
|
|
Other
liabilities |
|
|
227 |
|
|
65 |
|
|
Total
long-term liabilities |
|
|
4,580 |
|
|
5,989 |
|
|
Commitments
and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Minority
interests |
|
|
1,367 |
|
|
1,471 |
|
|
Shareholders’
equity: |
|
|
|
|
|
|
|
|
Common
stock - $0.01 par value per share: |
|
|
|
|
|
|
|
|
Authorized
- 20,000,000 shares; Issued - 8,740,729 and 8,937,395 shares at
December 31, 2003 and 2004, respectively |
|
|
87 |
|
|
88 |
|
|
Additional
paid-in capital |
|
|
39,595 |
|
|
39,733 |
|
|
Warrants |
|
|
461 |
|
|
461 |
|
|
Deferred
compensation |
|
|
-- |
|
|
(59 |
) |
|
Accumulated
deficit |
|
|
(33,069 |
) |
|
(34,290 |
) |
|
Treasury
stock, at cost - 838,704 and 820,704 shares for December 31, 2003 and
2004, respectively |
|
|
(3,874 |
) |
|
(3,791 |
) |
|
Accumulated
other comprehensive loss |
|
|
-- |
|
|
(17 |
) |
|
Total
shareholders’ equity |
|
|
3,200 |
|
|
2,125 |
|
|
Total
liabilities and shareholders’ equity |
|
$ |
17,784 |
|
$ |
17,025 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
| |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
| Sales: |
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
39,831 |
|
$ |
22,006 |
|
$ |
18,034 |
|
|
Services |
|
|
12,149 |
|
|
9,791 |
|
|
8,991 |
|
|
Projects |
|
|
3,906 |
|
|
3,237 |
|
|
3,088 |
|
|
Total
sales |
|
|
55,886 |
|
|
35,034 |
|
|
30,113 |
|
|
Cost
of sales: |
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
30,994 |
|
|
18,201 |
|
|
14,609 |
|
|
Services |
|
|
8,689 |
|
|
6,997 |
|
|
6,692 |
|
|
Projects |
|
|
3,288 |
|
|
2,778 |
|
|
2,286 |
|
|
Total
cost of sales |
|
|
42,971 |
|
|
27,976 |
|
|
23,587 |
|
|
Gross
profit |
|
|
12,915 |
|
|
7,058 |
|
|
6,526 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses |
|
|
1,526 |
|
|
153 |
|
|
30 |
|
|
Selling,
marketing, general and administrative expenses |
|
|
16,689 |
|
|
10,498 |
|
|
7,369 |
|
|
Impairment
of goodwill |
|
|
2,760 |
|
|
-- |
|
|
-- |
|
|
Impairment
of investments |
|
|
90 |
|
|
-- |
|
|
-- |
|
|
Total
operating expenses |
|
|
21,065 |
|
|
10,651 |
|
|
7,399 |
|
|
Operating
loss |
|
|
(8,150 |
) |
|
(3,593 |
) |
|
(873 |
) |
|
Interest
income |
|
|
253 |
|
|
61 |
|
|
84 |
|
|
Interest
expense |
|
|
(1,212 |
) |
|
(788 |
) |
|
(175 |
) |
|
Other
income (expense), net |
|
|
113 |
|
|
(475 |
) |
|
197 |
|
|
Loss
before taxes on income |
|
|
(8,996 |
) |
|
(4,795 |
) |
|
(767 |
) |
|
Taxes
on income |
|
|
28 |
|
|
(1 |
) |
|
126 |
|
|
Loss
from operations of the Company and its consolidated
subsidiaries |
|
|
(9,024 |
) |
|
(4,794 |
) |
|
(893 |
) |
|
Share
in losses of Comverge |
|
|
-- |
|
|
(1,752 |
) |
|
(1,242 |
) |
|
Gain
on sale of shares in Comverge |
|
|
-- |
|
|
-- |
|
|
705 |
|
|
Minority
interests |
|
|
880 |
|
|
264 |
|
|
(90 |
) |
|
Net
loss from continuing operations |
|
|
(8,144 |
) |
|
(6,282 |
) |
|
(1,520 |
) |
|
Net
income (loss) from discontinued operations, net of tax |
|
|
-- |
|
|
-- |
|
|
348 |
|
|
Net
loss |
|
$ |
(8,144 |
) |
$ |
(6,282 |
) |
$ |
(1,172 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
Loss
per share from continuing operations |
|
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.19 |
) |
|
Discontinued
operations |
|
|
-- |
|
|
-- |
|
|
0.04 |
|
|
Net
loss per share |
|
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.15 |
) |
|
Weighted
average number of shares outstanding - basic and diluted |
|
|
7,349 |
|
|
7,738
|
|
|
7,976 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(IN
THOUSANDS)
| |
|
Number
of
Shares |
|
Common
Stock |
|
Additional
Paid-In
Capital |
|
Warrants |
|
Stock-Based
Deferred Compensation |
|
Accumulated
Deficit |
|
Treasury
Stock |
|
Shareholder’s
Note |
|
Accumulated
Other
Comprehensive Loss |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of December 31, 2001 |
|
|
8,162 |
|
$ |
82 |
|
$ |
36,981 |
|
$ |
114 |
|
$ |
(14 |
) |
$ |
(18,643 |
) |
$ |
(3,860 |
) |
$ |
(298 |
) |
$ |
-- |
|
$ |
14,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
and amortization of stock option compensation |
|
|
-- |
|
|
-- |
|
|
18 |
|
|
-- |
|
|
7 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
25 |
|
|
Expiration
of warrants |
|
|
-- |
|
|
-- |
|
|
114 |
|
|
(114 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
- |
|
|
Value
of convertible note and convertible portion of line of credit allocated to
beneficial conversion feature and related warrants |
|
|
-- |
|
|
-- |
|
|
574 |
|
|
364 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
938 |
|
|
Purchase
of treasury shares |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(53 |
) |
|
-- |
|
|
|
|
|
(53 |
) |
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(8,144 |
) |
|
-- |
|
|
-- |
|
|
|
|
|
(8,144 |
) |
|
Balances
as of December 31, 2002 |
|
|
8,162 |
|
$ |
82 |
|
$ |
37,687 |
|
$ |
364 |
|
$ |
(7 |
) |
$ |
(26,787 |
) |
$ |
(3,913 |
) |
$ |
(298 |
) |
$ |
-- |
|
$ |
7,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
7 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
7 |
|
|
Issuance
of shares as compensation |
|
|
50 |
|
|
* |
|
|
50 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
50 |
|
|
Exercise
of options |
|
|
2 |
|
|
* |
|
|
(25 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
41 |
|
|
-- |
|
|
|
|
|
16 |
|
|
Issuance
of shares in lieu of debt repayment |
|
|
127 |
|
|
1 |
|
|
239 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
240 |
|
|
Conversion
of line of credit, net of professional fees |
|
|
400 |
|
|
4 |
|
|
559 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
563 |
|
|
Issuance
of warrants for professional services |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
97 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
97 |
|
|
Purchase
of treasury shares |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(2 |
) |
|
-- |
|
|
|
|
|
(2 |
) |
|
Write
off of stockholder’s note |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
298 |
|
|
|
|
|
298 |
|
|
Equity
from issuance of shares by Comverge |
|
|
-- |
|
|
-- |
|
|
1,085 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
1,085 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(6,282 |
) |
|
-- |
|
|
-- |
|
|
|
|
|
(6,282 |
) |
|
Balances
as of December 31, 2003 |
|
|
8,741 |
|
$ |
87 |
|
$ |
39,595 |
|
$ |
461 |
|
$ |
-- |
|
$ |
(33,069 |
) |
$ |
(3,874 |
) |
$ |
-- |
|
$ |
-- |
|
$ |
3,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted shares as compensation |
|
|
195 |
|
|
1 |
|
|
70 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
71 |
|
|
Exercise
of options |
|
|
1 |
|
|
* |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(49 |
) |
|
83 |
|
|
-- |
|
|
-- |
|
|
34 |
|
|
Issuance
of stock-based deferred compensation |
|
|
-- |
|
|
-- |
|
|
68 |
|
|
-- |
|
|
(68 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Amortization
of stock-based deferred compensation |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
9 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
9 |
|
|
Net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(1,172 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
(1,172 |
) |
|
Differences
from translation of subsidiaries’ financial statements |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(17 |
) |
|
(17 |
) |
|
Balances
as of December 31, 2004 |
|
|
8,937 |
|
$ |
88 |
|
$ |
39,733 |
|
$ |
461 |
|
$ |
(59 |
) |
$ |
(34,290 |
) |
$ |
(3,791 |
) |
$ |
-- |
|
$ |
(17 |
) |
$ |
2,125 |
|
* Less
than $1
The
accompanying notes are an integral part of these consolidated financial
statements.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Cash
flows used in operating activities: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(8,144 |
) |
$ |
(6,282 |
) |
$ |
(1,172 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating activities (see
Schedule A)activities--see Schedule A |
|
|
1,832 |
|
|
5,332 |
|
|
1,081 |
|
|
Net
cash used in operating activities |
|
|
(6,312 |
) |
|
(950 |
) |
|
(91 |
) |
|
Cash
flows provided by investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Withdrawal
of long-term deposit Products |
|
|
300 |
|
|
5,700 |
|
|
-- |
|
|
Investment
in debt securities |
|
|
(154 |
) |
|
-- |
|
|
-- |
|
|
Investment
in short-term bank deposits |
|
|
-- |
|
|
-- |
|
|
(72 |
) |
|
Proceeds
from sale and maturity of marketable and debt securities |
|
|
2,031 |
|
|
-- |
|
|
-- |
|
|
Amounts
funded for employee termination benefits |
|
|
(579 |
) |
|
(474 |
) |
|
(495 |
) |
|
Utilization
of employee termination benefits |
|
|
807 |
|
|
235 |
|
|
38 |
|
|
Acquisitions
of property and equipment |
|
|
(492 |
) |
|
(231 |
) |
|
(94 |
) |
|
Proceeds
from sale of Comverge shares |
|
|
-- |
|
|
-- |
|
|
975 |
|
|
Proceeds
from sale of property and equipment |
|
|
28 |
|
|
16 |
|
|
65 |
|
|
Restricted
cash |
|
|
(12 |
) |
|
21 |
|
|
(3 |
) |
|
Business
dispositions - see Schedule C |
|
|
-- |
|
|
(3,644 |
) |
|
-- |
|
|
Net
cash provided by investing activities |
|
|
1,929 |
|
|
1,623 |
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock |
|
|
(53 |
) |
|
(2 |
) |
|
-- |
|
|
Issuance
of subsidiary shares to minority interests Products |
|
|
-- |
|
|
22
|
|
|
-- |
|
|
Proceeds
from employee stock option exercises |
|
|
-- |
|
|
16
|
|
|
34 |
|
|
Proceeds
from issuance of convertible note, net of issuance costs |
|
|
1,749 |
|
|
-- |
|
|
-- |
|
|
Short-term
debt repayments, net |
|
|
(422 |
) |
|
(881 |
) |
|
(239 |
) |
|
Proceeds
from borrowings of long-term debt |
|
|
679 |
|
|
835
|
|
|
-- |
|
|
Repayments
of long-term debt |
|
|
(445 |
) |
|
(600 |
) |
|
(646 |
) |
|
Net
cash provided by (used in) financing activities |
|
|
1,508 |
|
|
(610 |
) |
|
(851 |
) |
|
Net
increase (decrease) in cash and cash equivalents |
|
|
(2,875 |
) |
|
63 |
|
|
(528 |
) |
|
Cash
and cash equivalents at beginning of year |
|
|
4,025 |
|
|
1,150 |
|
|
1,213 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
1,150 |
|
$ |
1,213 |
|
$ |
685 |
|
|
Supplemental
cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
579 |
|
$ |
328 |
|
$ |
151 |
|
|
Income
taxes |
|
$ |
138 |
|
$ |
136 |
|
$ |
90 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
SCHEDULES
TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN THOUSANDS)
| |
|
2002 |
|
2003 |
|
2004 |
|
|
A.Adjustments
to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization. |
|
$ |
1,155 |
|
$ |
527 |
|
$ |
227 |
|
|
Minority
interests |
|
|
(921 |
) |
|
(264 |
) |
|
90 |
|
|
Impairment
of goodwill and acquired software |
|
|
3,000 |
|
|
-- |
|
|
-- |
|
|
Share
in losses of Comverge |
|
|
-- |
|
|
1,752 |
|
|
1,242 |
|
|
Deferred
taxes |
|
|
(107 |
) |
|
(98 |
) |
|
24 |
|
|
Increase
(decrease) in liability for employee termination benefits |
|
|
(429 |
) |
|
739 |
|
|
558 |
|
|
Gain
on sale of Comverge shares |
|
|
-- |
|
|
-- |
|
|
(705 |
) |
|
Gain
on sale of marketable securities and debt securities, net |
|
|
(49 |
) |
|
-- |
|
|
-- |
|
|
Loss
from impairment of investment |
|
|
90 |
|
|
-- |
|
|
-- |
|
|
Loss
on write-off of stockholder’s note |
|
|
-- |
|
|
298 |
|
|
-- |
|
|
Gain
on sale of property and equipment, net |
|
|
(4 |
) |
|
(47
|
) |
|
(2 |
) |
|
Stock
and stock option compensation |
|
|
25 |
|
|
57 |
|
|
80 |
|
|
Accretion
of discount on convertible debt and amortization of related
costs |
|
|
679 |
|
|
500 |
|
|
-- |
|
|
Other |
|
|
(208 |
) |
|
70 |
|
|
21 |
|
|
Changes
in operating assets and liabilities, net of effect of
disposition: |
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable, unbilled work-in-
process and other assets |
|
|
(1,157 |
) |
|
3,108
|
|
|
424 |
|
|
Decrease
(increase) in inventory |
|
|
(1,559 |
) |
|
293
|
|
|
27 |
|
|
Increase
(decrease) in accounts payable and other liabilities |
|
|
1,317 |
|
|
(1,603 |
) |
|
(483 |
) |
|
Discontinued
operations |
|
|
-- |
|
|
-- |
|
|
(422 |
) |
|
|
|
$ |
1,832 |
|
$ |
5,332 |
|
$ |
1,081 |
|
|
B.Non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in lieu of debt repayment |
|
|
|
|
$ |
803 |
|
|
|
|
|
Increase
in investment in Comverge from issuance of preferredand common stock
credited to additional paid-in capital |
|
|
|
|
$ |
1,085 |
|
|
|
|
|
Accrued
expenses incurred in investment of Comverge |
|
|
|
|
$ |
200 |
|
|
|
|
|
Adjustment
of treasury stock and additional paid-in capital with respect to options
exercised |
|
|
|
|
$ |
41 |
|
|
|
|
|
Adjustment
of goodwill |
|
$ |
48 |
|
|
|
|
|
|
|
|
Accounts
payable incurred in acquisition of fixed assets |
|
$ |
50 |
|
|
|
|
|
|
|
|
Value
of beneficial conversion feature and related warrants on issuance of
convertible debt |
|
$ |
938 |
|
|
|
|
|
|
|
|
Increase
in deferred tax liability associated with adjustment of intangible
assets |
|
$ |
17 |
|
|
|
|
|
|
|
|
Issuance
of subsidiary shares to minority interest in lieu of
balancedue |
|
|
|
|
|
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.Assets/liabilities
disposed of in disposition of Comverge: |
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
$ |
4,634 |
|
|
|
|
|
Property,
equipment and other assets |
|
|
|
|
|
1,190 |
|
|
|
|
|
Goodwill
|
|
|
|
|
|
499 |
|
|
|
|
|
Intangibles |
|
|
|
|
|
214 |
|
|
|
|
|
Short-term
debt |
|
|
|
|
|
(3,880 |
) |
|
|
|
|
Current
liabilities |
|
|
|
|
|
(2,340 |
) |
|
|
|
|
Other
liabilities |
|
|
|
|
|
(517 |
) |
|
|
|
|
Cash
investment in Comverge |
|
|
|
|
|
(3,444 |
) |
|
|
|
|
|
|
|
|
|
$ |
(3,644 |
) |
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE
1—NATURE OF OPERATIONS
(a)
Description of Business
Data
Systems & Software Inc., a Delaware corporation (“DSSI”), through its
subsidiaries (collectively, the “Company”) and its equity investment (see Note
3) in Comverge Inc. (“Comverge”), (i) provides software consulting and
development services, (ii) is an authorized dealer and a value-added-reseller of
computer hardware, and (iii) provides energy intelligence solutions for
utilities and energy companies (through Comverge, whose results were
consolidated up to March 31, 2003 (see Note 3)). The Company’s operations are
based in the United States and in Israel. DSSI’s shares were delisted from The
Nasdaq SmallCap Market effective January 26, 2005 and its shares are currently
traded on the OTC Bulletin Board . On March 28, 2005, the Company entered into
entered into an agreement in principle for the sale of all the outstanding
shares of the Company’s majority-owned dsIT Technologies Ltd. (“dsIT”)
subsidiary to Matrix IT Ltd. (“Matrix”) (see Note 18(b)). As to principal
customers and principal markets - see Note 15.
