<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-21477
JAVELIN SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
STATE OF DELAWARE 52-1945748
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17891 CARTWRIGHT ROAD.
IRVINE, CALIFORNIA 92614
(Address of Principal Executive Offices) (Zip Code)
(949) 440-8000
(Issuer's Telephone Number, Including Area code)
N/A
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the issuer's classes
of common stock equity, as of the latest practicable date.
Title Date Outstanding
Common Stock, $.01 par value October 31, 1998 5,521,275
Transitional Small Business Disclosure Format (check one):
Yes No / X /
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JAVELIN SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998*
------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ $
Accounts receivable -- net 9,662,400 7,449,700
Inventories 7,991,600 5,925,300
Deferred income taxes 204,900 204,900
Other current assets 765,800 426,900
------------- -------------
Total current assets 18,624,700 14,006,800
Property and equipment, net 1,241,900 1,036,400
Excess of cost over net assets of purchased businesses 6,783,700 6,457,500
Deferred financing costs 853,300 889,000
Other assets, net 296,700 141,600
------------- -------------
Total assets $ 27,800,300 $ 22,531,300
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 4,398,000 $ 1,343,000
Accounts payable 7,651,400 5,636,900
Accrued expenses 684,900 625,000
Current maturities of long-term debt 300,000 300,000
Customer deposits 165,200 1,197,200
Deferred maintenance revenues 460,500 385,300
Income taxes payable 741,100 438,700
------------- -------------
Total current liabilities 14,401,100 9,926,100
------------- -------------
Deferred rent expense 6,300 6,300
Long-term debt, net of current portion 1,125,000 1,200,000
------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value:
authorized shares--1,000,000
issued and outstanding shares--none -- --
Common stock, $.01 par value:
authorized shares--10,000,000
issued and outstanding shares--4,171,275 at September 30,
1998, and 4,111,962 at June 30, 1998 41,700 41,100
Additional paid in capital 11,642,400 11,270,900
Deferred compensation (30,000) (39,200)
Retained earnings 605,500 132,900
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Cumulative translation adjustment 8,300 (6,800)
-------------- -------------
Total stockholders' equity 12,267,900 11,398,900
-------------- -------------
Total liabilities and stockholders' equity $ 27,800,300 $ 22,531,300
-------------- -------------
------------- -------------
</TABLE>
*The balance sheet at June 30, 1998 has been derived from audited financial
statements.
3
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JAVELIN SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Product sales $11,587,900 $ 2,950,100
Service 1,344,300
------------ ------------
Total revenues 12,932,200 2,950,100
------------ ------------
Cost of revenues:
Cost of product sales 8,156,300 2,268,800
Cost of service 1,110,500
------------ ------------
Total revenues 9,266,800 2,268,800
------------ ------------
Gross profit 3,665,400 681,300
------------ ------------
Operating expenses:
Research and development 298,000 137,200
Selling and marketing 366,700 147,500
General and administrative 1,975,700 374,700
------------ ------------
Total operating expenses 2,640,400 659,400
------------ ------------
Income from operations 1,025,000 21,900
Interest expense (234,500) (1,800)
Interest income 3,700 3,900
Other income (expense) 24,400 (2,800)
------------ ------------
Income before income taxes 818,600 21,200
Provision for income taxes (346,000)
------------ ------------
Net income $ 472,600 $ 21,200
------------ ------------
------------ ------------
Earnings per common share:
Basic $ 0.11 $ 0.01
------------ ------------
------------ ------------
Diluted $ 0.11 $ 0.01
------------ ------------
------------ ------------
Shares used in computing earnings
per share:
Basic 4,131,556 3,263,040
------------ ------------
------------ ------------
Diluted 4,271,736 3,279,731
------------ ------------
------------ ------------
</TABLE>
4
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JAVELIN SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 472,600 $ 21,200
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 178,300 23,000
Amortization of goodwill 67,000
Loss on disposal of assets 2,800
Amortization of deferred compensation 9,200 21,600
Deferred rent expense 1,100
Non-cash allowances 117,200
Changes in operating assets and liabilities:
Accounts receivable (2,323,900) 316,800
Inventories (2,066,300) (2,300)
Other current assets (338,900) (2,000)
Accounts payable 2,014,500 (171,600)
Accrued expenses 53,900 (51,200)
Income taxes payable 302,400
Customer deposits (1,032,000)
Deferred maintenance 75,200
------------- ------------
