<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 000-21477
Javelin Systems, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1945748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
17891 Cartwright Road
Irvine, California 92614
(Address of principal executive offices) (Zip Code)
(949) 440-8000
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
As of October 31, 1999, there were 8,894,803 shares of the Registrant's Common
Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JAVELIN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999*
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,410,500 $ 5,641,500
Investments in securities 4,594,800 7,472,000
Accounts receivable - net 18,744,800 16,000,200
Inventories 15,075,900 14,565,700
Deferred income taxes 530,900 530,900
Other current assets 1,166,600 823,500
-------------------- --------------------
Total current assets 44,523,500 45,033,800
Property and equipment, net 4,408,400 2,861,400
Excess of cost over net assets of purchased businesses 30,071,100 27,021,200
Deferred financing costs 542,300 617,600
Other assets, net 248,800 273,600
-------------------- --------------------
Total assets $ 79,794,100 $ 75,807,600
-------------------- --------------------
-------------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,876,900 $ 2,056,600
Accounts payable 9,548,200 7,681,800
Accrued expenses 2,088,600 2,446,200
Current maturities of long-term debt 300,000 300,000
Customer deposits 2,700 2,700
Deferred maintenance revenues 1,091,700 397,500
Income taxes payable 1,192,600 1,517,400
-------------------- --------------------
Total current liabilities 17,100,700 14,402,200
-------------------- --------------------
Deferred rent expense 25,000 21,000
Long-term debt, net of current portion 2,269,400 1,774,000
Stockholders' equity:
Preferred stock, $0.01 par value:
authorized shares--1,000,000
issued and outstanding shares--none --- ---
Common stock, $0.01 par value:
authorized shares--20,000,000
issued and outstanding shares--8,894,803 at September 30,
1999, and 8,887,203 at June 30, 1999 88,900 88,900
Additional paid in capital 55,869,200 55,800,700
Deferred compensation (6,700)
Retained earnings 4,398,400 3,799,700
Accumulated other comprehensive income (loss) 42,500 (72,200)
-------------------- --------------------
Total stockholders' equity 60,399,000 59,610,400
-------------------- --------------------
Total liabilities and stockholders' equity $ 79,794,100 $ 75,807,600
-------------------- --------------------
-------------------- --------------------
</TABLE>
*The balance sheet at June 30, 1999 has been derived from audited financial
statements.
SEE ACCOMPANYING NOTES. 2
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------------- ---------------
<S> <C> <C>
Revenues:
Product sales $ 13,457,700 $ 11,588,000
Services 6,777,200 1,344,200
------------------- ---------------
Total revenues 20,234,900 12,932,200
------------------- ---------------
Cost of revenues:
Cost of product sales 9,639,800 8,156,300
Cost of services 5,167,800 1,110,500
------------------- ---------------
Total cost of revenues 14,807,600 9,266,800
------------------- ---------------
Gross profit 5,427,300 3,665,400
------------------- ---------------
Operating expenses:
Research and development 469,100 298,000
Selling and marketing 1,718,900 366,700
General and administrative 2,116,400 1,975,700
------------------- ---------------
Total operating expenses 4,304,400 2,640,400
------------------- ---------------
Income from operations 1,122,900 1,025,000
Interest expense (133,200) (234,500)
Other income (expense) (8,200) 28,100
------------------- ---------------
Income before income taxes 981,500 818,600
Provision for income taxes (382,800) (346,000)
------------------- ---------------
Net income $ 598,700 $ 472,600
------------------- ---------------
------------------- ---------------
Earnings per common share:
Basic $ 0.07 $ 0.11
------------------- ---------------
------------------- ---------------
Diluted $ 0.07 $ 0.11
------------------- ---------------
------------------- ---------------
Shares used in computing earnings per
share:
Basic 8,893,432 4,131,556
------------------- ---------------
------------------- ---------------
Diluted 9,174,443 4,271,736
------------------- ---------------
------------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES. 3
<PAGE>
JAVELIN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 598,700 $ 472,600
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 385,100 181,600
Amortization of goodwill 501,900 63,700
Amortization of deferred compensation 6,700 9,200
Deferred rent expense 3,900
Non-cash allowances (156,200) 117,200
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable (2,252,800) (2,323,900)
Inventories (510,200) (2,066,300)
Other current assets (262,400) (338,900)
Accounts payable 1,601,600 2,014,500
Accrued expenses (387,800) 53,900
Income taxes payable (324,800) 302,400
Customer deposits (1,032,000)
Deferred maintenance 281,800 75,200
-------------------------------------
Net cash used in operating activities (514,500) (2,470,800)
-------------------------------------
INVESTING ACTIVITIES
Purchase of equipment (641,200) (308,700)
Cash paid in connection with acquisitions (3,808,300)
Investment in securities 2,877,200