(b)
Financing of Operations
As of
December 31, 2004, the Company had working capital of $874, including $685 in
unrestricted cash and cash equivalents. Net cash of $528 was used during 2004,
of which $91 was used in operating activities. The net loss for the year ended
December 31, 2004 of $1,172, was due primarily to the net loss from the
Company’s investment in Comverge of $537 (comprised of equity losses of $1,242
and a net gain on the sale of Comverge shares of $705) and
expenses of $342 incurred in connection with a strategic transaction which was
not consummated. The Company's use of cash of $91 in operating activities during
2004 was primarily for payment of accounts payable and other liabilities in
excess of collections of trade accounts receivables, unbilled work-in-process
and other assets of $481, net. Net cash of $414 provided by investing activities
was primarily from the net proceeds of $975 from the sale by the Company of
preferred shares of its Comverge equity investment, less amounts used to fund
employee termination benefits in dsIT of $495. Net cash of $851 used in
financing activities was primarily for payment of debt of $885.
The
working capital of $874 at December 31, 2004, included working capital of $275
in dsIT. Due to Israeli tax and company law constraints, dsIT’s own cash flow
requirements and the significant minority interest in dsIT, working capital and
cash flows from dsIT's operations are not readily available to finance US based
activities.
dsIT was
utilizing approximately $729 of its $1,160 lines of credit as of December 31,
2004. dsIT's lines of credit are denominated in NIS and bear an average interest
rate of the Israeli prime rate plus 2.6% per annum. The Israeli prime rate
fluctuates and as of December 31, 2004 was 5.2%.
The
Company intends to fund its US activities with the cash available and
anticipated profits from its US operations. The Company continues to consider
various restructuring, merger or acquisition and/or additional financing
transactions. Should the Company need additional liquidity to finance its US
activities and should it be unsuccessful in completing a timely transaction
providing the necessary liquidity, it may not have sufficient funds to finance
its US activities. In such event, the Company might need to sell additional
Comverge shares.
(c)
Accounting Principles
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America.
(d) Use
of Estimates in Preparation of Financial Statements
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Functional
Currency and Foreign Currency Transactions
The
currency of the primary economic environment in which the operations of DSSI and
its US subsidiaries are conducted is the United States dollar (“dollar”).
Accordingly, the Company and all of its US subsidiaries use the dollar as their
functional currency. The financial statements of the Company’s Israeli
subsidiaries whose functional currency is the New Israeli Shekel (“NIS”) have
been translated in accordance with Statement of Financial Accounting Standards
(“SFAS”) 52 of the Financial Accounting Standards Board of the United States
(“FASB”) assets and liabilities are translated at year-end exchange rates, while
operating results items are translated are translated at the exchange rate in
effect on the date of the transaction. Differences resulting from translation
are presented in shareholders’ equity as accumulated comprehensive loss. All
exchange gains and losses denominated in non-functional currencies are reflected
in other income (loss), net, in the consolidated statement of operations when
they arise.
Principles
of Consolidation and Presentation
The
consolidated financial statements of the Company include the accounts of all
majority-owned subsidiaries. All intercompany balances and transactions have
been eliminated. Minority interests in net losses are limited to the extent of
their equity capital. Losses in excess of minority interest equity capital are
charged against the Company.
Cash
Equivalents
The
Company considers all highly liquid investments, which include short-term
deposits (up to three months from date of deposit) that are not restricted as to
withdrawal or use, to be cash equivalents.
Inventory
Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out method for merchandise inventory and parts and supplies. Inventory is
primarily comprised of merchandise inventory.
Investment
in Associated Companies
An
associated company is a company over which significant influence is exercised.
The Company’s investment in Comverge is comprised of investment in common and
preferred shares. The Company considers Comverge preferred shares to be
in-substance common stock as defined in Emerging Issues Task Force (“EITF”)
Issue No. 02-14 “Whether the Equity Method of Accounting Applies When an
Investor Does Not Have an Investment in Voting Stock of an Investee but
Exercises Significant Influence Through Other Means”. Thus, the entire
investment in Comverge is accounted for by the equity method.
Property
and Equipment
Property
and equipment are presented at cost at the date of acquisition. Depreciation and
amortization is calculated based on the straight-line method over the estimated
useful lives of the depreciable assets, or in the case of leasehold
improvements, the shorter of the lease term or the estimated useful life of the
asset. Improvements are capitalized while repairs and maintenance are charged to
operations as incurred.
Goodwill
and Acquired Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets of businesses
acquired. Effective January 1, 2002 the Company adopted the provisions of SFAS
No. 142, “Goodwill and Other Intangible Assets”. In connection with the initial
adoption of SFAS No. 142, the Company performed a transitional impairment
evaluation of goodwill and concluded that there was no indication of impairment
as of January 1, 2002. Upon adooption, the Company also assessed the useful
lives and residual values of all amortizable intangible assets and determined
that no adjustments were necessary. Under SFAS No. 142, goodwill and intangible
assets determined to have an indefinite useful life are not amortized, but
instead are tested for impairment at least annually. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets”.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SFAS No. 142 requires the Company to assess annually whether there
is an indication that goodwill is impaired, or more frequently if events and
circumstances indicate that the asset might be impaired during the year. The
Company performs its annual impairment test at the conclusion of its annual
budget process, in the fourth quarter of each year. The Company has identified
its operating segments as its reporting units for purposes of the impairment
test and assigned its goodwill and intangible assets to its software consulting
and development segment. The Company determines the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units. The Company then
determines the fair value of each reporting unit and compares it to the carrying
amount of the reporting unit. Calculating the fair value of the reporting units
requires significant estimates and assumptions by management. To the extent the
carrying amount of a reporting unit exceeds the fair value of the reporting
unit, there is an indication that the reporting unit goodwill may be impaired
and a second step of the impairment test is performed to determine the amount of
the impairment to be recognized, if any.
Identifiable
intangible assets deemed to have an indefinite life are tested annually for
impairment, or more frequently if events and circumstances indicate that the
asset might be impaired during the year. An impairment loss is recognized to the
extent that the carrying amount exceeds the asset’s fair value as determined
based on discounted cash flows associated with the asset. The Company has not
identified any indefinite life intangible assets.
The costs
of licensed technology and software are presented at estimated fair value at
acquisition date. These costs are amortized on a straight-line basis over the
term of the license or estimated useful life of the software, generally five
years.
Impairment
of Long-Lived Assets
Under
SFAS No. 144 long-lived assets, except those addressed by SFAS No. 142, are
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the undiscounted future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future undiscounted cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires the Company to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Treasury
Stock
Company
shares held by the Company are presented as a reduction of shareholders’ equity,
at their cost to the Company. Losses, from the reissuance of treasury stock are
reflected in accumulated deficit, in the consolidated statement of shareholders’
equity.
Revenue
Recognition
Revenues
from time-and-materials service contracts, maintenance agreements and other
services are recognized as services are provided.
Revenues
from fixed-price contracts to design, develop, manufacture or modify complex
equipment and software to customer specifications are recognized using the
percentage-of-completion method in a long-term contract transaction.
The
percentage-of-completion is determined based on labor hours incurred.
Percentage-of-completion estimates are reviewed periodically, and any
adjustments required are reflected in the period when such estimates are
revised. Losses on contracts, if any, are recognized in the period in which the
loss is determined.
Revenues
from the sale of software licenses are recognized when a license agreement
exists, delivery has occurred, the license fee is fixed or determinable, and
collectibility is reasonably assured. Maintenance and subscription revenue is
recognized ratably over the contract period.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues
from the sale of products, which are shipped from the Company’s stock of
inventory, are recognized when the products are shipped provided that
appropriate signed documentation of the arrangement, such as a signed contract,
purchase order or letter of agreement, has been received, the fee is fixed or
determinable and collectibility is reasonably assured.
In
accordance with EITF Issue No. 99-19 “Recording Revenue Gross as a Principal
Versus Net as an Agent”, revenue from drop-shipments of third-party hardware and
software sales are recognized upon delivery, and recorded at the gross amount
when the Company is responsible for fulfillment of the customer order, has
latitude in pricing, customizes the product to the customer’s specifications and
has discretion in the selection of the supplier.
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.
Concentration
of Credit Risk - Allowance for Doubtful Accounts
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents, short-term bank deposits
and trade receivables. The counterparty to a majority of the Company’s cash
equivalent deposits as well as its short-term bank deposits is a major financial
institution of high credit standing. The
Company does not believe there is significant risk of non-performance by the
counterparty. Approximately 37% and 30%
of the trade accounts receivable at December 31, 2004 and 2003, respectively,
were due from a US customer that pays its trade receivables over usual credit
periods (as to revenues from such customer - see Note 15(d)). Credit risk with
respect to the balance of trade receivables is generally diversified due to the
large number of entities comprising the Company’s customer base.
An
appropriate allowance for doubtful accounts is included in respect of specific
debts of which collection is in doubt. The Company performs ongoing credit
evaluations of its customers and does not require collateral.
Research
and Development Expenses
Research
and development costs (mainly from Comverge) consisting primarily of labor and
related costs are charged to operations as incurred.
Advertising
Expenses
Advertising
expenses are charged to operations as incurred.
Issuance
of Stock of Subsidiary
The
Company recognizes gains and losses from the issuance of subsidiary stock
through the consolidated statement of operations. In non-cash transactions, when
the assurance as to the reliability of the fair value of the non-cash asset
received is difficult to determine, gains are recorded in additional paid-in
capital.
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 in
the pro forma amounts indicated below:
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss as reported |
|
$ |
(8,144 |
) |
$ |
(6,282 |
) |
$ |
(1,172 |
) |
|
Plus:
Stock-based employee compensation expense included in reported net
income |
|
|
25 |
|
|
57 |
|
|
80 |
|
|
Less:
Total stock-based employee compensation expense determined under fair
value based method for all awards |
|
|
1,199 |
|
|
502 |
|
|
188 |
|
|
Pro
forma net loss |
|
$ |
(9,318 |
) |
$ |
(6,727 |
) |
$ |
(1,280 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - as reported: |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted from continuing operations |
|
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.19 |
) |
|
Basic
and diluted from discontinued operations |
|
|
-- |
|
|
|
|
|
0.04 |
|
|
Basic
and diluted |
|
$ |
(1.11 |
) |
$ |
(0.81 |
) |
$ |
(0.15 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share -pro forma: |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted from continuing operations |
|
$ |
(1.27 |
) |
$ |
(0.87 |
) |
$ |
(0.20 |
) |
|
Basic
and diluted from discontinued operations |
|
|
|
|
|
|
|
|
0.04 |
|
|
Basic
and diluted |
|
$ |
(1.27 |
) |
$ |
(0.87 |
) |
$ |
(0.16 |
) |
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.
Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, as well as operating loss, capital
loss and tax credit carryforwards. Deferred tax assets and liabilities are
classified as current or non-current based on the classification of the related
assets or liabilities for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related to an asset
or liability for financial reporting. Valuation allowances are established
against deferred tax assets if it is more likely than not that they will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates or laws is recognized in
operations in the period that includes the enactment date.
Basic
and Diluted Net Loss Per Share
Basic net
loss per share is computed by dividing the net loss by the weighted average
number of shares outstanding during the year, excluding treasury stock. Diluted
net loss per share is computed by dividing the net loss by the weighted average
number of shares outstanding plus the dilutive potential of common shares which
would result from the exercise of stock options and warrants or conversion of
convertible securities. However, the dilutive effects of stock options, warrants
and convertible securities are excluded from the computation of diluted net loss
per share if doing so would be antidilutive. The number of options and warrants
that were excluded from the computation of basic and diluted net loss per share,
as they had an antidilutive effect, were 73,000 75,000 and 11,000 for the years
ending December 31, 2002, 2003 and 2004, respectively.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Recently
Issued Accounting Principles
In
December 2004, the FASB issued the revised SFAS No. 123, "Share-Based Payment"
("SFAS 123R"), which addresses the accounting for share-based payment
transactions in which the Company obtains employee services in exchange for (a)
equity instruments of the Company, or (b) liabilities that are based on the fair
value of the Company's equity instruments or that may be settled by the issuance
of such equity instruments. This statement eliminates the ability to account for
employee share-based payment transactions using APB Opinion No. 25 and requires
instead that such transactions be accounted for using the grant-date fair value
based method. This statement will be effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005 (July 1, 2005
for the Company). This Statement applies to all awards granted or modified after
the statement's effective date. In addition, compensation cost for the unvested
portion of previously granted awards, that remain outstanding on the statement's
effective date, shall be recognized on or after the effective date, as the
related services are rendered, based on the awards' grant-date fair value as
previously calculated for the pro-forma disclosure under FAS 123.
The
Company estimates that the cumulative effect of adopting SFAS 123R as of July 1,
2005, the Company’s adoption date, based on the awards outstanding as of
December 31, 2004, will be approximately $158. This estimate does not include
the impact of additional awards which may be granted or forfeitures which may
occur subsequent to December 31, 2004 and prior to our adoption of SFAS 123R.
The Company expects that upon the adoption of SFAS 123R, the Company will apply
the modified prospective application transition method, as permitted by the
statement. Under such transition method, upon the adoption of SFAS 123R, the
Company's financial statements for periods prior to the effective date of the
statement will not be restated. The impact of this statement on the Company's
financial statements or its results of operations in 2005 and beyond will depend
upon various factors, among them the Company's future compensation strategy. The
Company expects that the effect of applying this Statement on the Company's
results of operations in 2005 as it relates to existing option plans would not
be materially different from the FAS 123 pro forma effect previously reported.
In
December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary
Assets--An Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB
Opinion No. 29, "Accounting for Non-Monetary Transactions" (Opinion 29). The
amendments made by SFAS 153 are based on the principle that exchanges of
non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the exception for non-monetary
exchanges of similar productive assets and replace it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. The
provisions in FAS 153 are effective for non-monetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005 (July 1, 2005 for the Company).
The provisions of this Statement shall be applied prospectively. The Company
does not expect the adoption of SFAS 153 to have a material effect on the
Company's financial statements or its results of operations.
Reclassifications
Certain
reclassifications have been made to the Company’s prior years’ consolidated
financial statements to conform to the current year’s consolidated financial
statement presentation.
NOTE
3—INVESTMENT IN COMVERGE
On April
7, 2003, the Company and its then consolidated Comverge subsidiary, signed
and closed on a definitive agreement with a syndicate of venture capital firms
raising an aggregate of $13,000 in capital funding. The Company purchased $3,250
of Series A Convertible Preferred Stock issued by Comverge in the equity
financing and incurred transaction costs of an additional $294. A syndicate of
venture capital firms purchased $7,750 of Series A Convertible Preferred Stock
issued by Comverge, and one member of the syndicate also purchased $2,000 of
Series A-1 Convertible Preferred Stock of Comverge. In connection with the
transaction, the Company converted to equity intercompany balances of $9,673.
The purchaser of the Series A-1 Preferred Stock was granted a put option
exercisable in April 2004 and Comverge received a right to call all the Series
A-1 Preferred Stock for $2,000, at anytime on or before April 18, 2004.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
Series A Preferred Stock is convertible into Comverge’s common stock initially
on a one-for-one basis subject to adjustment for the achievement of certain
performance criteria. Conversion is mandatory (i) in the event that the holders
of at least a majority of the then-outstanding shares of Series A Preferred
consent to such conversion or (ii) upon the closing of a firmly underwritten
public offering of shares of Common Stock of Comverge at a per share price not
less than five times the original per-share purchase price of the Preferred
Stock. The holders of Preferred Stock have no mandatory redemption rights. Under
Comverge's Amended and Restated Certificate of Incorporation, the holders of
Comverge common stock have the right to elect two of the five directors on
Comverge's Board. Certain preferred shareholders other than the Company have the
right to elect the other three directors. Pursuant to a voting agreement, one of
the directors elected by the holders of the Comverge common stock must be the
Chief Executive Officer (CEO) of Comverge. The Company's chairman and CEO and
Comverge's CEO were elected as directors by the Comverge common
stockholders.
In
connection with Comverge's April 2003 equity financing transactions, Comverge
acquired Sixth Dimension, Inc. ("6D") in a purchase business combination, valued
at approximately $510, in exchange for 877,000 shares of Comverge common stock.
Some of the venture capital participants in Comverge's equity financing
transaction were the principal owners in 6D prior to the acquisition. In
connection with this transaction, as a result of the Company’s dilution and the
valuation of Comverge’s common stock reflected in the 6D transaction, we
recorded an increase of $1,085 to our common stock investment in Comverge. The
adjustment was recorded to additional paid-in capital.
Following
Comverge’s April 2003 equity transaction, the Company held approximately 50.6%
of the outstanding capital voting stock of Comverge (approximately 76% of
Comverge’s common stock and approximately 26% of Comverge’s Preferred Stock). As
a result of the transaction, the Company is no longer obligated to fund
Comverge. Additionally, as a result of the April 2003 equity transaction, the
Company had a negative investment balance in Comverge’s common stock of $1,824.
Due to the fact that the Company is not longer committed to fund Comverge, the
Company has ceased to record equity losses against its negative common stock
investment. The Company’s negative common investment will only be adjusted upon
disposition of the Company’s common stock investment or when the Company
realizes equity income from Comverge in excess of any accumulated equity losses
recorded on its Preferred Stock investment.
As a
result of the private equity financing transactions and other agreements
described above, effective April 1, 2003, Comverge is no longer a controlled
subsidiary of the Company and thus, the Company no longer consolidates
Comverge's balance sheet and results of operations, accounting for its
investment in Comverge on the equity method.
In
September 2003, Comverge completed an agreement raising an additional $2,000 in
capital funding in exchange for additional Series A Convertible Preferred Stock
issued by Comverge. Comverge utilized these funds to repurchase the Series A-1
Convertible Preferred Stock previously issued by Comverge. In October 2003,
Comverge completed an agreement raising an additional $5,600 in capital funding
in exchange for additional Series A Convertible Preferred Stock issued by
Comverge.