Net cash provided by (used in) operating activities (2,470,800) 159,400
------------- ------------
INVESTING ACTIVITIES
Purchase of equipment (308,700) (87,000)
Other assets (185,100) (1,200)
------------ ------------
Net cash used in investing activities (493,800) (88,200)
------------ ------------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit 3,055,000 (200,000)
Repayment of notes payable (75,000)
Deferred offering costs (39,400)
Exercise of stock options 8,900 71,400
------------ ------------
Net cash provided by (used in) financing activities 2,949,500 (128,600)
------------ ------------
CUMULATIVE TRANSLATION ADJUSTMENT 15,100
------------ ------------
Net (decrease) in cash and cash equivalents 0 (57,400)
Cash and cash equivalents at beginning of period 0 686,200
------------ ------------
Cash and cash equivalents at end of period $ 0 $ 628,800
------------ ------------
------------ ------------
</TABLE>
5
<PAGE>
<TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Income tax paid $ 43,600 $ --
------------ ------------
Interest paid $ 159,400 $ 1,800
------------ ------------
------------ ------------
</TABLE>
6
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Javelin Systems, Inc. ("the Company") was incorporated in the State of Delaware
under the name of Sunwood Research, Inc. on September 19, 1995. The Company
designs, develops, markets and sells open systems touch screen point-of-sale
("POS") computers.
On November 1, 1996, the Company completed an initial public offering (the
"IPO") of 850,000 shares of its common stock at $5.00 per share, netting
proceeds to the Company of approximately $3.2 million. Proceeds to the Company
were used to repay debt with an outstanding balance of approximately $745,000
and for general corporate purposes.
In December 1997, Javelin acquired all of the outstanding common stock of POSNET
Computers, Inc.("Posnet") and CCI Group, Inc. ("CCI") as described in Note 3.
Posnet and CCI provide full turn-key systems integration services, including
system consulting, staging, training, deployment, product support and
maintenance.
In March and April 1998, Javelin established three international subsidiaries
to expand its sales and distribution channels in the international marketplace.
The international subsidiaries are: Javelin Systems (Europe) Limited ("Javelin
Europe") headquartered in England; Javelin Systems International Pte Ltd
("Javelin Asia") headquartered in Singapore; and Javelin Systems Australia Pty
Limited ("Javelin Australia") headquartered in Australia.
In May 1998, Javelin Asia acquired all of the outstanding common stock of
Aspact IT Services (Singapore) Pte Ltd ("Aspact"). Aspact is headquartered in
Singapore and provides consulting and system integration services.
In October 1998, the Company completed a public offering of 1,350,000 shares of
its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.0 million. Proceeds to the Company were used to repay
borrowings under the revolving line of credit of approximately $3.2 million,
to purchase all of the outstanding common stock of RGB/Trinet Ltd. ("RGB") and
Jade Communications Ltd ("Jade") described below and for general corporate
purposes.
In November 1998, Javelin acquired all of the outstanding common stock of
RGB/Trinet Ltd. ("RGB") and Jade Communications Ltd ("Jade"). RGB and Jade are
headquartered in England and provided complementary Wide Area Networking (WAN)
products and services primarily to large retail, hospitality, and
telecommunications companies. The aggregate price for the companies was
$1,242,300 in cash and 243,125 shares of the Company's common stock. Javelin
may be required to issue additional shares of its common stock with a market
value of
7
<PAGE>
$3,290,000 in each of 1999 and 2000 based on cumulative net profits of RGB and
Jade during the 24-month period ending September 30, 2000. The acquisitions
will be accounted for using the purchase method and, accordingly, the operations
of RGB and Jade will be consolidated with the operations of Javelin commencing
in November 1998.
Hereinafter, Javelin and its subsidiaries are referred to as the Company.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. In the opinion of the Company's management, all
adjustments necessary for a fair presentation of the accompanying unaudited
financial statements are reflected herein. All such adjustments are normal and
recurring in nature. Interim results are not necessarily indicative of the
results for the full year or for any future interim periods. For more complete
financial information, these financial statements should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-KSB filed with the SEC.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Javelin and of
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the accompanying financial statements.
Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
These consolidated financial statements contain financial instruments whereby
the fair market value of the financial instruments could be different than that
recorded on a historical basis in the accompanying consolidated financial
statements. The financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and debt. The carrying
amounts of the Company's financial instruments as of June 30, 1998 and September
30, 1998 approximate their respective fair values.
CONCENTRATION OF BUSINESS AND CREDIT RISK
8
<PAGE>
Javelin operates within an industry that is subject to rapid technological
advancement, intense competition and uncertain market acceptance. The
introduction of new technologies, competitors' alternative products and ultimate
market acceptance of the products sold by Javelin, could have a substantial
impact on the future operations of the Company.
Financial instruments which potentially subject the Company to a concentration
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers and collateral is
generally not required. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for potential losses
which, when realized, have been within the range of management's expectations.
During the quarter ended September 30, 1998 one customer represented
approximately 23.1% of net sales, a second customer approximated 10.6% of net
sales and a third customer approximated 10.1% of net sales. During the year
ended June 30, 1998 one customer represented approximately 11% of net sales.
Foreign sales, principally to Europe, during the quarter ended September 30,
1998 aggregated approximately 14.2% of net sales. Foreign sales during the year
ended June 30, 1997 were not significant.
INVENTORIES
Inventories consist primarily of computer hardware and components and are stated
at the lower of cost (first-in, first-out) or market as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------- --------------
<S> <C> <C>
Raw materials $ 4,977,000 $ 3,572,500
Finished goods 3,014,600 2,352,800
-------------- --------------
$ 7,991,600 $ 5,925,300
-------------- --------------
</TABLE>
EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Excess of cost over net assets of purchased businesses (goodwill) represents the
excess of purchase price over the fair value of the net assets of acquired
businesses. Goodwill is stated at cost and is amortized on a straight-line
basis over 25 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted cash flows. The
amount of goodwill impairment, if any, is measured based on projected
undiscounted cash flows and is charged to operations in the period in which
goodwill impairment is determined by management. To date, management has not
identified any impairment of goodwill.
DEFERRED FINANCING COSTS
Deferred financing costs represent incremental costs to unrelated parties
incurred in connection with the credit facility described in Note 5 and are
deferred and amortized over the term of the related debt.
9
<PAGE>
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Company's non-U.S. operations
are translated into U.S. dollars for financial reporting purposes. The assets
and liabilities of non-U.S. operations whose functional currencies are other
than the U.S. dollar are translated at rates of exchange at fiscal year-end,
and revenues and expenses are translated at average exchange rates for the
fiscal year. The cumulative translation effects are reflected in stockholders'
equity. Gains and losses on transactions denominated in other than the
functional currency of an operation are reflected in other income (expense).
REVENUE RECOGNITION
Revenues from sales of products are recognized upon shipment of the products.
The Company generally does not have any significant remaining obligations upon
shipment of the products. Product returns and sales allowances, which
historically have not been significant, are provided for at the date of sale.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to use APB 25 for accounting for stock-based compensation to
employees must make pro forma disclosures of net income or loss, as if the fair
value method of accounting defined in SFAS 123 had been applied. The Company
has elected to account for its stock-based compensation to employees under
APB 25.
INCOME TAXES
The Company accounts for its income taxes using the asset and liability method
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize those taxes through future operations.
10
<PAGE>
EARNINGS PER COMMON SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards 128, " Earnings per Share" ("SFAS 128"), which specifies
the computation, presentation and disclosure requirements for earnings per share
("EPS"). It replaces the presentation of primary and fully diluted EPS with
basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS 128 in the quarter ended December 31, 1997 and has
restated all previously reported per share amounts to conform to the new
presentation.
Diluted loss per common share is computed using the weighted average number of
common shares outstanding during the period.A reconciliation of basic and
diluted EPS for the quarters ended September 30, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1997 September 30, 1998
------------------ ------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net income $ 21,100 $ 21,100 $ 472,600 $ 472,600
Weighted average common shares
outstanding 3,130,115 3,130,115 4,131,556 4,131,556
Additional shares due to potential
exercise of stock options 149,616 140,180
Diluted weighted average
common shares outstanding 3,130,115 3,279,731 4,131,556 4,271,736
Earnings per share $ 0.01 $ 0.01 $ 0.11 0.11
</TABLE>
COMPREHENSIVE INCOME
Effective in the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from nonowner sources. Total comprehensive
income was $21,200 and $481,700 for the quarters ended September 30, 1997 and
1998, respectively. The primary difference from net income as reported is the
tax effected change in the cumulative translation adjustment.