Other assets 25,100 (185,100)
-------------------------------------
Net cash used in investing activities (1,547,200) (493,800)
-------------------------------------
FINANCING ACTIVITIES
Net borrowings under line of credit 820,300 3,055,000
Repayment of notes payable (174,600) (75,000)
Deferred offering costs (39,400)
Exercise of stock options 68,500 8,900
-------------------------------------
Net cash provided by financing activities 714,200 2,949,500
-------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENT 116,500 15,100
-------------------------------------
Net decrease in cash and cash equivalents (1,231,000) 0
Cash and cash equivalents at beginning of period 5,641,500 0
-------------------------------------
Cash and cash equivalents at end of period $ 4,410,500 $ 0
-------------------------------------
-------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax paid $ 750,000 $ 43,600
-------------------------------------
-------------------------------------
Interest paid $ 131,200 $ 159,400
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES. 4
<PAGE>
JAVELIN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Javelin Systems, Inc. ("Javelin") was incorporated in the State of Delaware on
September 19, 1995 under the name of Sunwood Research, Inc. Javelin is a leading
provider of retail foodservice technology solutions and services that enable
restaurants and retailers to capture, analyze, disseminate and use information
throughout the enterprise, from the point-of-sale (POS) cash register terminal
to the back office to an organization's headquarters. Javelin designs,
manufactures and markets open system touchscreen POS network-ready hardware
systems and provides POS systems integration services and software solutions
primarily for the foodservice and retail industries.
On November 1, 1996, Javelin completed an initial public offering (the "IPO") of
850,000 shares of its common stock at $5.00 per share, netting proceeds of
approximately $3.2 million. Proceeds 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"). 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 November 1998, the Company completed a public offering of 1,395,000 shares of
its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.1 million. Proceeds to the Company were used to repay
borrowings under a revolving line of credit of approximately $3.2 million, to
purchase all of the outstanding common stock of RGB/Trinet Limited ("RGB") and
Jade Communications Ltd ("Jade"), as described below, and for general corporate
purposes.
5
<PAGE>
In November 1998, Javelin acquired all of the outstanding common stock of RGB
and Jade. RGB and Jade are headquartered in England and provide complementary
Wide Area Networking (WAN) products and services primarily to large retail,
hospitality, and telecommunications companies.
In February 1999, the Company completed a public offering of 2,375,000 shares of
its common stock at $12.25 per share, netting proceeds to the Company of
approximately $26.9 million. Proceeds to the Company were used to purchase the
outstanding common stock of Dynamic Technologies, Inc. ("DTI") and SB Holdings,
Inc. ("SB"), as described below, and for working capital and general corporate
purposes.
In April 1999, the Company acquired all of the outstanding capital stock of DTI
and all of the outstanding capital stock of SB. DTI and SB provide custom
Internet/Intranet software and services.
In August 1999, the Company acquired all of the outstanding capital stock of
Restaurant Consulting Services, Inc. ("RCS") as described in Note 2. RCS
implements, operates and supports packaged software applications for the
restaurant industry.
Hereinafter, Javelin and its subsidiaries are referred to as the Company.
BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 consolidated 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 consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-KSB filed with the SEC.
6
<PAGE>
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,
1999 1999
-------------------- -------------------
<S> <C> <C>
Raw materials $ 7,215,300 $ 7,195,600
Work-in-process 666,500 227,000
Finished goods 7,194,100 7,143,100
-------------------- -------------------
$ 15,075,900 $ 14,565,700
-------------------- -------------------
-------------------- -------------------
</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. For the acquisitions of Posnet, CCI, Aspact, RGB and Jade, the
excess was allocated entirely to goodwill. Management determined that for these
acquired companies, there were no other identifiable intangible assets, such as
workforce, that would require an allocation of the purchase price. The workforce
of the acquired companies requires limited specialized skills. Goodwill is
stated at cost and is amortized on a straight-line basis over 10 years for DTI
and SB and over 25 years for all other acquired companies. The Company assesses
the recoverability of these intangible assets by determining whether the
amortization of the goodwill balances over the remaining lives can be recovered
through projected undiscounted cash flows of the related operations. The amount
of goodwill impairment, if any, is measured based on projected discounted 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.