The
Company has entered into various agreements with Comverge and the syndicate of
venture capital investors. These agreements provide for, among other things,
restrictions and other provisions relating to the transfer, voting and
registration of the Comverge shares owned by the Company, and the Company's
right to receive quarterly and annual financial reports from Comverge.
Until
December 31, 2003, the Company had an option to purchase from Comverge up to
$1,500 of Series A-2 Convertible Preferred Stock. The Series A-2 Preferred Stock
has the same purchase price as the Series A-1 Preferred Stock. The Series A-2
Preferred Stock has the same rights as the Series A and the Series A-1 Preferred
Stock, except the Series A-2 Preferred Stock is junior in priority in
liquidation (which includes the sale of Comverge) to both the Series A and
Series A-1 Preferred Stock. On December 22, 2003, the Company exercised its
option and invested an additional $100 in Series A-2 Convertible Preferred
Stock.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of
December 31, 2003, the Company owned approximately 40.9% of the outstanding
capital voting stock of Comverge, comprised of approximately 17% of the
Preferred Stock and approximately 76% of Comverge's common stock.
In
September 2004, the Company signed an agreement with certain other shareholders
of Comverge’s Series A Preferred Stock for the sale by the Company to other
shareholders of 480,769 shares of Comverge Series A Preferred Stock for
approximately $1,000, resulting in a gain of $705. After giving effect to this
transaction, the Company held approximately 11% of Comverge’s preferred equity
and approximately 34% of its total equity.
In
October 2004, Comverge closed on the sale of additional Series B Preferred Stock
in the amount of $13,600. The Series B preferred equity is senior to the
preferred stock of Comverge owned by the Company. This round of financing
diluted the Company’s holdings to approximately 7% of Comverge’s preferred
equity and approximately 25% of its total equity.
Summary
financial information for Comverge as at December 31, 2003 and 2004 and for the
period from April 1 to December 31, 2003 and year ended December 31, 2004 is as
follows:
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| |
|
As
at December 31, |
|
|
Financial
Position |
|
2003 |
|
2004 |
|
|
Cash
and cash equivalents |
|
$ |
4,570 |
|
$ |
8,761 |
|
|
Other
current assets |
|
|
6,949 |
|
|
7,779 |
|
|
Property
and equipment, net |
|
|
2,097 |
|
|
5,342 |
|
|
Goodwill
and other intangible assets |
|
|
993 |
|
|
726 |
|
|
Intangible
and other assets, net |
|
|
412 |
|
|
1,353 |
|
|
Total
assets |
|
$ |
15,021 |
|
$ |
23,961 |
|
|
Current
liabilities |
|
$ |
4,136 |
|
$ |
5,642 |
|
|
Long-term
debt |
|
|
1,346 |
|
|
-- |
|
|
Other
non-current liabilities |
|
|
816 |
|
|
2,211 |
|
|
Total
liabilities |
|
|
6,298 |
|
|
7,853 |
|
|
Common
stock and paid-in capital |
|
|
19,070 |
|
|
19,125 |
|
|
Convertible
preferred stock |
|
|
18,525 |
|
|
35,106 |
|
|
Deferred
compensation |
|
|
(51 |
) |
|
(44 |
) |
|
Accumulated
deficit |
|
|
(28,821 |
) |
|
(38,079 |
) |
|
Total
liabilities and shareholders’ equity |
|
$ |
15,021 |
|
$ |
23,961 |
|
|
Results
of Operations |
|
Nine
Months
Ended
December 31,
2003 |
|
Year
Ended
December 31,
2004 |
|
| |
|
Unaudited |
|
|
|
|
Sales |
|
$ |
10,942 |
|
$ |
18,159 |
|
|
Operating
loss |
|
$ |
(7,578 |
) |
$ |
(9,029 |
) |
|
Net
loss |
|
$ |
(7,955 |
) |
$ |
(9,258 |
) |
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
activity in the Company’s investments in Comverge is as follows:
| |
|
Common
Stock |
|
Preferred
Stock |
|
Net
Investment |
|
|
Accumulated
deficit at March 31, 2003 |
|
$ |
(12,582 |
) |
$ |
-- |
|
$ |
(12,582 |
) |
|
Conversion
of inter-company balances to equity |
|
|
9,673 |
|
|
-- |
|
|
9,673 |
|
|
Adjustment
of the Company’s investment from dilution of common shares and new
valuation of Comverge common shares |
|
|
1,085 |
|
|
-- |
|
|
1,085 |
|
|
Cash
paid for preferred stock of Comverge |
|
|
-- |
|
|
3,350 |
|
|
3,350 |
|
|
Transaction
costs |
|
|
-- |
|
|
294 |
|
|
294 |
|
|
Equity
loss in Comverge - nine months ended December 31, 2003 |
|
|
-- |
|
|
(1,752 |
) |
|
(1,752 |
) |
|
Balances
as of December 31, 2003 |
|
|
(1,824 |
) |
|
1,892 |
|
|
68 |
|
|
Preferred
shares sold |
|
|
-- |
|
|
(270 |
) |
|
(270 |
) |
|
Equity
loss in Comverge - year ended December 31, 2004 |
|
|
--
|
|
|
(1,242 |
) |
|
(1,242 |
) |
|
Balances
as of December 31, 2004 |
|
$ |
(1,824 |
) |
$ |
380 |
|
$ |
(1,444 |
) |
The
percentage share of Comverge’s loss recognized by the Company as equity loss
against its preferred stock investment in 2003 and 2004 can be found in the
table below:
| |
Percentage
of
Comverge Loss
Recognized Against
Preferred
Stock |
|
|
April
1, 2003 - September 30, 2003 |
26% |
|
|
October
1, 2003 - March 8, 2004 |
17% |
|
|
March
9, 2004 - September 9, 2004 |
15% |
|
|
September
10, 2004 - October 20, 2004 |
11% |
|
|
October
21, 2004 - December 31, 2004 |
7% |
|
NOTE
4—ACCOUNTS RECEIVABLE, NET
|
Accounts
receivable, net, consists of the following: |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Trade
accounts receivable |
|
$ |
6,480 |
|
$ |
6,101 |
|
|
Allowance
for doubtful accounts |
|
|
(55 |
) |
|
(32 |
) |
|
Accounts
receivable, net |
|
$ |
6,425
|
|
$ |
6,069 |
|
Bad debt
expense (income) related to trade accounts receivable was $194, $50 and $(38)
for the years ended December 31, 2002, 2003 and 2004, respectively.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE
5--OTHER CURRENT ASSETS
|
Other
current assets consist of the following: |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Prepaid
expenses |
|
$ |
135
|
|
$ |
125 |
|
|
Employees |
|
|
79 |
|
|
104 |
|
|
Income
tax receivable |
|
|
267 |
|
|
99 |
|
|
Deferred
income taxes |
|
|
87 |
|
|
62 |
|
|
Other |
|
|
93
|
|
|
150 |
|
| |
|
$ |
661 |
|
$ |
540 |
|
NOTE
6--PROPERTY AND EQUIPMENT, NET
Property
and equipment consist of the following:
| |
|
Estimated
Useful
Life
(in years) |
|
As
of December 31, |
|
|
Cost: |
|
|
|
2003 |
|
2004 |
|
|
Computer
hardware and software |
|
|
3 |
|
$ |
1,103 |
|
$ |
1,149 |
|
|
Office
furniture and equipment |
|
|
4-10 |
|
|
873
|
|
|
496 |
|
|
Motor
vehicles |
|
|
4-7 |
|
|
515
|
|
|
315 |
|
|
Leasehold
improvements |
|
|
Term
of lease |
|
|
258
|
|
|
218 |
|
| |
|
|
|
|
|
2,749
|
|
|
2,178 |
|
|
Accumulated
depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
Computer
hardware and software |
|
|
|
|
|
894
|
|
|
910 |
|
|
Office
furniture and equipment |
|
|
|
|
|
662
|
|
|
335 |
|
|
Motor
vehicles |
|
|
|
|
|
249
|
|
|
166 |
|
|
Leasehold
improvements |
|
|
|
|
|
130
|
|
|
118 |
|
| |
|
|
|
|
|
1,935
|
|
|
1,529 |
|
|
Property
and equipment, net |
|
|
|
|
$ |
814 |
|
$ |
649 |
|
Depreciation
and amortization in respect of property and equipment amounted to $834, $451 and
$195 for 2002, 2003 and 2004, respectively.
NOTE
7--GOODWILL AND OTHER INTANGIBLE ASSETS
As
required by SFAS No. 142, in 2002 the Company evaluated its goodwill for
impairment, which indicated that the goodwill of its software consulting and
development segment was impaired. The fair value of the software consulting and
development segment was determined by applying a market-rate multiple to the
estimated near-term future revenue stream expected to be produced by the
segment. As a result, the Company recognized a provision for goodwill impairment
of $2,760 in 2002. In 2003 and 2004, the Company performed its annual impairment
test and no additional of goodwill impairment resulted.
| |
|
Software
Consulting and Development Segment |
|
Energy
Intelligence Solutions Segment |
|
Total |
|
|
Balance
as of December 31, 2002 |
|
$ |
4,430 |
|
$ |
499 |
|
$ |
4,929 |
|
|
Deconsolidation
of Comverge |
|
|
-- |
|
|
(499 |
) |
|
(499 |
) |
|
Balance
as of December 31, 2003 |
|
$ |
4,430 |
|
$ |
-- |
|
$ |
4,430 |
|
|
Cumulative
translation adjustment |
|
|
(22 |
) |
|
-- |
|
|
(22 |
) |
|
Balance
as of December 31, 2004 |
|
$ |
4,408 |
|
$ |
-- |
|
$ |
4,408 |
|
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
Company’s intangible assets as of December 31, 2003 and 2004 was comprised of
software licenses, valued at $188, being amortized over their estimated useful
lives of five years, with a net carrying amount of $114 and $81, as of December
31, 2003 and 2004, respectively.
Amortization
in respect of license, patents, software licenses and acquired backlog amounted
to $321, $76 and $32 for 2002 (amortization in 2002 included $120 of acquired
backlog - there was no amortization of acquired backlog in subsequent years),
2003 and 2004 (amortization in 2004 was only in respect of software licenses),
respectively. In 2002, in connection with the Company’s evaluation of the
software consulting and development segment goodwill, the Company recognized an
impairment charge of $240 for software licenses, included in cost of service
sales.
Amortization
expense with respect to intangible assets is estimated as $32, $32 and $17 for
the years ending December 31, 2005, 2006 and 2007, respectively.
NOTE
8—SHORT-TERM BANK CREDIT AND BANK DEBT
(a) Lines
of credit
At
December 31, 2004, the Company had approximately $1,160 in Israeli credit lines
available to dsIT, of which $729 was then being used and $431 was available for
future draws. These credit lines are generally for a term of one year,
denominated in NIS and bear interest at a weighted average rate of the Israeli
prime rate per annum plus 2.6% (at December 31, 2003, plus 1.4%). The Israeli
prime rate fluctuates and as of December 31, 2004 was 5.2% (December 31, 2003,
6.7%). The Company has a floating lien and provided guarantees of up to $500
with respect to dsIT’s lines of credit.
In
December 2002, the Company’s subsidiary Comverge, Inc., secured a three-year
$2,000 revolving line of credit from Laurus Master Fund, Ltd. (“Laurus”) which
was closed as a in April 2003. In connection with this line of credit, Laurus
was able to convert up to an aggregate of $600 of the line of credit into shares
of the Company’s common stock at a fixed conversion price of $1.50. On April 10,
2003, the Company received $600 from Laurus in connection with the sale to them
of 400,000 shares of the Company’s common stock. Such sale was in lieu of the
conversion by Laurus of $600 of the credit line it afforded Comverge. The
Company also issued a five-year warrant to purchase 190,000 shares of the
Company’s common stock, exercisable in three tranches at exercise prices ranging
from $2.00 to $3.34 per share, all of which were immediately exercisable.
The
Company used the Black-Scholes valuation method to estimate the fair value of
the warrants to purchase 190,000 shares of common stock of the Company, using a
risk free interest rate of 3.1%, its contractual life of five years, an annual
volatility of 82% and no expected dividends. The Company estimated the fair
value of the beneficial conversion feature and related warrants at the issuance
of the convertible line of credit to be approximately $244 and credited such
amount to additional paid-in capital. The Company recorded interest expense of
$178 and $66, with respect to the beneficial conversion feature of the warrants
during the years ended December 31, 2003 and 2002, respectively. In addition,
Comverge recorded debt issuance costs of $86 with respect to the issuance of the
line of credit. The Company recorded amortization of such costs of $7 during the
year ended December 31, 2003 (amortization is only for the period during which
the Company consolidated the results of Comverge - see Note 3).
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(b) Bank
debt
Bank debt
representing loans received by the Company’s Israeli subsidiaries from Israeli
banks denominated in NIS, consists of the following:
| |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Bank
debt |
|
$ |
1,291 |
|
$ |
667 |
|
|
Less:
current portion |
|
|
(659 |
) |
|
(466 |
) |
|
Long-term
bank debt |
|
$ |
632
|
|
$ |
201 |
|
|
|
|
As
of December 31, |
|
|
|
|
Weighted
Average
Interest
Rate |
|
2003 |
|
2004 |
|
|
Linked
to the Index |
|
|
7.08% |
|
$ |
66 |
|
$ |
36 |
|
|
Linked
to the Dollar |
|
|
7.48% |
|
|
49
|
|
|
25 |
|
|
Unlinked |
|
|
8.20% |
|
|
1,176 |
|
|
606 |
|
| |
$ |
1,291 |
|
$ |
667 |
|
At
December 31, 2004, the bank debt bears a weighted average interest rate of 7.8%
(December 31, 2003, 8.3%). During the year ended December 31, 2004, the Israeli
Consumer Price Index (the “Index”) increased by 1.2% (decreased by 1.9% in 2003)
and the NIS appreciated in value against the US dollar by 1.6% (7.6% in 2003).
In connection with the bank debt and lines of credit (see (a) above), a lien in
favor of the Israeli banks was placed on some of dsIT’s assets.
The
aggregate maturities of debt are as follows:
Year
ending December 31, |
|
|
|
|
2005 |
|
$ |
466 |
|
|
2006 |
|
|
175
|
|
|
2007 |
|
|
26
|
|
|
|
|
$ |
667 |
|
(c)
Convertible note
In June
2002, the Company completed a transaction with Laurus, pursuant to which Laurus
made a $2,000 investment in the Company in exchange for a 10% convertible note
and a three-year warrant to purchase 125,000 shares of the Company’s common
stock at an exercise price of $4.20 per share. Under the 10% convertible note,
the Company made interest-only payments for the first three months and
thereafter ten payments of $200 plus accrued interest on the outstanding
balance. In 2003, the Company issued to Laurus 127,196 shares of its common
stock as settlement of $240 of the convertible note.
The
Company used the Black-Scholes valuation method to estimate the fair value of
the 125,000 warrants to purchase common stock of the Company, using a risk free
interest rate of 3.0%, its contractual life of three years, an annual volatility
of 73% and no expected dividends. The Company estimated the fair value of the
beneficial conversion feature and related warrant at the issuance of the
convertible note to be approximately $692. Such amount was credited to
additional paid-in capital and is being charged to interest expense over the
conversion period (with respect to the note) and the term of the note (with
respect to the warrants), using the effective interest method. In the years
ended December 31, 2003 and 2002, the Company recorded $176 and $516,
respectively of the interest expense with respect to the beneficial conversion
feature and warrants. In addition, the Company incurred other debt issuance
costs of $167 with respect to the issuance of the convertible note. In the years
ended December 31, 2003 and 2002, the Company recorded interest expense of $42
and $125, respectively, with respect other debt issuance costs.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE
9—OTHER CURRENT LIABILITIES
Other
current liabilities consists of the following:
| |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Taxes
payable |
|
$ |
795 |
|
$ |
824 |
|
|
Lien
allowance |
|
|
558
|
|
|
410 |
|
|
Advances
from customers |
|
|
239
|
|
|
160 |
|
|
Accrued
expenses |
|
|
755 |
|
|
463 |
|
|
Other |
|
|
626 |
|
|
370 |
|
| |
|
$ |
2,973 |
|
$ |
2,227 |
|
NOTE
10—LIABILITY FOR EMPLOYEE TERMINATION BENEFITS
(a) Israeli
labor law and certain employee contracts generally requires payment of severance
pay upon dismissal of an employee or upon termination of employment in certain
other circumstances. The Company has recorded a severance pay liability for the
amount that would be paid if all its Israeli employees were dismissed at the
balance sheet date, on an undiscounted basis, in accordance with Israeli labor
law. This liability is computed based upon the employee’s number of years of
service and salary components, which in the opinion of management create
entitlement to severance pay in accordance with labor agreements in
force.
The
liability is partially offset by sums deposited in dedicated funds in respect of
employee termination benefits. The Company may only utilize the insurance
policies for the purpose of disbursement of severance pay.
(b) Severance
pay expenses amounted to approximately, $1,280, $1,132 and $915 for the years
ended December 31, 2002, 2003 and 2004, respectively.
(c) The
Company expects to contribute $441 to the insurance policies in respect of its
severance pay obligations in the year ended December 31, 2005.