11
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RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segment of an Enterprise and Related Information"
("SFAS 131") which supersedes Statement of Financial Accounting Standards
No. 14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about product and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 will be effective for
the Company's year ending June 30, 1999 and will not affect the financial
position or results of operations.
2. LINE OF CREDIT AND LONG-TERM DEBT
On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit
facility of $7,500,000 from an unrelated financial institution. The credit
facility expires on June 8, 2001 and consists of a line of credit of up to
$6,000,000 and a term loan of $1,500,000.
Under the terms of the line of credit, the Company may borrow up to 80% of
eligible accounts receivable (as defined) and 50% of eligible inventory (as
defined) with monthly interest payments based upon the prime rate of a national
financial institution plus 1.75% (10.25% as of September 30, 1998). Borrowings
under the line of credit are collateralized by substantially all the assets of
the Company. As of September 30, 1998, borrowings outstanding under the line
amounted to $4,398,000 with approximately $1,100,000 available for future
borrowings.
Borrowings under the term loan are collateralized by substantially all of the
assets of the Company, bear interest at 13.65% per annum and are repayable at
$25,000 per month with all unpaid principal and interest due on June 8, 2001.
3. STOCKHOLDERS' EQUITY
COMMON STOCK
During the three months ended September 30, 1998, 56,250 shares of common stock,
valued at $363,200, were issued to the former shareholders of Posnet in
consideration for the termination of the earnout provisions contained in the
stock purchase agreement related to the Posnet acquisition, 1,600 shares of
common stock were issued upon the exercise of stock options with a weighted
average exercise price of $5.56 per share and 1,463 shares of common stock were
exchanged for warrants to purchase 2,998 shares of common stock at $6.25 per
share.
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, the Company
recognizes as compensation expense the
12
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difference between the exercise price and the fair market value of the
underlying stock on the date of grant. Stock based compensation expense is
deferred and amortized over the life of the stock option. During the three
months ended September 30, 1997 and September 30, 1998, the Company recognized
$21,600 and $9,200, respectively, in stock based compensation expense.
In August 1996, the Company adopted a stock incentive award plan (the "Plan")
under which the Board of Directors (the "Board"), or a committee appointed for
such purpose, may from time to time grant options, restricted stock or other
stock-based compensation to the directors, officers, eligible employees or
consultants of the Company to acquire up to an aggregate of 300,000 shares of
common stock, in such numbers, under such terms and at such exercise prices as
are determined by the Board or such committee. Options vest over a 3-year
period based on the following schedule: 40% after year one, 30% after year two,
and 30% at the end of year three. All options expire five years from the date
of grant. It is the Company's intention to grant options under the Plan
principally to employees.
In December 1997, the stockholders approved the Company's 1997 Equity
Incentive Plan (the " 1997 Plan") under which the Board, or a committee
appointed for such purpose, may from time to time grant options, restricted
stock or other stock-based compensation to the directors, officers, eligible
employees or consultants of the Company to acquire up to an aggregate of
1,100,000 shares of common stock, in such numbers, under such terms and at such
exercise prices as are determined by the Board or such committee. Options
generally vest 20% per year over a 5-year period. All options expire ten years
from the date of grant. It is the Company's intention to grant options under
the Plan principally to employees.