(d) The Company
expects to pay the following future benefits to its employees upon their normal
retirement age in the next ten years:
Years
ending December 31, |
|
|
|
2005 |
|
$ |
2 |
|
2006 |
|
|
--
|
|
2007 |
|
|
70
|
|
2008 |
|
|
29
|
|
2009 |
|
|
--
|
|
|
2010
- 2014 |
|
|
1,788
|
|
| |
|
$ |
1,889 |
|
The
liability as at December 31, 2004 for future benefit payments in the next ten
years is included in these financial statements in “liability for employee
termination benefits”. The liability for future benefits does not reflect any
amounts already deposited in dedicated funds with respect to those employees
(see “a” above). The above amounts were determined based on the employees’
current salary rates and the number of service years that will be accumulated
upon their retirement date. These amounts do not include amounts that might be
paid to employees that will cease working with the Company before their normal
retirement age.
(e) Employee
Retirement Savings Plan
The
Company sponsors a tax deferred retirement savings plan that permits eligible US
employees to contribute varying percentages of their compensation up to the
limit allowed by the Internal Revenue Service. This plan also provides for
discretionary Company contributions, of which none were made for the years ended
December 31, 2002, 2003 and 2004.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE
11--COMMITMENTS AND CONTINGENCIES
(a)
Leases of Property and Equipment
Office
rental and automobile leasing expenses, for 2002, 2003 and 2004, were $2,171,
$1,521 and $1,683, respectively. The Company and its subsidiaries lease office
space and equipment under operating lease agreements. Those leases will expire
on different dates from 2005 to 2009. The lease payments are mainly in dollars
or are linked to the exchange rate of the dollar. Future minimum lease payments
on non-cancelable operating leases as of December 31, 2004 are as
follows:
Year
ending December 31, |
|
|
|
|
2005 |
|
$ |
1,240 |
|
|
2006 |
|
|
1,024 |
|
|
2007 |
|
|
737 |
|
|
2008 |
|
|
408 |
|
|
2009 |
|
|
199 |
|
| |
|
$ |
3,608 |
|
(b)
Guarantees
Previously,
the Company accrued a loss for contingent performance of bank guarantees. The
Company’s remaining commitment under these guarantees (included in other current
liabilities) is $558 and $410 at December 31, 2003 and 2004. The Company has
collateralized a portion of these guarantees by means of a deposit (classified
as restricted cash) of $241 as of December 31, 2003 and 2004.
The
Company’s subsidiaries have provided various performance, advance and tender
guarantees as required in the normal course of its operations. As at December
31, 2004, such guarantees totaled approximately $223 and were due to expire
through October 2005.
See Note
8(b) with respect to guarantees on the Company’s lines of credit.
(c)
Litigation
The
Company is involved in various other legal actions and claims arising in the
ordinary course of business. In the opinion of management and its legal counsel,
the ultimate disposition of these matters will not have a material adverse
effect on the Company’s consolidated financial position, results of operations
or cash flow.
NOTE
12--SHAREHOLDERS’ EQUITY
Effective
January 26, 2005, the Company’s shares were transferred from the Nasdaq SmallCap
Market, and its shares are currently traded on the OTC Bulletin Board.
(b) Stock
Option Plans
The
Company’s stock option plans provide for the granting officers, directors and
other key employees, options to purchase shares of common stock at not less than
85% of the market value of the Company’s common stock on the date of grant. The
purchase price must be paid in cash. Each option is exercisable to one share of
the Company’s common stock. All options expire within five to ten years from the
date of the grant, and generally vest over a two to three year period from the
date of the grant. At December 31, 2004, the total authorized number of options
or other equity instruments available for grant under the various plans was
560,242.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary
status of the Company’s option plans as of December 31, 2002, 2003 and 2004, as
well as changes during each of the years then ended, is presented
below:
| |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
Number
of Options (in shares) |
|
Weighted
Average Exercise Price |
|
Number
of Options (in shares) |
|
Weighted
Average Exercise Price |
|
Number
of Options (in shares) |
|
Weighted
Average Exercise Price |
|
|
Outstanding
at beginning of year |
|
|
1,568,442 |
|
$ |
5.11 |
|
|
1,738,767 |
|
$ |
5.18 |
|
|
1,308,051 |
|
$ |
4.83 |
|
|
Granted |
|
|
236,000 |
|
$ |
5.38 |
|
|
17,000 |
|
$ |
1.86 |
|
|
790,000 |
|
$ |
0.96 |
|
|
Exercised |
|
|
-- |
|
$ |
-- |
|
|
(10,666 |
) |
$ |
1.70 |
|
|
(19,666 |
) |
$ |
1.74 |
|
|
Forfeited
and expired |
|
|
(65,675 |
) |
$ |
4.26 |
|
|
(437,050 |
) |
$ |
6.17 |
|
|
(357,950 |
) |
$ |
5.83 |
|
|
Outstanding
at end of year |
|
|
1,738,767 |
|
$ |
5.18 |
|
|
1,308,051 |
|
$ |
4.83 |
|
|
1,720,435 |
|
$ |
2.88 |
|
|
Exercisable
at end of year |
|
|
1,557,395 |
|
$ |
5.21 |
|
|
1,282,048 |
|
$ |
4.88 |
|
|
956,267 |
|
$ |
4.47 |
|
The
Company granted to related parties 195,000, 15,000 and 600,000 options in the
years ending December 31, 2002, 2003 and 2004, respectively, under various
employee option plans. No options were exercised by related parties to purchase
shares of common stock of the Company, during 2002, 2003, and 2004 and as of
December 31, 2002, 2003, and 2004, the number of outstanding options held by the
related parties was 1,289,750, 932,250 and 1,159,750 options,
respectively.
Summary
information regarding the options outstanding and exercisable at December 31,
2004 is as follows:
| |
|
|
Outstanding |
|
|
Exercisable |
|
| Range
of Exercise Prices |
|
|
Number
Outstanding |
|
|
Weighted
Average Remaining Contractual Life |
|
|
Weighted
Average Exercise Price |
|
|
Number
Exercisable |
|
|
Weighted
Average Exercise Price |
|
| |
|
|
(in
shares) |
|
|
(in
years) |
|
|
|
|
|
(in
shares) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.71
- 1.78 |
|
|
751,668 |
|
|
6.85 |
|
$ |
0.84 |
|
|
9,168 |
|
$ |
1.67 |
|
|
$1.80
- 2.85 |
|
|
283,500 |
|
|
2.29 |
|
$ |
2.08 |
|
|
261,832 |
|
$ |
2.02 |
|
|
$3.50
- 4.00 |
|
|
104,000 |
|
|
2.10 |
|
$ |
3.62 |
|
|
104,000 |
|
$ |
3.62 |
|
|
$4.75
- 5.50 |
|
|
185,467 |
|
|
1.87 |
|
$ |
4.96 |
|
|
185,467 |
|
$ |
4.96 |
|
|
$5.95
- 6.40 |
|
|
395,800 |
|
|
1.03 |
|
$ |
6.15 |
|
|
395,800 |
|
$ |
6.38 |
|
| |
|
|
1,720,435 |
|
|
3.94 |
|
$ |
2.88 |
|
|
956,267 |
|
$ |
4.47 |
|
The
weighted average grant-date fair value of the options granted during 2002, 2003
and 2004, amounted to $2.46, $1.51 and $0.73 per option, respectively. The
Company utilized the Black-Scholes option pricing model to estimate fair value,
utilizing the following assumptions for the respective years (all in weighted
averages):
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Risk-free
interest rate |
|
|
4.2% |
|
|
3.9% |
|
|
3.7% |
|
|
Expected
life of options, in years |
|
|
5.3 |
|
|
9.4 |
|
|
6.9 |
|
|
Expected
annual volatility |
|
|
78% |
|
|
78% |
|
|
91% |
|
|
Expected
dividend yield |
|
|
None |
|
|
None |
|
|
None |
|
The
Company’s dsIT subsidiary adopted a stock option plan that allows the grant of
options for up to 573,268 ordinary shares of common stock of dsIT. Through
December 31, 2004 170,659 options had been granted, no options had been
exercised and no options had been forfeited. If all options are exercised, the
Company’s share in dsIT would decrease from approximately 68% to approximately
65%. At December 31, 2004, the weighted-average remaining contractual life
of the stock options outstanding was approximately 3.96 years.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(b)
Warrants
The
Company has issued warrants at exercise prices equal to or greater than market
value of the Company’s common stock at the date of issuance. A summary of
warrants activity follows:
| |
|
2002 |
|
2003 |
|
2004
|
|
| |
|
Number
of Warrants (in shares) |
|
Weighted
Average Exercise Price |
|
Number
of Warrants (in shares) |
|
Weighted
Average Exercise Price |
|
Number
of Warrants (in shares) |
|
Weighted
Average Exercise Price |
|
|
Outstanding
at beginning of year |
|
|
120,000 |
|
$ |
3.07 |
|
|
315,000 |
|
$ |
3.36 |
|
|
435,000 |
|
$ |
3.06 |
|
|
Granted |
|
|
315,000 |
|
$ |
3.36 |
|
|
120,000 |
|
$ |
2.25 |
|
|
-- |
|
$ |
-- |
|
|
Forfeited |
|
|
(120,000 |
) |
$ |
3.07 |
|
|
-- |
|
$ |
-- |
|
|
-- |
|
$ |
-- |
|
|
Outstanding
at end of year |
|
|
315,000 |
|
$ |
3.36 |
|
|
435,000 |
|
$ |
3.06 |
|
|
435,000 |
|
$ |
3.06 |
|
|
Exercisable
end of year |
|
|
315,000 |
|
$ |
3.36 |
|
|
435,000 |
|
$ |
3.06 |
|
|
435,000 |
|
|
|
|
The
following table summarized information about warrants outstanding and
exercisable at December 31, 2004:
|
Exercise
Price |
|
Number
Outstanding |
|
Weighted
Average Remaining Contractual Life |
|
Weighted
Average Exercise Price |
|
| |
|
(in
shares) |
|
(in
years) |
|
|
|
|
$2.00 |
|
|
90,000 |
|
|
1.08 |
|
$ |
2.00 |
|
|
$2.34 |
|
|
60,000 |
|
|
2.93 |
|
$ |
2.34 |
|
|
$2.50 |
|
|
60,000 |
|
|
0.16 |
|
$ |
2.50 |
|
|
$3.34 |
|
|
100,000 |
|
|
2.93 |
|
$ |
3.34 |
|
|
$4.20 |
|
|
125,000 |
|
|
0.50 |
|
$ |
4.20 |
|
| |
|
|
435,000 |
|
|
1.47 |
|
$ |
3.06 |
|
In 2003,
the Company engaged a third party for the purposes of providing investor
awareness and business advisory services for a period of one year. The Company
paid a monthly advisory fee, totaling $90 over the period of the agreement. In
addition, the Company granted the third party common stock purchase warrants for
the purchase of 120,000 shares of the Company’s common stock (60,000 at $2.00
per share and 60,000 at $2.50 per share). The warrants became fully vested in
May, 2003 and expired on February 25, 2005. The Company used the Black-Scholes
valuation method to estimate the fair value of the warrants, using a risk free
interest rate of 1.75%, their contractual life of two years, an annual
volatility of 88% and no expected dividends. The Company estimated the fair
value of the warrants to be approximately $97, which has been charged to
selling, general and administrative expense. Total expenses with respect to
warrants granted to service providers amounts to $0, $97, and $0 for the years
ended December 31, 2002, 2003 and 2004, respectively.
See Notes
8(a) and 8(c) with respect to warrants issued in 2002 and 2003.
(c) Stock
Awards
In
September 2001, the Company entered into a restricted stock purchase agreement
with the then newly hired Chief Executive Officer (CEO) of the Company’s energy
intelligence solutions segment subsidiary. Pursuant to this agreement, the
Company issued to the segment CEO 50,000 shares of its common stock at a
purchase price of $5.95 per share. The common stock was paid for by assigning
and endorsing to the Company a 6% subordinated note, due April 15, 2010, in the
principal amount of $298. The subordinated note was issued by Philip Services
Corp. (OTCBB: PPSVF) in favor of the segment CEO under a trust indenture with
Wilmington Trust Company. The subordinated note was reflected as a reduction in
shareholders’ equity. In 2003, PSCD filed for bankruptcy and the Company wrote
off this note to other expense.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In
January 2003, the CEO of the energy intelligence solutions segment subsidiary
received a restricted stock grant of 50,000 shares of common stock of the
Company. The Company recognized an expense of $50, which was charged to selling,
general and administrative expense in 2003.
In August
2004, the CEO of the computer hardware segment subsidiary received a stock grant
of 100,000 shares of common stock of the Company. The Company recognized an
expense of $71, which has been charged to selling, general and administrative
expense. In addition, the CEO of the computer hardware segment subsidiary
received a restricted stock grant of 95,000 shares of common stock of the
Company, which vest one third each on the second, third and fourth anniversaries
of the grant. The Company recognized deferred compensation of $68 with respect
to the restricted stock grant and recognized an expense (amortization) of $9,
which has been charged to selling, general and administrative expense in
2004.
(d) Stock
Repurchase Program
In
September 2000, the Company’s Board of Directors authorized the purchase of up
to 500,000 shares of the Company’s common stock. In August 2002, the Company’s
Board of Directors authorized the purchase of up to 300,000 more shares of the
Company’s common stock. During 2003, the Company purchased 2,000 of its common
stock (in 2003 and 2004, the Company also issued 9,000 and 18,000, respectively,
of its treasury shares with respect to options exercised), and at December 31,
2004 owned in the aggregate 820,704 of its own shares. The purpose of the stock
purchase program was to underscore the Company’s commitment to enhance long-term
shareholder value.
(e) Other
In March
1996, the Company’s Board of Directors adopted a stockholder rights plan
providing for the distribution of common stock purchase rights at the rate of
one right for each share of the Company’s common stock held by shareholders of
record as of the close of business on April 1, 1996. The rights plan is designed
to deter coercive takeover tactics, including the accumulation of shares in the
open market or through private transactions, and to prevent an acquirer from
gaining control of the Company without offering a fair price to all of the
Company’s shareholders. Each right initially entitles shareholders to buy
one-half of a share of common stock of the Company for $15. Generally, the right
will be exercisable only if a person or group acquires beneficial ownership of
15% or more of the Company’s common stock or commences a tender or exchange
offer upon consummation of which such person or group would beneficially own 15%
or more of the Company’s common stock.
If any
person (“Acquiring Person”) becomes the beneficial owner of 15% or more of the
Company’s common stock, other than pursuant to a tender or exchange offer for
all outstanding shares of the Company approved by a majority of the Company’s
independent directors, then, subject to certain exceptions set forth in the
rights plan, each right not owned by the Acquiring Person or related parties
will entitle its holder to purchase, at the right’s then current exercise price,
shares of the Company’s common stock (or in certain circumstances, as determined
by the Board of Directors, cash, other property or other securities) having a
value of twice the right’s then current exercise price. The Company will
generally be entitled to redeem the rights at one half of one cent per right at
any time until 10 days (subject to extension) following a public announcement
that a 15% position has been acquired. The rights plan will expire in March
2006.
NOTE
13--INCOME TAXES
(a) Composition
of loss from continuing operations before income taxes is as
follows:
| |
|
|
|
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Domestic |
|
$ |
(4,805 |
) |
$ |
(3,739 |
) |
$ |
(1,157 |
) |
|
Foreign |
|
|
(4,191 |
) |
|
(1,056 |
) |
|
390 |
|
| |
|
$ |
(8,996 |
) |
$ |
(4,795 |
) |
$ |
(767 |
) |
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income
tax expense (benefit) consists of the following:
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
|
State
and local |
|
|
24 |
|
|
18 |
|
|
-- |
|
|
Foreign |
|
|
80 |
|
|
79 |
|
|
102 |
|
| |
|
|
104 |
|
|
97 |
|
|
102 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
|
State
and local |
|
|
(13 |
) |
|
(10 |
) |
|
5 |
|
|
Foreign |
|
|
(63 |
) |
|
(88 |
) |
|
19 |
|
| |
|
|
(76 |
) |
|
(98 |
) |
$ |
24 |
|
|
Total
income tax expense (benefit) |
|
$ |
28 |
|
$ |
(1 |
) |
$ |
126 |
|
(b)
Effective Income Tax Rates
Set forth
below is reconciliation between the federal tax rate and the Company’s effective
income tax rates with respect to continuing operations:
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Statutory
Federal rates |
|
|
34 |
% |
|
34 |
% |
|
34 |
% |
|
Increase
(decrease) in income tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
Non-deductible
expenses |
|
|
(12 |
) |
|
1 |
|
|
(29 |
) |
|
State
and local income taxes, net |
|
|
4 |
|
|
5 |
|
|
6 |
|
|
Other |
|
|
1 |
|
|
-- |
|
|
1 |
|
|
Valuation
allowance |
|
|
(27 |
) |
|
(40 |
) |
|
(28 |
) |
|
Effective
income tax rates |
|
|
0 |
% |
|
0 |
% |
|
(16 |
)% |
(c)
Analysis of Deferred Tax Assets and (Liabilities)
|
Deferred
tax assets consist of the following: |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Employee
benefits |
|
$ |
640 |
|
$ |
591 |
|
|
Negative
investment in Comverge |
|
|
-- |
|
|
620 |
|
|
Other
temporary differences |
|
|
670 |
|
|
526 |
|
|
Net
operating and capital loss carryforwards |
|
|
7,494 |
|
|
7,271 |
|
| |
|
|
8,804 |
|
|
9,008 |
|
|
Valuation
allowance |
|
|
(8,552 |
) |
|
(8,794 |
) |
|
Net
deferred tax assets |
|
|
252 |
|
|
214 |
|
|
Deferred
tax liabilities consist of the following: |
|
|
|
|
|
|
|
|
Intangible
asset basis differences |
|
|
(41 |
) |
|
(27 |
) |
|
Net
deferred tax assets, net |
|
$ |
211 |
|
$ |
187 |
|
| |
|
|
|
|
|
|
|
| Deferred
tax assets - current |
|
$ |
87 |
|
$ |
62 |
|
| Deferred
tax assets - non-current |
|
|
165 |
|
|
152
|
|
| Deferred
tax liabilities - non-current |
|
|
(41 |
) |
|
(27 |
) |
| Net
deferred tax assets |
|
$ |
211 |
|
$ |
187 |
|
No
valuation allowance is established for the Company’s operations, which are
reasonably expected to utilize their deferred tax assets. Valuation allowances
relate principally to net operating loss and capital loss carryforwards and
foreign tax credit carryforwards. The change in the valuation allowance was a
decrease of $4,082 and an increase of $242 in 2003 and 2004, respectively. The
decrease in 2003 was due primarily to the deconsolidation of Comverge (see Note
3), whereas the increase in 2004 was primarily attributable to the Company’s
negative investment in Comverge partially offset by a reduction in future tax
rates in Israel (see (f) below).
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(d)
Summary of Tax Loss Carryforwards
As of
December 31, 2004, the Company had various net operating loss carryforwards
expiring as follows:
|
Expiration: |
|
Federal |
|
State |
|
Foreign |
|
|
2005-2007 |
|
$ |
-- |
|
$ |
68 |
|
$ |
-- |
|
|
2008 |
|
|
-- |
|
|
801 |
|
|
-- |
|
|
2009 |
|
|
-- |
|
|
2,291 |
|
|
-- |
|
|
2010 |
|
|
-- |
|
|
2,862 |
|
|
-- |
|
|
2011 |
|
|
-- |
|
|
422 |
|
|
-- |
|
|
2019-2024 |
|
|
8,698 |
|
|
-- |
|
|
-- |
|
|
Unlimited |
|
|
-- |
|
|
-- |
|
|
9,440 |
|
|
Total |
|
|
8,698 |
|
|
6,444 |
|
|
9,440 |
|
(e) Tax
Reform in the United States
On
October 22, 2004, The American Jobs Creation Act (the “Act”) was signed into
law. The Act includes a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the Act. The Company’s foreign earnings are solely
derived from the Company’s Israeli subsidiaries. Due to Israeli tax and company
law constraints, the significant minority interest in dsIT and dsIT’s own cash
and finance needs, the Company does not expect any foreign earnings to be
repatriated to the Company in the near future.
(f) Tax
Reform in Israel
The
income of the Company’s Israeli subsidiaries is taxed at the regular Israeli
corporate tax rates. Through December 31, 2003, the corporate tax was 36%.
In July 2004, an amendment to the Income Tax Ordinance was enacted. One of the
provisions of this amendment is that the corporate tax rate is to be gradually
reduced from 36% to 30%, in the following manner: the rate for 2004 will be 35%,
in 2005 - 34%, in 2006 - 32%, and in 2007 and thereafter - 30%. The reduction in
the future income tax rates caused a reduction of deferred tax assets and
associated valuation allowance of approximately $621 and $597, respectively.
NOTE
14--RELATED PARTY BALANCES AND TRANSACTIONS
(a) The
Company paid consulting and other fees to directors of $98, $112 and $95 for the
years ended December 31, 2002, 2003 and 2004, respectively, which are included
in selling, general and administrative expenses.
(b) The
Company paid legal fees for services rendered and out-of-pocket disbursements to
a firm in which a principal is a former director and is the son-in-law of the
Company’s Chief Executive Officer, of approximately $630, $403 and $479 for the
years ended December 31, 2002, 2003 and 2004, respectively. Approximately $106
and $99 was owed to this firm as of December 31, 2003 and 2004, respectively,
and is included in other current liabilities and trade accounts payable.
(c) An asset
management firm that is controlled by a former director of the Company provided
discretionary asset management services to the Company. The Company paid $12 for
these services for the year ended December 31, 2002. The engagement with the
asset management firm was terminated in September 2002.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(d) The
Company received $35 and $6 of rent from a company controlled by the Chief
Executive Officer for the years ended December 31, 2002 and 2003, respectively.
(e) The chief
executive officer of the Company’s Israeli subsidiary has a loan from the
subsidiary that was acquired in 2001. The loan balance and accrued interest at
December 31, 2003 and 2004 was $52 and $112, respectively. The loan has no
defined maturity date, is denominated in NIS, is linked to the Index and bears
interest at 4%.
NOTE
15--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
(a)
General Information
As of
December 31 2004, the Company has two reportable segments:
(i) The
software consulting and development segment provides computer software and
systems consulting and development services
(ii) The
computer hardware segment is an authorized dealer and value-added reseller of
computer hardware.
Until
March 31, 2003, the Company’s included the results of Comverge in its energy
intelligence solutions segment. Since March 31, 2003, the Company no longer
consolidates the results of Comverge (see Note 3) and no longer includes their
results in segment reporting.
The
Company’s reportable segments are strategic business units, offering different
products and services and are managed separately as each business requires
different technology and marketing strategies. Similar operating segments
operating in different countries are aggregated into one reportable
segment.
(b)
Information about Profit or Loss and Assets
The
accounting policies of all the segments are those described in the summary of
significant accounting policies. The Company evaluates performance based on the
profit or loss from operations before income taxes not including nonrecurring
gains and losses.
The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. The Company
does not systematically allocate assets to the divisions of the subsidiaries
constituting its consolidated group, unless the division constitutes a
significant operation. Accordingly, where a division of a subsidiary constitutes
a segment that does not meet the quantitative thresholds of SFAS No. 131,
depreciation expense is recorded against the operations of such segment, without
allocating the related depreciable assets to that segment. However, where a
division of a subsidiary constitutes a segment that does meet the quantitative
thresholds of SFAS No. 131, related depreciable assets, along with other
identifiable assets, are allocated to such division.
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following tables represent segmented data for the years ended December 31, 2004,
2003 and 2002:
| |
|
Software
Consulting
and
Development
(*) |
|
Energy
Intelligence
Solutions
(***) |
|
Computer
Hardware |
|
Other
(**) |
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers |
|
$ |
11,581 |
|
$ |
-- |
|
$ |
18,468 |
|
$ |
64 |
|
$ |
30,113 |
|
|
Intersegment
revenues |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Depreciation
and amortization |
|
|
209 |
|
|
-- |
|
|
16 |
|
|
-- |
|
|
225 |
|
|
Segment
gross profit |
|
|
2,718 |
|
|
-- |
|
|
3,744 |
|
|
64 |
|
|
6,526 |
|
|
Segment
income |
|
|
198 |
|
|
-- |
|
|
15 |
|
|
38 |
|
|
251 |
|
|
Minority
interests |
|
|
(90 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
(90 |
) |
|
Income
tax expense |
|
|
121 |
|
|
-- |
|
|
5 |
|
|
-- |
|
|
126 |
|
|
Segment
assets |
|
|
12,109 |
|
|
-- |
|
|
4,156 |
|
|
-- |
|
|
16,265 |
|
|
Expenditures
for segment assets |
|
|
81 |
|
|
-- |
|
|
13 |
|
|
-- |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers |
|
$ |
12,156 |
|
$ |
4,700 |
|
$ |
18,139 |
|
$ |
39 |
|
$ |
35,034 |
|
|
Intersegment
revenues |
|
|
-- |
|
|
284 |
|
|
20 |
|
|
-- |
|
|
304 |
|
|
Depreciation
and amortization |
|
|
350 |
|
|
158 |
|
|
16 |
|
|
-- |
|
|
524 |
|
|
Segment
gross profit |
|
|
2,581 |
|
|
1,313 |
|
|
3,125 |
|
|
39 |
|
|
7,058 |
|
|
Segment
loss |
|
|
(849 |
) |
|
(1,422 |
) |
|
(199 |
) |
|
(17 |
) |
|
(2,487 |
) |
|
Minority
interests |
|
|
264 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
264 |
|
|
Income
tax expense (benefit) |
|
|
(10 |
) |
|
1 |
|
|
8 |
|
|
-- |
|
|
(1 |
) |
|
Segment
assets |
|
|
11,640 |
|
|
-- |
|
|
4,324 |
|
|
-- |
|
|
15,964 |
|
|
Expenditures
for equity investments |
|
|
-- |
|
|
3,444 |
|
|
-- |
|
|
-- |
|
|
3,444 |
|
|
Expenditures
for segment assets |
|
|
162 |
|
|
54 |
|
|
15 |
|
|
-- |
|
|
231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers |
|
$ |
14,202 |
|
$ |
19,023 |
|
$ |
22,605 |
|
$ |
56 |
|
$ |
55,886 |
|
|
Intersegment
revenues |
|
|
19 |
|
|
1,125 |
|
|
87 |
|
|
-- |
|
|
1,231 |
|
|
Depreciation
and amortization |
|
|
580 |
|
|
552 |
|
|
17 |
|
|
-- |
|
|
1,149 |
|
|
Segment
gross profit |
|
|
2,674 |
|
|
6,087 |
|
|
4,098 |
|
|
56 |
|
|
12,915 |
|
|
Segment
loss |
|
|
(4,503 |
) |
|
(2,161 |
) |
|
15 |
|
|
(2 |
) |
|
(6,651 |
) |
|
Minority
interests |
|
|
880 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
880 |
|
|
Income
tax expense (benefit) |
|
|
11 |
|
|
6 |
|
|
11 |
|
|
-- |
|
|
28 |
|
|
Segment
assets |
|
|
12,614 |
|
|
7,872 |
|
|
5,651 |
|
|
-- |
|
|
26,137 |
|
|
Expenditures
for segment assets |
|
|
112 |
|
|
407 |
|
|
14 |
|
|
-- |
|
|
533 |
|
| (*) |
2004 segment information excludes the discontinued
results of the US-based consulting activities - see Note 17.
|
| (**) |
Represents segments below the quantitative thresholds of
SFAS No. 131 - a VAR software operation in Israel and a holding
company. |
|
(***) |
Operating
results of Comverge (the Energy Intelligence Solutions segment) are no
longer consolidated beginning the second quarter of 2003 - see Note 3.
Segment loss in 2003 includes the Company’s consolidated share of
Comverge’s losses from January 1 to March 31, 2003 of $1,124 and other
expense of $298, relating to the write-off of a stockholder’s note
received from Comverge’s CEO. Not included above are equity losses from
Comverge of $1,242 and $1,752 in 2004 and 2003, respectively, and a gain
of $705 from the sale of shares in
Comverge. |
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(c) The
following tables represent a reconciliation of the segment data to consolidated
statement of operations and balance sheet data for the years ended and as of
December 31, 2002, 2003 and 2004:
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
Total
revenues for reportable segments |
|
$ |
55,830 |
|
$ |
34,995 |
|
$ |
30,049 |
|
|
Other
operational segment revenues |
|
|
56 |
|
|
39 |
|
|
64 |
|
|
Total
consolidated revenues |
|
$ |
55,886 |
|
$ |
35,034 |
|
$ |
30,113 |
|
|
Income
(loss) |
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) for reportable segments |
|
$ |
(6,649 |
) |
$ |
(2,470 |
) |
$ |
213 |
|
|
Other
operational segment operating income (loss) |
|
|
(2 |
) |
|
(17 |
) |
|
38 |
|
|
Total
operating loss |
|
|
(6,651 |
) |
|
(2,487 |
) |
|
251 |
|
|
Net
loss of corporate headquarters |
|
|
(1,493 |
) |
|
(2,043 |
) |
|
(1,234 |
) |
|
Equity
loss in Comverge |
|
|
-- |
|
|
(1,752 |
) |
|
(1,242 |
) |
|
Gain
on sale of shares in Comverge |
|
|
-- |
|
|
-- |
|
|
705 |
|
|
Discontinued
operations income |
|
|
-- |
|
|
-- |
|
|
348 |
|
|
Consolidated
loss |
|
$ |
(8,144 |
) |
$ |
(6,282 |
) |
$ |
(1,172 |
) |
| |
|
As
of December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Assets: |
|
|
|
|
|
|
Total
assets for reportable segments |
|
$ |
16,032 |
|
$ |
16,265 |
|
|
Unallocated
amounts: Net assets of corporate headquarters * |
|
|
1,752 |
|
|
760 |
|
|
Total
consolidated assets |
|
$ |
17,784 |
|
$ |
17,025 |
|
* In 2003
includes cash and cash equivalents of $1,116 as well as restricted cash of
$241.
|
Other
Significant Items |
|
Segment
Totals |
|
Adjustments |
|
Consolidated
Totals |
|
|
Year
ended December 31, 2004 |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
$ |
225 |
|
$ |
2 |
|
$ |
227 |
|
|
Expenditures
for assets |
|
|
94 |
|
|
-- |
|
|
94 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
$ |
524 |
|
$ |
3 |
|
$ |
527 |
|
|
Expenditures
for assets |
|
|
231 |
|
|
-- |
|
|
231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
$ |
1,149 |
|
$ |
6 |
|
$ |
1,155 |
|
|
Expenditures
for assets |
|
|
533 |
|
|
1 |
|
|
534 |
|
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
reconciling items are all corporate headquarters data, which are not included in
the segment information. None of the other adjustments are
significant.
| |
|
Year
Ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
|
Revenues
based on location of customer: |
|
|
|
|
|
|
|
|
United
States |
|
$ |
41,622 |
|
$ |
21,682 |
|
$ |
17,389 |
|
|
Israel |
|
|
13,700 |
|
|
13,087 |
|
|
12,453 |
|
|
Other |
|
|
564 |
|
|
265 |
|
|
271 |
|
|
|
|
$ |
55,886 |
|
$ |
35,034 |
|
$ |
30,113 |
|
| |
|
|
As
at December 31, |
|
| |
|
|
2003 |
|
|
2004 |
|
| Long-lived
assets located in the following countries: |
|
|
|
|
|
|
|
|
Israel |
|
$ |
780 |
|
$ |
624 |
|
|
United
States |
|
|
34 |
|
|
25 |
|
|
|
|
|
814 |
|
|
649 |
|
(a) Revenues
from Major Customers
There was
only one major customer, included in the computer hardware segment with sales of
$4,910, $5,143 and $7,412, representing 8.8%, 8.8% and 25% of total revenues in
2002, 2003 and 2004, respectively.
NOTE
16--FINANCIAL INSTRUMENTS
Fair
values of financial instruments included in current assets and current
liabilities are estimated to approximate their book values, due to the short
maturity of such instruments. Fair values for long-term debt as of December 31,
2004 and 2003 are estimated based on the current rates offered to the Company
for debt with similar terms and remaining maturities. The fair value of the
Company’s long-term debt is not materially different from its carrying amounts.
NOTE
17—DISCONTINUED OPERATIONS
Since the
latter part of 2003, the Company has not recorded revenues from its US-based
consulting business. During the second quarter of 2004, the Company decided to
discontinue its efforts to reestablish this business as it was previously
conducted. As a result, the Company recorded a gain from discontinued operations
of $348, net of tax.
Assets
and liabilities of the discontinued operation were as follows:
| |
|
As
at December 31, |
|
| |
|
2003 |
|
2004 |
|
|
Current
assets |
|
$ |
2 |
|
$ |
-- |
|
|
Fixed
assets |
|
$ |
2 |
|
$ |
-- |
|
|
Current
liabilities |
|
$ |
729 |
|
$ |
307 |
|
Profit
and loss of the discontinued operations within consulting segment were as
follows:
| |
|
Year
ended December 31, 2004 |
|
|
Sales |
|
$ |
-- |
|
|
Cost
of sales |
|
|
-- |
|
|
Gross
profit |
|
|
-- |
|
|
Income
(loss) from operations |
|
|
(2 |
) |
|
Interest
expense |
|
|
4 |
|
|
Net
income (loss) from discontinued operations |
|
$ |
348 |
|
DATA
SYSTEMS & SOFTWARE INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
consolidated statements of operations and cash flow for the years ended December
31, 2002 and 2003 have not been restated to reflect the discontinued operations
since the presentation for those years is immaterial.
NOTE
18—SUBSEQUENT EVENTS
(a)
Judgment by the Jerusalem District Court
In March
2005, a Jerusalem District Court rendered a decision in favor of the Company in
its suit against Israel Discount Bank (“IDB”) and has awarded the Company
damages, legal fees and other costs of approximately $2.2 million.
The
Company’s case against IDB was commenced in March 1999 and had alleged that IDB
had wrongfully retained control of shares of the Company’s Decision System
Israel Ltd. subsidiary (now known as dsIT Technologies Ltd.). The Company’s
action also sought a declaratory judgment that the Company was not liable to IDB
on a guaranty made on behalf of a former equity affiliate. In September 2001 the
District Court decided against the Company on all claims. The Company appealed
the decision to the Israel Supreme Court, which in June 2004 upheld the decision
of the District Court on the guarantee but reversed the District Court on the
shares and held that IDB had wrongfully retained the shares. The Supreme Court
remanded the case to the District Court to determine the damages payable by IDB
to the Company. The decision announced by the Company today was rendered on the
remand from the Israel Supreme Court. The District Court decision is subject to
possible appeal by IDB. The Company has been informally notified that IDB
intends to appeal the Jerusalem District Court decision.