The following option activity occurred in the quarter ended September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
FOR OPTIONS GRANTED AT LESS THAN FAIR
MARKET VALUE ON THE DATE OF THE GRANT:
Outstanding as of July 1, 1998 150,200 $3.77
Granted
Exercised ------- -------
Canceled ------- -------
------- -------
Balance, September 30, 1998 150,200 $3.77
------- -------
------- -------
Exercisable at September 30, 1998 117,304 $3.76
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
FOR OPTIONS GRANTED AT LESS THAN FAIR
MARKET VALUE ON THE DATE OF THE GRANT:
Outstanding as of July 1, 1998 683,500 $8.96
Granted 20,000 12.00
Exercised (1,600) 5.56
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Canceled ------- -------
------- -------
Balance, September 30, 1998 701,900 $9.05
-------
-------
Exercisable at September 30, 1998 86,035 $5.33
------- -------
</TABLE>
WARRANTS
In connection with its initial public offering, the Company sold the
representatives of the underwriters a warrant to purchase 85,000 shares of the
Company's common stock at $6.25 per share. During the quarter ended June 30,
1998, warrants to purchase 2,998 shares of the Company's common stock were
exchanged into 1,463 shares of common stock pursuant to the net-exercise
provisions of such warrants. The fair value of the common stock issued
approximated the fair value of the warrants received.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Javelin Systems, Inc. (the "Company") designs, manufactures, and markets open
system touchscreen point-of-sale ("POS") computers and provides POS systems
integration services primarily for the food service and retail industries.
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended
and Section 21E of the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), and the Company intends that such forward-looking statements
be subject to the safe harbors created thereby. The Company may experience
significant fluctuations in future operating results due to a number of
factors, including, among other things, the size and timing of individual
orders; seasonality of revenues; employee hiring and retention, particularly
with respect to sales and consulting personnel; lengthy sales and
implementation cycles; reduction in demand for existing products and services
and shortening of product life cycles; the timing of the introduction of
products, product enhancements and services by the Company or its
competitors; competition in pricing in the POS systems industry; market
acceptance of new products; service personnel utilization rates; the ability
of the Company to expand its domestic and international sales, as well as the
mix of such sales; foreign currency exchange rates; changes in the mix of
products and services sold; general health of the restaurant industry,
particularly the quick service restaurant segment; the ability of the Company
to generate service agreements; product quality problems; the ability of the
Company to control costs; the Company's success in establishing and expanding
its direct and indirect distribution channels; the mix of distribution
channels through which the Company's products are sold; and general economic
conditions. Any of these factors could cause operating results to vary
significantly from prior periods. Significant variability in orders during
any period may have a material adverse impact on the Company's cash flow, and
any significant decrease in orders could have a material adverse impact on
the Company's results of operations and financial condition. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. Fluctuations in the Company's
operating results could cause the price of the Company's Common Stock to
fluctuate substantially.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately, and many of which are beyond
the control of the Company. In addition, the business and operations of the
Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
15
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RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
The following discussion sets forth the historical results of operations and
financial condition of the Company for the quarters ended September 30, 1997
and 1998 . The following table sets forth certain statements of operations data
as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
--------------------
1997 1998
---- ----
<S> <C> <C>
Revenues:
Hardware and related software 100.0% 88.4%
Services 11.6
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Hardware and related software 76.9 70.4
Services 82.6
----- -----
Total cost of revenues 76.9 71.7
----- -----
Gross profit 23.1 28.3
----- -----
Operating expenses:
Research and development 4.7 2.3
Selling and marketing 5.0 2.9
General and administrative 12.7 15.2
----- -----
Total operating expenses 22.4 20.4
----- -----
Operating income (loss) 0.7 7.9
Interest expense (0.1) (1.8)
Other income 0.1 0.2
Provision for income taxes -- (2.6)
----- -----
Net income (loss) 0.7% 3.7%
----- -----
----- -----
</TABLE>
REVENUES. Revenues increased by 338.4% to $12.9 million in 1998 compared to
revenues of $3.0 million for 1997. The change is due to an increase in
revenues relating to Javelin hardware sales of $3.8 million (129.4%), hardware
revenues from CCI of $3.1 million, service revenues from CCI of $1.2 million and
revenues primarily from hardware from the newly established foreign subsidiaries
of $1.8 million. The increases relating to Javelin are attributable primarily to
increases in the number of units sold (approximately 5,400 units in 1998
compared to 1,600 in 1997) as the average sales price of Javelin hardware
remained relatively constant.