In
accordance with generally accepted accounting principles, any gain contingency
associated with the decision in the Company’s favor will not be recognized as
income until the earlier of the exhaustion of all appeals or settlement of the
action
(a)
Sale of
dsIT subsidiary
In March
2005, the Company and the other shareholders of dsIT entered into an agreement
in principle for the sale of all the outstanding shares of dsIT to Matrix IT
Ltd. (“Matrix”). Matrix is listed on the Tel Aviv Stock Exchange and is part of
the Formula Group. Under the terms of the agreement in principle, the total
consideration to be paid for the shares would be $9 million, to be paid in cash
and in Matrix ordinary shares. A portion of the consideration is subject to
adjustment based on dsIT’s performance against certain operating goals to be set
forth in the definitive agreement. The agreement in principle includes a
“no-shop” agreement for a period of 45 days to allow Matrix to perform its
due-diligence investigation.
Comverge,
Inc. and Subsidiaries
Consolidated
Financial Statements
December
31, 2004 and 2003
Comverge,
Inc. and Subsidiaries
Index
December
31, 2004 and 2003
| |
Page(s) |
|
Report
of Independent Auditors |
1 |
|
Consolidated
Financial Statements |
|
|
Consolidated
Balance Sheets |
2 |
|
Consolidated
Statements of Operations |
3 |
|
Consolidated
Statements of Changes in Shareholders' Deficit |
4 |
|
Consolidated
Statements of Cash Flows |
5 |
|
Notes
to Consolidated Financial Statements |
6-21 |
Report
of Independent Auditors
To Board
of Directors and Shareholders of
Comverge,
Inc.
In our
opinion, the accompanying consolidated
balance sheets and the related consolidated statements of operations,
shareholders’ deficit and cash flows present fairly, in all material respects,
the financial position of Comverge, Inc. and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their cash
flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Atlanta,
Georgia
March 30,
2005
Comverge,
Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31, 2004 and 2003
(in
thousands of dollars, except per share data) |
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
Assets |
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
8,761 |
|
$ |
4,570 |
|
|
Accounts
receivable |
|
|
4,620 |
|
|
3,021 |
|
|
Inventory |
|
|
2,102 |
|
|
3,404 |
|
|
Other
current assets |
|
|
1,057 |
|
|
524 |
|
|
Total
current assets |
|
|
16,540 |
|
|
11,519 |
|
|
Property
and equipment, net |
|
|
5,342 |
|
|
2,097 |
|
|
Goodwill
and other intangible assets |
|
|
726 |
|
|
993 |
|
|
Prepaid
employee termination benefits |
|
|
336 |
|
|
375 |
|
|
Other
assets |
|
|
1,017 |
|
|
37 |
|
|
Total
assets |
|
$ |
23,961 |
|
$ |
15,021 |
|
|
Liabilities
and Shareholders' Deficit |
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
2,225 |
|
$ |
2,793 |
|
|
Deferred
revenue |
|
|
1,963 |
|
|
371 |
|
|
Accrued
expenses |
|
|
986 |
|
|
467 |
|
|
Other
current liabilities |
|
|
468 |
|
|
505 |
|
|
Total
current liabilities |
|
|
5,642 |
|
|
4,136 |
|
|
Long-term
liabilities |
|
|
|
|
|
|
|
|
Long-term
trade payable |
|
|
1,362 |
|
|
- |
|
|
Long-term
bank debt |
|
|
- |
|
|
1,346 |
|
|
Liability
for employee termination benefits |
|
|
559 |
|
|
644 |
|
|
Other
liabilities |
|
|
290 |
|
|
172 |
|
|
Total
long-term liabilities |
|
|
2,211 |
|
|
2,162 |
|
|
Commitments
and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
Convertible
Preferred Stock |
|
|
|
|
|
|
|
|
Series
A, $.001 par value per share, authorized 10,402,000
shares; |
|
|
|
|
|
|
|
|
issued
and outstanding 10,401,146 and 8,945,350 shares at |
|
|
|
|
|
|
|
|
December
31, 2004 and 2003, respectively; net of offering costs |
|
|
|
|
|
|
|
|
of
$238 and $218; liquidation preference of $32,516 and
$27,995 |
|
|
|
|
|
|
|
|
at
December 31, 2004 and 2003, respectively |
|
|
21,438 |
|
|
18,425 |
|
|
Series
A-2, $.001 par value per share, authorized 36,076 shares; |
|
|
|
|
|
|
|
|
issued
and outstanding 36,076 shares at December 31, 2004 |
|
|
|
|
|
|
|
|
and
2003; liquidation preference of $147 and $150 at |
|
|
|
|
|
|
|
|
December
31, 2004 and 2003, respectively |
|
|
100 |
|
|
100 |
|
|
Series
B, $.001 par value per share, authorized 7,875,377 shares; |
|
|
|
|
|
|
|
|
issued
and outstanding 5,640,878 and 0 shares at December 31, |
|
|
|
|
|
|
|
|
2004
and 2003, respectively; net of offering costs of $31;
liquidation |
|
|
|
|
|
|
|
|
preference
of $20,449 |
|
|
13,568 |
|
|
- |
|
| |
|
|
35,106 |
|
|
18,525 |
|
|
Shareholders'
Deficit |
|
|
|
|
|
|
|
|
Common
stock $.001 par value per share |
|
|
|
|
|
|
|
|
Authorized
28,185,739 shares; issued and outstanding |
|
|
|
|
|
|
|
|
5,903,598
and 5,814,748 shares at December 31, 2004 |
|
|
|
|
|
|
|
|
and
2003, respectively |
|
|
6 |
|
|
6 |
|
|
Additional
paid-in capital |
|
|
19,105 |
|
|
19,013 |
|
|
Deferred
compensation |
|
|
(30 |
) |
|
- |
|
|
Accumulated
deficit |
|
|
(38,079 |
) |
|
(28,821 |
) |
|
Total
shareholders' deficit |
|
|
(18,998 |
) |
|
(9,802 |
) |
|
Total
liabilities and shareholders' deficit |
|
$ |
23,961 |
|
$ |
15,021 |
|
The
accompanying notes are an integral part of these financial
statements.
Comverge,
Inc. and Subsidiaries
Consolidated
Statements of Operations
Year
Ended December 31, 2004 and 2003
(in
thousands of dollars) |
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
Revenue |
|
|
|
|
|
|
Product |
|
$ |
13,028 |
|
$ |
12,592 |
|
|
Service |
|
|
5,131 |
|
|
3,050 |
|
|
Total
revenue |
|
|
18,159 |
|
|
15,642 |
|
|
Cost
of revenue |
|
|
|
|
|
|
|
|
Product |
|
|
9,478 |
|
|
9,763 |
|
|
Service |
|
|
1,078 |
|
|
875 |
|
|
Total
cost of revenue |
|
|
10,556 |
|
|
10,638 |
|
|
Gross
profit |
|
|
7,603 |
|
|
5,004 |
|
|
General
and administrative expenses |
|
|
7,382 |
|
|
7,777 |
|
|
Marketing
and selling expenses |
|
|
7,335 |
|
|
4,177 |
|
|
Depreciation
and amortization |
|
|
869 |
|
|
1,166 |
|
|
Research
and development expenses |
|
|
1,046 |
|
|
615 |
|
|
Operating
loss |
|
|
(9,029 |
) |
|
(8,731 |
) |
|
Interest
and other expense, net |
|
|
229 |
|
|
586 |
|
|
Net
loss |
|
$ |
(9,258 |
) |
$ |
(9,317 |
) |
The accompanying notes are an integral part of these
financial statements.
Comverge,
Inc. and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Deficit
Year
Ended December 31, 2004 and 2003
(in
thousands of dollars, except share data) |
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Number
of |
|
Common |
|
Paid-in |
|
Deferred |
|
Accumulated |
|
|
|
| |
|
Shares |
|
Stock |
|
Capital |
|
Compensation |
|
Deficit |
|
Total |
|
|
Balances
at December 31, 2002 |
|
|
4,937,748 |
|
$ |
5 |
|
$ |
8,631 |
|
$ |
- |
|
$ |
(19,504 |
) |
$ |
(10,868 |
) |
|
Issuance
of common stock |
|
|
877,000 |
|
|
1 |
|
|
509 |
|
|
- |
|
|
- |
|
|
510 |
|
|
Contribution
of debt by affiliated investor |
|
|
- |
|
|
- |
|
|
9,673 |
|
|
- |
|
|
- |
|
|
9,673 |
|
|
Executive
compensation payable by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliated
investor |
|
|
- |
|
|
- |
|
|
200 |
|
|
- |
|
|
- |
|
|
200 |
|
|
Net
loss |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(9,317 |
) |
|
(9,317 |
) |
|
Balances
at December 31, 2003 |
|
|
5,814,748 |
|
|
6 |
|
|
19,013 |
|
|
- |
|
|
(28,821 |
) |
|
(9,802 |
) |
|
Issuance
of common stock |
|
|
4,052 |
|
|
- |
|
|
5 |
|
|
- |
|
|
- |
|
|
5 |
|
|
Repurchase
of common stock |
|
|
(8,000 |
) |
|
- |
|
|
(14 |
) |
|
- |
|
|
- |
|
|
(14 |
) |
|
Deferred
compensation |
|
|
- |
|
|
- |
|
|
30 |
|
|
(30 |
) |
|
- |
|
|
- |
|
|
Issuance
of common stock with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
series
B financing |
|
|
92,798 |
|
|
- |
|
|
34 |
|
|
- |
|
|
- |
|
|
34 |
|
|
Shareholder
loans |
|
|
- |
|
|
- |
|
|
37 |
|
|
- |
|
|
- |
|
|
37 |
|
|
Net
loss |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(9,258 |
) |
|
(9,258 |
) |
|
Balances
at December 31, 2004 |
|
|
5,903,598 |
|
$ |
6 |
|
$ |
19,105 |
|
$ |
(30 |
) |
$ |
(38,079 |
) |
$ |
(18,998 |
) |
The accompanying notes are an integral part of these
financial statements.
Comverge,
Inc. and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Deficit
Year
Ended December 31, 2004 and 2003
(in
thousands of dollars) |
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
Cash
flows from operating activities |
|
|
|
|
|
|
Net
Income/(loss) |
|
$ |
(9,258 |
) |
$ |
(9,317 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
1,212 |
|
|
1,166 |
|
|
Executive
compensation payable by affiliate investor |
|
|
- |
|
|
200 |
|
|
Loss
on disposal of property and equipment |
|
|
69 |
|
|
62 |
|
|
Provision
for inventory |
|
|
45 |
|
|
- |
|
|
Changes
in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(1,599 |
) |
|
579 |
|
|
Inventories |
|
|
1,256 |
|
|
(1,364 |
) |
|
Prepaid
expenses and other assets |
|
|
(1,474 |
) |
|
(286 |
) |
|
Accounts
payable |
|
|
(568 |
) |
|
1,596 |
|
|
Accrued
expenses and other liabilities |
|
|
1,774 |
|
|
114 |
|
|
Deferred
revenue |
|
|
1,592 |
|
|
117 |
|
|
Net
cash used in operating activities |
|
|
(6,951 |
) |
|
(7,133 |
) |
|
Cash
flows investing activities |
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
|
(4,156 |
) |
|
(1,485 |
) |
|
Funding
of termination benefits |
|
|
- |
|
|
(69 |
) |
|
Net
cash used in investing activities |
|
|
(4,156 |
) |
|
(1,554 |
) |
|
Cash
flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options |
|
|
5 |
|
|
- |
|
|
Repurchace
of common stock |
|
|
(14 |
) |
|
- |
|
|
Proceeds
from Series A Preferred Stock issuance, |
|
|
|
|
|
|
|
|
net
of $20 and $218 of issuance costs, respectively |
|
|
3,014 |
|
|
18,425 |
|
|
Proceeds
from Series A-1 Preferred Stock issuance |
|
|
- |
|
|
2,000 |
|
|
Repurchace
of Series A-1 Preferred Stock |
|
|
- |
|
|
(2,000 |
) |
|
Proceeds
from A-2 Preferred Stock issuance |
|
|
- |
|
|
100 |
|
|
Proceeds
from Series B Preferred Stock issuance, |
|
|
|
|
|
|
|
|
net
of $31 of issuance costs |
|
|
13,602 |
|
|
- |
|
|
Repayments
of long-term debt |
|
|
(1,346 |
) |
|
(8,200 |
) |
|
Proceeds
from repayment of shareholder loans |
|
|
37 |
|
|
- |
|
|
Borrowings
under credit facility |
|
|
- |
|
|
2,822 |
|
|
Net
cash provided by financing activities |
|
|
15,298 |
|
|
13,147 |
|
|
Net
change in cash |
|
|
4,191 |
|
|
4,460 |
|
|
Cash
and cash equivalents at beginning of year |
|
|
4,570 |
|
|
110 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
8,761 |
|
$ |
4,570 |
|
|
Supplemental
disclosure of noncash investing and |
|
|
|
|
|
|
|
|
financing
activities |
|
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
91 |
|
$ |
190 |
|
|
Recording
of asset retirement obligation |
|
$ |
102 |
|
$ |
- |
|
|
Increase
in fixed assets resulting from transfer of inventory |
|
$ |
686 |
|
$ |
685 |
|
|
Affiliated
investor contribution of debt to paid-in-capital |
|
$ |
- |
|
$ |
9,673 |
|
|
Assets/liabilities
acquired in acquisition: |
|
|
|
|
|
|
|
|
Property
and equipment |
|
$ |
- |
|
$ |
(472 |
) |
|
Identified
intangible |
|
$ |
- |
|
$ |
(104 |
) |
|
Other
current liabilities |
|
$ |
- |
|
$ |
66 |
|
|
Issuance
of shares in respect of acquisition |
|
$ |
- |
|
$ |
510 |
|
The accompanying notes are an integral part of these
financial statements.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share data)
| 1. |
Description
of Business and Summary of Significant Accounting Policies
|
Description
of Business
Comverge,
Inc., a Delaware corporation, and its subsidiaries (collectively, “We” or
the "Company"), provides (i) Energy intelligence systems, comprised of hardware,
software and installation services, to utilities and other energy customers and
(ii) On-call capacity relief to electricity generators and transmitters (Note
14). Prior to April 2003, the Company was a wholly-owned subsidiary of Data
Systems & Software, Inc. (“DSSI”). In April 2003 and continuing thereafter,
the Company completed a series of equity financings totaling $35,410 (Note 11).
DSSI remained the Company’s largest shareholder owning approximately 25 percent
and 41 percent of the Company’s issued and outstanding voting equity at December
31, 2004 and 2003, respectively.
Liquidity
The
Company has experienced losses since inception and expects to generate
additional losses in the foreseeable future. During 2004, the Company raised
additional financing and management believes this, along with available
borrowing capacity, will be sufficient to meet the operating needs of the
Company over the next twelve months. Additional financing may be required to
help the Company continue to develop its Enterprise business (Note
14).
Use
of Estimates in Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Foreign
Currency Translations
The
currency of the primary economic environment in which the operations of the
Company are conducted is the United States Dollar ("dollar"). Accordingly,
Comverge and its subsidiaries use the dollar as their functional currency. All
exchange gains and losses denominated in nondollar currencies are presented on a
net basis in operating expense in the consolidated statement of operations when
they arise. Foreign currency loss amounted to $4 and $15
for the years ended December 31, 2004 and 2003, respectively.
Principles
of Consolidation and Presentation
The
consolidated financial statements of the Company include the accounts of its
subsidiaries. The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. All intercompany balances and transactions have been eliminated.
Cash
and Cash Equivalents
The
company considers all highly liquid investments with a remaining maturity of
three months or less to be cash equivalents. Cash and cash equivalents consist
of cash and demand deposits in banks and short-term investments.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share data)
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based on specific identification of accounts
considered to be doubtful of collection as well as historical experience. As of
December 31, 2004 and 2003 there were no accounts identified as doubtful of
collection.
Inventory
Inventories
are stated at the lower of cost or market. Inventory cost is determined on the
basis of specific identification based on acquisition cost, and due provision is
made to reduce all slow-moving, obsolete, or unusable inventories to their
estimated useful or scrap values.
Property
and Equipment
Property
and equipment are presented at the lesser of cost or fair value at the date of
acquisition. Depreciation is calculated using the straight-line method over the
estimated useful lives of the depreciable assets. In the case of installed
assets that are part of long-term contracts, the assets are depreciated over the
shorter of the useful life or the expected life of the contract. Leasehold
improvements are depreciated over the shorter of the lease term or useful life.
Improvements are capitalized while repairs and maintenance are expensed as
incurred.
In
accordance with Statement on Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, the Company recognizes the fair
value of liabilities for asset retirement obligations in the period in which it
is incurred if a reasonable estimate of fair value can be made. Any associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and recognized as depreciation expense over the assets useful
life. As part of the Company’s Enterprise business (Note 14), the Company
installs hardware at the places of residence of select utility customers’ homes.
At the request of the homeowner, the Company is obligated to remove this
hardware. Accordingly, in 2004,
the Company recognized an asset retirement obligation liability and an
associated increase in the value of long-lived assets of $102. In 2003, the
estimated cost of these obligations was immaterial. As such, there was no
obligation recognized.
Goodwill
and Intangibles
Goodwill
represents the excess of cost over the fair value of the net tangible
assets of subsidiaries acquired in purchase transactions. Goodwill is not being
amortized in accordance with SFAS 142, Goodwill
and Other Intangible Assets. In
accordance with SFAS 142, goodwill and other indefinite-lived intangible assets
are tested for impairment on at least an annual basis, on December 31 of each
year. Based on the Company’s most recent impairment test, there has been no
impairment loss recognized for goodwill.
The costs
of licensed technology are presented at their fair value at acquisition date.
These costs are amortized on a straight-line basis over the term of the license,
generally five years.
The costs
of registered patents and patents pending acquired from third parties are
presented at their fair value at acquisition date. In addition, registration
costs and fees for patents are capitalized. Registered patents costs are
amortized over the estimated remaining useful life of the patents, from four to
fourteen years. Costs for patents pending are not amortized until they are
issued.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
Revenue
Recognition
In
accordance with Staff Accounting Bulletin (SAB) 104, Revenue
Recognition, the
Company recognizes revenues when the following criteria have been met: delivery
has occurred, the price is fixed and determinable, collection is probable, and
persuasive evidence of an arrangement exists.
In
accordance with Emerging Issues Task Force (EITF) 00-21, Accounting
for Revenue Arrangements With Multiple Deliverables, the
Company assesses revenue arrangements to determine when multiple deliverables
exist in order to determine if separate accounting is required for these
deliverables separately per EITF 00-21.
Revenue
from time-and-materials service contracts and other services are recognized as
services are provided. Revenue from maintenance contracts is recognized on a
straight-line basis over the life of the contract.
In
accordance with SAB 104, the Company defers revenues and associated costs of
revenues related to certain long term contracts until such time as the contract
price is fixed and determinable. These contracts require the Company to provide
capacity through our load curtailment solutions to electricity generators, and
require a measurement and verification of capacity provided on an annual basis
in order to determine final contract consideration for a given year. For the
year ended December 31, 2004, the Company deferred $1,713 of revenues and $281
of corresponding costs of revenues.
In
accordance with EITF issue 00-10, Accounting
for Shipping and Handling Fees and Costs, the
Company reports shipping and handling revenues and their associated costs in
Revenue and Cost of Revenue, respectively.
Warranty
Provision
Comverge
generally warrants its products against certain manufacturing and other defects.
These product warranties are provided for specific periods of time and/or usage
of the product depending on the nature of the product, the geographic location
of its sale and other factors. As of December 31, 2004 and 2003
the Company had accrued $161 and $152, respectively, for estimated product
warranty costs, which was included in other current liabilities. The accrued
product warranty costs were based primarily on estimated costs to satisfy a
customer warranty claim. Warranty claims expense for the years ended December
31, 2004 and 2003 were $91 and $20, respectively.
| |
|
2004 |
|
2003 |
|
|
Warranty
provision at beginning of period |
|
$ |
152 |
|
$ |
52 |
|
|
Accruals
for warranties issued during the period |
|
|
100 |
|
|
100 |
|
|
Warranty
settlements during the period |
|
|
(91 |
) |
|
(20 |
) |
|
Changes
in liability for pre-existing warranties |
|
|
|
|
|
|
|
|
during
the period, including expirations |
|
|
- |
|
|
20 |
|
|
Warranty
provision at the end of period |
|
$ |
161 |
|
$ |
152 |
|
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
Advertising
Expenses
Advertising
costs are expensed as incurred. Advertising expense amounted to $2,816 and
$813 for the
years ended December 31, 2004 and 2003, respectively.
Research
and Development Expenses
Research
and development costs are expensed as incurred.
Stock-Based
Compensation
The
Company accounts for employee and director stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and
related interpretations. In accordance therewith, the Company records
compensation expense on fixed stock options and restricted common stock granted
to employees and directors at the date of grant if the current market price of
the Company’s common stock exceeds the exercise price of the options and
restricted common stock. Compensation expense on variable stock option grants is
estimated until the measurement date. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options. The
Company complies with the disclosure provisions of SFAS
123,
Accounting
for Stock-Based Compensation (“SFAS
123”). As such, the Company provides pro forma net income disclosures for
employee and director stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. The Company’s stock-based employee
compensation plan is described more fully in Note 12.
Total
stock-based compensation expense determined under the fair-value method for all
awards was $35 and $52 for the years ended December 31, 2004 and 2003,
respectively. See the pro forma net loss reconciliation in the table
below.
| |
|
Fiscal
year ended |
|
|
|
December
31, |
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
| |
|
(In
thousands, except for share numbers) |
|
|
Net
loss as reported |
|
$ |
(9,258 |
) |
$ |
(9,317 |
) |
|
Add: |
|
|
|
|
|
|
|
|
Stock-based
employee compensation |
|
|
|
|
|
|
|
|
expense
included in reported net income |
|
|
|
|
|
|
|
|
net
of related tax effects |
|
|
- |
|
|
- |
|
|
Deduct: |
|
|
|
|
|
|
|
|
Total
stock-based employee compensation |
|
|
|
|
|
|
|
|
expense
determined under fair value method- |
|
|
|
|
|
|
|
|
based
methods for all awards, net of tax effects |
|
|
(35 |
) |
|
(52 |
) |
|
Pro
forma net loss |
|
$ |
(9,293 |
) |
$ |
(9,369 |
) |
The
Company accounts for stock-based compensation issued to consultants on a fair
value basis in accordance with SFAS 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.
Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, as well as operating loss, capital
loss and tax credit carry forwards. Deferred tax assets and liabilities are
classified as current or noncurrent based on the classification of the related
assets or liabilities for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related to an asset
or liability for financial reporting. Valuation allowances are established
against deferred tax assets if it is more likely than not that they will not be
realized.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
Income
taxes associated with the undistributed earnings of a subsidiary are provided
for in accordance with Accounting Principals Board Opinion No. 23, when the
Company has sufficient evidence that the subsidiary has invested or will invest
the undistributed earnings indefinitely. If it is determined that the
undistributed earnings of a subsidiary will be remitted in the foreseeable
future, all taxes related to the remittance of such undistributed earnings are
provided for in the current period as income tax expense.
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of its long-lived assets and certain
identifiable intangible assets in accordance with SFAS 144, Accounting
for the Impairment or Disposal of Ling-Lived Assets. SFAS 144
requires recognition of impairment in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets.
If impairment is indicated, the carrying amount of the asset is written down to
fair value. The Company has identified no such impairments.
Significant
Risks and Uncertainties
The
Company’s operations are subject to certain risks and uncertainties including,
but not limited to; a history of unprofitability and the inability to fund its
operations and capital requirements with free cash flow, the continued ability
to obtain financing on commercially reasonable terms, operating results that are
often volatile and difficult to predict, the ability to develop new products and
the market’s acceptance of those products, a highly competitive marketplace, the
reliance on strategic relationships as distribution channels to market products,
the use of technology licensed from third parties, the potential of product
defects, the commoditization of products and resulting pricing pressures,
lengthy sales cycles of our utility customers, the ability to manage growth,
possible disruption in commercial activities due to terrorist activity and armed
conflict, delays in product development and related release schedules, the
ability to protect intellectual property and the need to retain key personnel.
Additionally, the Company has a significant share of a market that is presently
very small, making it difficult to achieve internal growth absent a significant
market expansion. Any of these factors could impair our ability to expand our
operations or to generate significant revenues and cash flows from those markets
in which we operate. As a result of the above and other factors, the Company’s
financial condition can vary significantly from year to year.
Impact
of Recent Accounting Pronouncements
On
December 16, 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123(R)”),
Share-Based
Payment, which
is a revision of SFAS 123. SFAS 123(R) supersedes APB 25, and amends SFAS 95,
Statement
of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25’s intrinsic value method and, as
such, recognizes no compensation cost on grants of employee stock options when
the exercise price of an option is at or below the fair market value of the
underlying stock. Accordingly, the adoption of SFAS 123(R) could have a
significant impact on the Company’s results of operations, although it will have
no impact on its overall financial position. The impact of adoption of SFAS
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
The
Company expects to adopt SFAS 123(R) on January 1, 2006. SFAS 123(R) permits the
Company to adopt its requirements using one of two methods:
| · |
A
“modified prospective” method in which compensation cost is recognized
beginning with the January 1, 2006 adoption date (a) based on the
requirements of SFAS 123(R) for all share-based payments granted after
January 1, 2006 and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to January 1, 2006 that remain unvested
on the adoption date. |
| · |
A
“modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for
purposes of pro forma disclosures either (a) all prior periods presented
or (b) prior interim periods of the year of
adoption. |
The
Company plans to adopt SFAS 123(R) using the modified prospective
method.
On April
7, 2003, the Company acquired from an unrelated company, Sixth Dimension, Inc.
(“6D”), certain property and equipment and technological know-how (software)
relating to its iNET software platform in exchange for 877,000 of its common
shares (the “Acquisition”). The Acquisition was accounted for using the purchase
method of accounting. The Company acquired
a
business including property and equipment, intellectual property, certain
contracts with customers and all of 6D’s employees. In consideration of the
Company’s acquisition, certain 6D investors purchased $3,750 of the Company’s
Series A Preferred Stock. 6D is an early stage Internet-based software company,
whose iNET platform enables a broad range of energy services including: upstream
facility metering, monitoring, and control; performance-based operations and
proactive maintenance; economic demand response and active load curtailment;
aggregated distributed generation; power reliability and quality monitoring; and
other real-time capital equipment analysis using a low-cost, robust, software
for service delivery. The iNET platform adds to Comverge's product offering,
technology for upstream monitoring and control of capital assets, by combining
real-time, internet-based, data warehousing capabilities with the analytical and
metering capabilities of the Company’s PowerCAMP software
applications.
The
purchase price of the
acquired assets was $510, determined by an independent appraisal of the value of
the Company’s common shares issued in respect of the Acquisition as of the
Acquisition date. As a result of the Acquisition, the Company recorded an
intangible asset, the iNET software, of $104. This asset will be amortized on a
straight line basis over three years from the Acquisition date.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
| 3. |
Property
and Equipment |
Property
and equipment, at December 31, 2004 and 2003
consisted of the following:
| |
|
Estimated |
|
|
|
|
|
| |
|
Useful
Life |
|
|
|
|
|
| |
|
(in
years) |
|
2004 |
|
2003 |
|
|
Load
control equipment |
|
|
3-10 |
|
$ |
4,775 |
|
$ |
973 |
|
|
Computer
hardware and software |
|
|
3 |
|
|
1,259 |
|
|
1,807 |
|
|
Office
furniture and equipment |
|
|
5-7 |
|
|
1,660 |
|
|
1,657 |
|
|
Leasehold
improvements |
|
|
Term
of lease |
|
|
177 |
|
|
103 |
|
| |
|
|
|
|
|
7,871 |
|
|
4,540 |
|
|
Accumulated
depreciation |
|
|
|
|
|
2,529 |
|
|
2,443 |
|
|
Property
and equipment, net |
|
|
|
|
$ |
5,342 |
|
$ |
2,097 |
|
Depreciation
in respect of property and equipment amounted to $946 and $831 for and the years
ended December 31, 2004 and 2003, respectively.
| 4. |
Goodwill
and Intangible Assets |
The
Company’s goodwill balance as of both December 31, 2004 and 2003 was $499, which
is recorded as part of the Solutions segment (Note 14).
Intangible
assets and accumulated amortization as of December 31, 2004 and 2003 consisted
of the following:
| |
|
Estimated |
|
|
|
|
|
| |
|
Useful
Life |
|
|
|
|
|
| |
|
(in
years) |
|
2004 |
|
2003 |
|
|
Technological
Know-How |
|
|
5 |
|
$ |
1,436 |
|
$ |
1,436 |
|
|
Acquired
Software |
|
|
3 |
|
|
104 |
|
|
104 |
|
|
Patents |
|
|
4-14 |
|
|
287 |
|
|
287 |
|
| |
|
|
|
|
|
1,827 |
|
|
1,827 |
|
|
Accumulated
amortization |
|
|
|
|
|
1,600 |
|
|
1,333 |
|
|
Identified
intangible assets with finite lives, net |
$ |
227 |
|
$ |
494 |
|
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
The
Company uses the straight line method of computing amortization expense.
Amortization expense for the years ended December 31, 2004 and 2003 was $266 and
$335, respectively. Estimated amortization expense for the next five years is as
follows:
|
Year
Ending December 31, |
|
|
|
2005 |
$ |
50 |
|
2006 |
|
24 |
|
2007 |
|
15 |
|
2008 |
|
15 |
|
2009 |
|
15 |
|
Thereafter |
|
108 |
Other
assets at December 31, 2004 and 2003 consisted of the following:
| |
|
2004 |
|
|
2003 |
|
|
Long-term
inventory |
|
$ |
975 |
|
|
$ |
- |
|
|
Other |
|
|
42 |
|
|
|
37 |
|
|
Total
other assets |
|
$ |
1,017 |
|
|
$ |
37 |
|
The
inventory balance of $975 as of December 31, 2004, represents certain finished
goods inventory not anticipated to be sold during the next twelve months
primarily due to the necessary completion in 2005 of certain firmware to be
integrated into the products. The inventory was obtained pursuant to a purchase
agreement with the vendor that provides for extended payment terms (Note
7).
On April
7, 2003, in connection with a private equity financing, the Company entered into
a $6,500 credit facility (“Credit Facility”) with a major United States
commercial bank. The Credit Facility consists of a three-year term loan (“Term
Loan”) of $1,500 bearing interest at the prime rate and a $5,000, three year,
revolving credit facility (“Revolving Facility”) bearing interest between
prime+1.5 percent and prime+2.0 percent per annum. Initial borrowings were used
to refinance certain debt. The Term Loan was secured by cash collateral in a
like amount pledged by DSSI and was repaid by the Company in December 2003.
Interest paid on this Term Loan totaled $45 in 2003. The Revolving Facility is
secured by virtually all of the assets of the Company including the Company’s
intellectual property. On
September 24, 2004, the Company modified the Credit Facility to (i) increase the
revolving line credit amount to $7,000, (ii) increase the letter of credit
sublimit to $3,000 and (iii) extend the maturity date of the Revolving Facility
to September 15, 2007. Borrowings under the Revolving Facility can be requested,
from time to time, up to an amount that, based on a formula, includes 80 percent
of eligible receivables and eligible inventory limited to the lesser of (i) 25
percent of FMV, (ii) 80 percent of net orderly liquidation value or (iii) $500.
At December 31, 2004 and 2003 the Company had $0 and $1,346, respectively, of
borrowings under the Revolving Facility.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
As of
December 31, 2004, the Company had unutilized borrowing availability under its
Revolving Facility of approximately $3,000.
| 7. |
Long-Term
Trade Payable |
At
December 31, 2004, the Company owed a trade vendor $1,362 in consideration of
certain inventory obtained pursuant to a purchase agreement executed in
September of 2003 (Note 5). Pursuant to an amendment to the terms of the
purchase agreement in September 2004, the due date of this trade obligation was
extended to March 30, 2006. The amount owed bears no interest and is not secured
by any assets of the Company.
| 8. |
Liability
for Employer Termination Benefits |
Under
Israeli law and labor agreements, one of the Company’s subsidiaries, Comverge
Control Systems, is required to make severance and pension payments to dismissed
employees and to employees leaving employment in 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. The
pension plans are multi-employer and independent of the Company. Pension and
severance costs for the years
ended December 31, 2004 and 2003 was $143 and $217, respectively, and is
included in general and administrative expenses.
The
Company has Federal, state, and foreign net operating losses of approximately
$25,196, $15,601 and $3,036, respectively, at December 31, 2004. The Federal net
operating loss carryforwards begin expiring in 2019 and state net operating loss
carryforwards begin expiring in 2006. During year ended December 31, 2003,
certain substantial changes in the Company’s ownership, as defined in the
provisions of the Internal Revenue Code, resulted in a limitation on the
utilization of a significant portion of the Federal and state net operating
losses on an annual basis.
At
December 31, 2004, the Company has provided a valuation allowance for the full
amount of its net deferred tax asset since realization of any future tax benefit
cannot be sufficiently assured.
A
reconciliation of income tax expense (benefit) at the statutory federal income
tax rate and income taxes as reflected in the consolidated financial statements
is as follows:
| |
|
2004 |
|
2003 |
|
|
|
Federal
income tax at statutory federal rate |
|
|
34.0%
|
|
|
34.0%
|
|
|
|
State
income tax expense |
|
|
4.0%
|
|
|
4.0%
|
|
|
|
Other |
|
|
(1.4
%) |
|
|
(0.4%) |
|
|
|
Valuation
allowance |
|
|
(36.6%) |
|
|
(37.6%) |
|
|
|
Effective
tax rate |
|
|
0%
|
|
|
0%
|
|
|
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
Deferred
tax assets (liabilities) consist of the following:
| |
|
2004 |
|
2003 |
|
|
Deferred
tax assets |
|
|
|
|
|
|
Net
operating loss carryforwards |
|
$ |
10,283 |
|
$ |
7,981 |
|
|
Other |
|
|
1,161 |
|
|
735 |
|
|
Deferred
tax liabilities |
|
|
|
|
|
|
|
|
Other |
|
|
(171 |
) |
|
(185 |
) |
| |
|
|
11,273 |
|
|
8,531 |
|
|
Valuation
allowance |
|
|
(11,273 |
) |
|
(8,531 |
) |
|
Net
deferred tax assets (liabilities) |
|
$ |
- |
|
$ |
- |
|
| 10. |
Commitments
and Contingencies |
(a)
Leases of Property and Equipment
Rental
and leasing expenses for the years
ended December 31, 2004 and 2003 was $624 and $532, respectively. Future minimum
rental payments and lease payments on noncancelable operating leases as of
December 31, 2004 are as follows:
(in
thousands of dollars)
Year
Ending December 31, |
|
|
|
|
2005 |
|
$ |
469 |
|
|
2006 |
|
|
313 |
|
|
2007 |
|
|
181 |
|
|
2008 |
|
|
176 |
|
|
2009 |
|
|
166 |
|
|
Thereafter |
|
|
14 |
|
(b)
Employee Retirement Savings Plan
The
Company sponsors a tax deferred retirement savings plan that permits eligible
U.S. employees to contribute varying percentages of their compensation up to the
limit allowed by the Internal Revenue Service. This plan also provides for
discretionary Company contributions. No discretionary contributions were made
for the years ended December 31, 2004 or 2003.