16
<PAGE>
GROSS PROFIT. Gross profit increased by 438.0% to $3.7 million in 1998 compared
to a gross profit of $681,000 in 1997. The change is due to an increase in gross
profit relating to Javelin of $1.5 million (221.8%), gross profit relating to
hardware sales by CCI of $752,000, gross profit relating to services provided
by CCI of $98,000 and gross profit from the newly established foreign
subsidiaries of $622,000. The increase in gross margins relating to Javelin are
attributable to (i) the increase in revenues, (ii) reduced prices from the
Company's suppliers resulting from increased volume of purchases by the Company
and (iii) the realization of manufacturing efficiencies. During the quarter
ended September 30, 1998, the Company did not commence or complete any
significant deployment service contracts. Costs of service revenues are
relatively fixed in the near term. Consequently, until the Company has a larger
volume of matured service contracts, gross margins on service revenues will be
lower than the Company believes can ultimately be realized by its service
operations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
117.2% to $298,000 in 1998 compared to research and development expenses of
$137,000 in 1997. All research and development activities are conducted by
Javelin. The increase is primarily attributable to increased payroll costs due
to the hiring of additional engineers.
SELLING AND MARKETING. Selling and marketing expenses increased by 148.6% to
$367,000 in 1998 compared to selling and marketing expenses of $148,000 in 1997.
Such expenses represent primarily expenses of Javelin and consisted primarily
of payroll, trade show fees, and travel costs. The increase is primarily
attributable to additional personnel and advertising costs associated with the
growth of the business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
427.3% to $2.0 million in 1998 compared to general and administrative of
$375,000 in 1997. The change is due to an increase in general and administrative
expenses relating to Javelin of $279,000 (74.5%), general and administrative
expenses from the acquired domestic subsidiaries of $865,000 and general and
administrative from the newly established foreign subsidiaries of $457,000.
The increase at Javelin consisted primarily of increased payroll costs due
primarily to an increase in the number of employees and increased facility costs
due to expansion.
INTEREST EXPENSE. Interest expense increased by $233,000 to $235,000 in 1998
compared to interest expense of $2,000 in 1997. The increase is due to
borrowings under the credit facility in 1988. Such borrowings were necessary
to sustain the growth of business.
INCOME TAXES. A provision for federal, state and foreign income taxes of
$346,000 was required in 1998 since the Company generated taxable income while
no provision was required in 1997 as the Company utilized available tax
benefits. All of such benefits were utilized during the fiscal year ended
June 30, 1998.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On November 1, 1996, the Company completed its IPO of 850,000 shares of its
common stock at $5 per share, netting proceeds to the Company of approximately
$3.2 million. A portion of the proceeds was used to repay debt of approximately
$745,000 and for general corporate purposes. The remaining proceeds were used
to build the Company's infrastructure and for working capital.
On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit
facility of $7.5 million from a financial institution. The credit facility
expires on June 8, 2001 and consists of a line of credit of up to $6.0 million
and a term loan of $1.5 million. Under the line of credit, the Company may
borrow up to 80% of eligible receivables (as defined) and 50% of eligible
inventory (as defined) with monthly interest based upon the prime rate of a
national financial institution plus 1.75% (10.25% as of September 30, 1998). As
of September 30, 1998 borrowing outstanding under the line amounted to $4.4
million with approximately $1.1 million available for future borrowings.
Borrowings under the term loan are collateralized by substantially all of the
assets of the Company and bear interest at 13.65% per annum. The Company is
required to pay $25,000 per month under the term loan with all unpaid principal
and interest due on June 8, 2001. As of September 30, 1998, the Company had
working capital of $4.2 million.
On October 30, 1998, the Company completed a public offering of 1,350,000 shares
of its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.0 million. Proceeds to the Company were used to repay
borrowings under the revolving line of credit of approximately $3.2 million,
to purchase all of the outstanding common stock of RGB/Trinet Ltd. ("RGB") and
Jade Communications Ltd ("Jade") and for general corporate purposes.
Cash used in operating activities for the three months ended September 30, 1998
amounted to $2.5 million and consisted primarily of increases in trade
receivables and inventories. Cash used in investing activities for the three
months ended September 30, 1998 amounted to $493,800 and consisted primarily of
purchases of property and equipment. Cash provided by financing activities for
the three months ended September 30, 1998 amounted to $2.9 million and consisted
primarily of net borrowings under the line of credit.
The Company believes that the net proceeds from the public offering completed in
October 1998, together with the availability of its line of credit, will be
sufficient to meet its capital requirements for the next eighteen months.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
18
<PAGE>
information could generate erroneous data or cause a system to fail. The
Company is reviewing both its information technology and its non-information
technology systems to determine whether they are year 2000 compliant, and to
date the Company has not identified any material systems which are not year 2000
compliant. The Company has not made any material expenditure to address the
year 2000 problem and at present does not anticipate that it will be required
to make any such material expenditures in the future.