(c)
Royalties
The
Company is committed to pay royalties to the Government of Israel on proceeds
from the sale of certain products in which the Government of Israel participated
in the research and development by way of grants. Royalties are currently
payable at a rate of 4.5 percent of the annual sales of the product. The amount
payable as royalties is limited to the amount of the original grant of $595. The
net amount due in respect of these grants amounted to approximately $418 at
December 31, 2004.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
| 11. |
Shareholders'
Deficit |
Contribution
of DSSI debt to paid-in-capital
In April
of 2003, by agreement, and in consideration of the sale of the Company’s Series
A and A-1 preferred shares and the placement of a New Credit Facility, DSSI and
its affiliated companies (other than the Company) contributed accrued management
fees and the principal amount of loans, advances and accrued interest thereon in
the amount of $9,673 to paid in capital.
Common
Stock
Holders
of the Company’s common stock are entitled to dividends if and when declared by
the board of directors. The holders of common stock, voting as a separate class,
are entitled to elect two members of the Board of Directors at each meeting or
pursuant to each consent of the Corporation’s stockholders for the election of
directors, and to remove from office such directors and to fill any vacancy
caused by the resignation, death or removal of such directors.
Convertible
Preferred Stock
During
2003, the Company sold to investors (i) 8,945,350 shares of its Series A
Convertible Preferred Stock (“Series A Preferred”) for $18,643, (ii) 721,527
shares of its Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”)
for $2,000 and (iii) 36,076 of its Series A-2 Convertible Preferred Stock
(“Series A-2 Preferred”) for $100. The Company repurchased its Series A-1
Preferred in 2003, pursuant to a put right of an investor for $2,000 plus
accrued dividends of $74 which dividends were recognized as a financial expense
in 2003.
During
2004, the Company sold to investors (i) 1,455,796 of its Series A Preferred for
$3,034 and (ii) 5,640,878 shares of its Series B Convertible Preferred Stock
(“Series B Preferred”) for $13,633. As part of the Series B Preferred
transaction, the Company issued 92,798 shares of common stock for no monetary
consideration to one of the investors. The fair value of these shares, based on
an independent third party valuation, is $34. Accordingly, the Company made a
pro rata allocation of the total consideration received to the Series B
Preferred and the common stock, resulting in $13,599 allocated to the Series B
Preferred and $34 to the common stock.
The
rights, preferences and privileges attached to the Series A Preferred, Series
A-2 Preferred and Series B Preferred (Collectively, the “Preferred Stock”) are
as follows:
(a)
Conversion
The
Preferred Stock is convertible into the Company’s common stock initially on a
one-for-one basis subject to adjustment for the achievement of certain
performance criteria. Conversion is mandatory (i) in
the event that the holders of at least a majority of the then-outstanding shares
of Preferred Stock consent to such conversion or (ii) upon the closing of a
firmly underwritten public offering of shares of common stock of the Company at
a per share price not less than five times the original per-share purchase price
of the Preferred Stock. The
holders of Preferred Stock have no mandatory redemption rights.
(b) Board
of Directors
The
holders of Preferred Stock, voting as a separate class, shall be entitled to
elect three members of the Board of Directors at each meeting or pursuant to
each consent of the Corporation’s stockholders for the election of directors,
and to remove from office such directors and to fill any vacancy caused by the
resignation, death or removal of such directors. After
December 31, 2004, the board can be increased by no more than two additional
seats based on a majority vote of the then members of the board. The additional
two seats shall be filled by outside directors, who shall be selected by a
majority of the other members of the Board of Directors, including the
affirmative vote of at least two of the directors designated by the holders of
Preferred Stock.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
(c)
Dividends
In the
event the Company declares and pays any dividend on its common stock other than
stock or other dividends payable solely in shares of common stock, the Company
must also pay to the holders of Preferred Stock the dividends that would have
been payable had all of the outstanding Preferred Stock been converted to common
stock immediately prior to the record date of the dividend.
The
holders of shares of Preferred Stock, on a pari passu basis and in preference to
the holders of any shares of any other class of capital stock of the Company,
shall be entitled to receive, when, as and if declared by the Board of
Directors, but only out of funds legally available therefore, dividends at the
rate of 8 percent per annum based, in each case, on the original Preferred Stock
issue price. Dividends are noncumulative.
(d)
Voting
The
Preferred Stock shall vote together with all other classes and series of stock
of the Company as a single class on all actions to be taken by the stockholders
of the Company.
(e)
Liquidation Preferences
Upon any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, the holders of shares of Series A Preferred and the Series B
Preferred shall be entitled to be paid, on a pari passu basis, before any
distribution or payment is made upon the Series A-2 Preferred Stock or on the
common stock an amount equal to 1.5 times the original Series A issue price per
share or original Series B price per share, respectively, plus all declared and
unpaid dividends. After payment to the holders of Series A Preferred and the
Series B Preferred of the full amounts to which they are entitled the holders of
Series A-2 Preferred Stock shall be entitled to be paid, before any distribution
or payment is made upon the common stock, an amount equal to 1.5 times the
original Series A-2 issue price per share plus all declared but unpaid
dividends. After the preferential payments have been made in full, any
additional remaining assets shall be distributed ratably to the holders of
Preferred Stock (on an as-converted basis) and common stock until such holders
of Preferred Stock have received, inclusive of their liquidation amount, an
amount equal to 5 times their original issue price per share. After payment of
all preferential amounts, the entire remaining assets of the Company legally
available for distribution, if any, shall be distributed ratably among the
holders of its common stock.
Unless
otherwise agreed by holders of at least 66 2/3 percent of the then-outstanding
shares of Preferred Stock, a liquidation, dissolution or winding up of the
Company shall also include (i) the acquisition or sale of the Company unless the
Company’s stockholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale hold at
least 50 percent of the voting power of the surviving or acquiring entity or
(ii) a sale, lease or other conveyance or disposition of all or
substantially all of the assets of the Company, including a sale of all or
substantially all of the assets of the Company’s subsidiaries, if such assets
constitute substantially all of the assets of the Company and such subsidiaries
taken as a whole.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
(f)
Anti-dilution Rights
The
conversion prices of Preferred Stock are subject to broad-based weighted average
anti-dilution adjustments to reduce dilution in the event that the Company
issues additional equity securities (other than Board approved employee
incentives, including stock options) at a purchase price less than the
then-applicable conversion price of the Series A Preferred, Series A-2 Preferred
and Series B Preferred, respectively. The conversion price is also subject to
proportional adjustment for stock splits, stock dividends, recapitalizations and
the like.
(g)
Protective Provisions
For so
long as at least 100,000 shares of Preferred Stock remain outstanding, consent
of the holders of at least 60% of the then outstanding Preferred Stock shall be
required to (i) alter or change the rights, preferences or privileges of the
Preferred Stock, (ii) create (by reclassification or otherwise) any new class or
series of shares having rights, preferences or privileges senior to or on a
parity with the Preferred Stock, (iii) amend or waive any provision of the
Company’s Articles of Incorporation or Bylaws, (iv) increase or decrease the
authorized number of shares of common or Preferred Stock, (v) redeem any shares
of common stock (other than pursuant to equity incentive agreements with service
providers giving the Company the right to repurchase shares upon the termination
of services), (vi) consummate any merger, other corporate reorganization, sale
of control, or any transaction in which all or substantially all of the assets
of the Company are sold, (vii) increase or decrease the authorized size of
the Company’s Board of Directors or the Compensation Committee of the Board of
Directors, (viii) pay or declare any dividend on any shares of common or
Preferred Stock, (ix) liquidate or dissolve the Company, (x) increase the number
of shares reserved for issuance under the Option Plan, (xi) issue any shares of
capital stock of the Company or options to acquire capital stock of the Company
under the Option Plan, unless such issuance is approved by the Board of
Directors and the Compensation Committee of the Board of Directors, or (xii)
authorize or incur any additional indebtedness in excess of $500 (other than the
revolving Credit Facility), unless such incurrence of indebtedness is approved
by the Board of Directors, including at least two of the directors designated by
the holders of Preferred Stock.
The
Company's stock option plan provides for the granting to officers, directors and
other key employees of options to purchase shares of common stock at not less
than 85 percent of the estimated fair value of the Company’s common stock on the
date of grant. The purchase price must be paid in cash. At December 31,
2004, the
Company had 2,600,996 issued and outstanding options under the various plans of
which 78,491 options had been exercised by optionees. Options expire between
five years and ten years from the date of the grant. The options generally vest
over a two to four year period from the date of the grant. At December 31, 2004,
1,260,244 options were available for grant under the various plans.
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
A summary
status of the Company's option plans as of December 31, 2004 and 2003, as well
as changes during the year then ended, is presented below:
| |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
| |
|
|
Number
of |
|
|
Average |
|
|
Number
of |
|
|
Average |
|
| |
|
|
Options |
|
|
Exercise |
|
|
Options |
|
|
Exercise |
|
| |
|
|
(in
Shares) |
|
|
Price |
|
|
(in
Shares) |
|
|
Price |
|
|
Outstanding
at beginning of year |
|
|
2,216,049 |
|
$ |
1.20 |
|
|
943,530 |
|
$ |
1.20 |
|
|
Granted |
|
|
980,525 |
|
$ |
0.44 |
|
|
1,278,800 |
|
$ |
1.20 |
|
|
Exercised |
|
|
(4,052 |
) |
$ |
1.27 |
|
|
- |
|
$ |
1.20 |
|
|
Forfeited |
|
|
(591,526 |
) |
$ |
1.06 |
|
|
(6,281 |
) |
$ |
1.20 |
|
|
Outstanding
at end of year |
|
|
2,600,996 |
|
$ |
0.95 |
|
|
2,216,049 |
|
$ |
1.20 |
|
|
Exercisable
at end of year |
|
|
1,260,078 |
|
$ |
1.13 |
|
|
921,094 |
|
$ |
1.16 |
|
| |
|
Outstanding
as of December 31, 2004 |
|
| |
|
|
|
Average |
|
|
|
| |
|
|
|
Remaining |
|
|
|
| |
|
Number |
|
Contractual |
|
Number |
|
|
Exercise
Prices |
|
Outstanding |
|
Life |
|
Exercisable |
|
| |
|
(In
Shares) |
|
(In
Years) |
|
(In
Shares) |
|
|
$0.29 |
|
|
818,700 |
|
|
6.72 |
|
|
193,948 |
|
|
$1.20 |
|
|
1,695,059 |
|
|
4.42 |
|
|
978,894 |
|
|
$1.31 |
|
|
52,587 |
|
|
6.87 |
|
|
52,587 |
|
|
$2.00 |
|
|
10,191 |
|
|
1.01 |
|
|
10,191 |
|
|
$4.00 |
|
|
24,459 |
|
|
1.24 |
|
|
24,459 |
|
| |
|
|
2,600,996 |
|
|
5.15 |
|
|
1,260,098 |
|
The
weighted average grant-date fair value of 980,525 and 1,278,800 options granted
during 2004 and 2003, respectively, was zero. The Company utilized the
Black-Scholes option pricing model to estimate fair value, utilizing the
following assumptions for the respective years (all in weighted averages):
| |
|
2004 |
|
2003 |
|
|
Risk-free
interest rate |
|
|
3.50 |
% |
|
5.38 |
% |
|
Expected
life of options, in years |
|
|
5.0 |
|
|
5.0 |
|
|
Expected
annual volatility |
|
|
0 |
% |
|
0 |
% |
|
Expected
dividend yield |
|
|
None |
|
|
None |
|
During
2002, the Company repriced certain incentive stock options of ten employees. One
of these employee’s options were repriced, pursuant to his employment agreement,
from $4.00 to $1.20 per share. The Company also repriced certain incentive stock
options of ten employees (including the aforementioned employee) who held
certain anti-dilution options from $1.94 to $1.31 per share. As a result of
these repricings, the options are accounted for as variable awards with a
compensation charge recognized for periodic changes in the intrinsic value of
the option until the award expires, is exercised, or is forfeited. No
compensation charge was recognized during 2004 or 2003 related to these repriced
option grants since the fair market value of the common stock was below the
exercise prices. During 2004, the Company incurred $30 in deferred compensation
related to option grants which will be recognized into expense over the vesting
period of the awards
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
During
the year ended December 31, 2004, the Company had two customers which accounted
for 15.4% and 10.7% of the Company’s total revenue. The total accounts
receivable from these customers were $256 and $129, respectively, at December
31, 2004. During the year ended December 31, 2003, the Company had one customer
which accounted for 18.5% of the Company’s total revenue. The total accounts
receivable from this customer was $172 at December 31, 2003. No other customer
accounted for more than 10 percent of the Company’s total revenue in 2004 or
2003.
We have
two
operating segments by which we evaluate our business and for which we have
discrete financial information available. These operating segments are (1)
Solutions sales, consisting of energy intelligence systems comprised of hardware
and software sold to utilities and other customers and (2) Enterprise sales,
consisting of long-term, turnkey contracts to provide capacity relief to
electricity generators and transmitters. In evaluating financial performance, we
focus on operating income as a measure of a segment’s profit or loss. Operating
income for this purpose is income before interest, taxes and allocation of
certain corporate expenses. Operating income is
significant as it includes the revenue and related costs that apply to the
individual segments. We do not utilize total assets as a measure of a segment’s
performance. Total assets are reviewed at the enterprise level and thus are not
included in our segment disclosure.
Capital
requirements of our Enterprise segment are significant and consist of hardware
devices and control equipment that allow us to provide energy capacity to our
generation and transmission customers during periods of peak electricity demand.
The
following table includes financial information for 2004 and 2003 related to our
segments. The information presented below may not be indicative of results if
the segments were independent organizations.
| |
|
For
the Year Ended 2004 |
|
| |
|
Solutions |
|
Enterprise |
|
Total |
|
|
External
revenues |
|
$ |
17,002 |
|
$ |
1,157 |
|
$ |
18,159 |
|
|
Operating
loss |
|
|
(6,905 |
) |
|
(2,124 |
) |
|
(9,029 |
) |
|
Identifiable
long term assets |
|
|
724 |
|
|
4,618 |
|
|
5,342 |
|
|
Depreciation
expense |
|
|
589 |
|
|
357 |
|
|
946 |
|
|
Capital
expenditures |
|
|
434 |
|
|
3,722 |
|
|
4,156 |
|
|
Net
loss |
|
|
(7,595 |
) |
|
(1,663 |
) |
|
(9,258 |
) |
Comverge,
Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
(All
notes in thousands of dollars, except per share
data)
| |
|
For
the Year Ended 2003 |
|
|
|
|
Solutions |
|
Enterprise |
|
Total |
|
|
External
revenues |
|
$ |
15,394 |
|
$ |
248 |
|
$ |
15,642 |
|
|
Operating
loss |
|
|
(8,234 |
) |
|
(497 |
) |
|
(8,731 |
) |
|
Identificable
long term assets |
|
|
704 |
|
|
1,393 |
|
|
2,097 |
|
|
Depreciation
expense |
|
|
778 |
|
|
53 |
|
|
831 |
|
|
Capital
expenditures |
|
|
312 |
|
|
1,173 |
|
|
1,485 |
|
|
Net
loss |
|
|
(9,184 |
) |
|
(133 |
) |
|
(9,317 |
) |
| 15. |
Related
Party Transactions and Balances |
An
affiliate of DSSI charged the Company’s Israeli subsidiary, Comverge Control
Systems, $138 and $138
in 2004 and 2003, respectively, in consideration of it providing office space
and certain accounting and administrative services which amounts are included in
general and administrative expense. Also, DSSI paid a cash bonus of $200 to an
executive officer of the Company in January 2004 related to performance metrics
achieved during 2003. This amount was recognized in the Company’s Statement of
Operations as compensation expense in 2003. Because the Company had no
obligation to reimburse DSSI for such bonus payment, it is classified on the
Company’s balance sheet as a contribution to paid-in-capital. Additionally, in
January of 2003, DSSI granted the Company's Chief Executive Officer a restricted
stock grant of 50,000 shares of common stock of DSSI. Also, in 2003, the Company
purchased $100 of computers and other equipment from an affiliate of DSSI of
which $62 is recorded in property and equipment and $38 is recorded as a general
and administrative expense.
Prior to
April 2003, DSSI charged the Company $130 in consideration of certain management
fees and interest on advances and loans made by DSSI to the Company and included
in selling and administrative services. Such amount was classified on the
Company’s balance sheet as a liability to DSSI. By agreement, in April 2003,
such amount was contributed to the Company’s paid in capital (Note 11). Also by
agreement, subsequent to April 2003, no management fees are payable to
DSSI.
The
Company extended loans of $10 each to both the Chief Executive Officer and Chief
Financial Officer of DSSI. The loans had an initial maturity date of January 3,
2002, and were extended at that time to mature on January 3, 2004. The loans
bear interest at 4.25 percent per annum. The balance of the loans and accrued
interest at December 31, 2003 were $26. The loans were repaid in
2004.
The
Company has 4,637 stock options outstanding and issued to an executive officer
of an affiliated company.