The Company has initiated formal communications with all significant suppliers
and service providers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate the year 2000 problem. Although
the Company has received verbal assurances of year 2000 compliance from certain
of such third parties, the Company has not received written assurances of year
2000 compliance from the third parties with whom it has relationships. The
Company believes its operations will not be significantly disrupted even if
third parties with whom the Company has relationships are not year 2000
compliant. In the event that the Company's suppliers are unable to provide
sufficient quantities of materials or goods to the Company as a result of their
failure to be year 2000 compliant, the Company believes that it can obtain
adequate supplies of materials and goods at comparable prices from other
sources. In the event that the Company's OEMs and VARs are adversely affected
by any failure to become year 2000 compliant and are therefore unable to
purchase anticipated quantities of the Company's products on a timely basis,
the Company may seek to replace such OEMs and VARs. Nevertheless, the Company
believes that any year 2000 compliance problems of its suppliers, OEMs and VARs
could cause the Company's results of operations to fluctuate on a period to
period basis. Uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance, and the Company intends to continue
to make efforts to ensure that third parties with whom it has relationships are
year 2000 compliant. Any year 2000 compliance problem of either the Company or
third parties with whom the Company has relationships could materially adversely
affect the Company's business, financial condition or results of operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segment of an Enterprise and Related Information"
("SFAS 131") which supersedes Statement of Financial Accounting Standards
No. 14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about product and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 will be effective for
the Company's year ending June 30, 1999 and will not affect the financial
position or results of operations.
19
<PAGE>
PART II. OTHER INFORMATION
In August 1998, the company issued an aggregate of 56,250 shares of the
Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph
E. Rudzik, Jr. in consideration for the termination of the earnout
provisions of the stock purchase agreement related to the acquisition
of Posnet. The issuance of the Common Stock was deemed to be exempt from
registration under the Securities Act of 1933, as amended ("the Act"), by virtue
of Section 4(2) of the Act.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1. On August 31, 1998, the Company issued an aggregate of 56,250 shares of the
Company's Common Stock to Mark LeMay, Paul Amestoy, Greg Kosin and Ralph
E. Rudzik, Jr. in consideration for the termination of the earnout provisions
of the stock purchase agreement related to the acquisition of Posnet. The
issuance of the Common Stock was deemed to be exempt from registration
under the Securities Act of 1933, as amended ("the Act"), by virtue of Section
4(2) of the Act.
On September 18, 1998, the Company issued an aggregate of 1,463 shares of its
Common Stock to Meridian Capital Group, Inc. ("Meridian") upon exercise of
warrants held by Meridian pursuant to the net-exercise provisions contained in
such warrants. The issuance of the Common Stock was deemed to be exempt from
registration under the Act by virtue of Section 4(2) of the Act.
The recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 27.1 Financial Data Schedule in accordance with Article 5 of
Regulation S-X.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1998
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Javelin Systems, Inc.
November 12, 1998 /s/ Richard P. Stack
- ------------------------- -----------------------------
Date Richard P. Stack
Chief Executive Officer
and President
November 12, 1998 /s/ Horace W. Hertz
- ------------------------- -----------------------------
Date Horace M. Hertz
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
-------------
27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,911,200
<ALLOWANCES> (248,800)
<INVENTORY> 7,991,600
<CURRENT-ASSETS> 18,624,700
<PP&E> 1,569,400
<DEPRECIATION> (327,500)
<TOTAL-ASSETS> 27,800,300
<CURRENT-LIABILITIES> 14,401,100
<BONDS> 0
0
0
<COMMON> 41,700
<OTHER-SE> 12,226,200
<TOTAL-LIABILITY-AND-EQUITY> 27,800,300
<SALES> 12,932,200
<TOTAL-REVENUES> 12,932,200
<CGS> 9,266,800
<TOTAL-COSTS> 11,907,200
<OTHER-EXPENSES> 28,100
<LOSS-PROVISION> 117,200
<INTEREST-EXPENSE> 234,500
<INCOME-PRETAX> 818,600
<INCOME-TAX> 346,000
<INCOME-CONTINUING> 472,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472,600
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