The Company recorded $501,900 and $63,700 in goodwill amortization for the
quarters ended September 30, 1999 and 1998, respectively.
EARNINGS PER COMMON SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No.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 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.
7
<PAGE>
A reconciliation of basic and diluted EPS for the quarters ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
September 30, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 598,700 $ 598,700 $ 472,600 $ 472,600
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 8,893,432 8,893,432 4,131,556 4,131,556
- -------------------------------------------------------------------------------------------------------------------------------
Additional shares due to potential
exercise of stock options 281,011 140,180
- -------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding 8,893,432 9,174,443 4,131,556 4,271,736
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.07 $ 0.07 $ 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 $713,400 and $487,700 for the quarters ended September 30, 1999 and 1998,
respectively. The primary difference from net income as reported is the change
in the cumulative translation adjustment.
SEGMENT INFORMATION
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position but did affect the disclosure of segment information
8
<PAGE>
2. ACQUISITION OF RCS
In August 1999, the Company acquired all of the outstanding capital stock of
RCS. RCS implements, operates and supports packaged software applications for
the restaurant industry. The aggregate purchase price for the RCS capital stock
consisted of $3,033,100 in cash. The Company may, in the future, be required to
pay an additional $1,516,600 in cash and issue shares of its common stock with a
market value of up to $1,516,600 based upon the cumulative net profits of RCS
during the twenty four months ending August 31, 2001. The acquisition has been
accounted for by the purchase method, and accordingly, the results of operations
of RCS will be included with those of the Company commencing on the date of
acquisition. The purchase price resulted in excess of purchase price over the
fair value of net assets acquired of approximately $3.0 million. Such excess
(which will increase for any contingent payments) is being amortized on a
straight-line basis over 10 years. The final allocation of the purchase price
may vary as additional information is obtained, and accordingly, the ultimate
allocation may differ from that used in the unaudited consolidated financial
statements included herein. The results of operations of RCS prior to August
1999 were not material.
3. STOCKHOLDERS' EQUITY
During the three months ended September 30, 1999, 7,600 shares of common stock
were issued upon the exercise of stock options with a weighted average exercise
price of $9.76 per share.
4. SEGMENT INFORMATION
In 1999, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The 1998 segment information has been restated to conform to the
1999 presentation. The Company's three reportable segments are as follows:
(1) Research and development- provides all research and development
activities for the other business segments.
(2) Hardware products- designs, manufactures and markets open system
touchscreen point-of-sale (POS) network-ready hardware systems.
These systems can be sold on a stand-alone basis or integrated as
part of an end-to-end solution.
(3) Solutions- provides retail foodservice technology solutions and
services that enable restaurants and retailers to capture, analyze,
disseminate and use information throughout the enterprise, from the
point-of-sale (POS) cash register terminal to the back office to an
organization's headquarters.
Segment data includes intersegment revenues. The Company does not allocate
corporate-headquarters costs or research and development costs to the operating
segments. Resources for research and development are allocated based on budgets.
The Company evaluates the performance of its segments and allocates resources to
them based on net income/loss.
9
<PAGE>
The table below presents information about reportable segments for the quarters
ended September 30:
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
DEVELOPMENT PRODUCTS SOLUTIONS TOTAL
1999
<S> <C> <C> <C> <C>
SALES $ 9,463,000 $ 12,228,400 $ 21,691,400
NET INCOME (LOSS) $ (286,200) $ 703,600 $ 336,000 $ 753,400
TOTAL ASSETS $30,097,700 $ 49,696,400 $ 79,794,100
</TABLE>
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
DEVELOPMENT PRODUCTS SOLUTIONS TOTAL
1998
<S> <C> <C> <C> <C>
SALES $ 10,041,900 $ 4,489,500 $ 14,531,400
NET INCOME (LOSS) $ (172,800) $ 779,900 $ 22,200 $ 629,300
TOTAL ASSETS $ 14,437,300 $ 13,363,000 $ 27,800,300
</TABLE>
A reconciliation of total segment sales to total consolidated sales and of total
segment net income to total consolidated net income for the quarters ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
SALES 1999 1998
<S> <C> <C>
Total segment sales $ 21,691,400 $ 14,531,400
Elimination of intersegment sales (1,456,500) (1,599,200)
------------ ------------
Consolidated sales $ 20,234,900 $ 12,932,200
------------ ------------
------------ ------------
NET INCOME
Total segment net income $ 753,400 $ 629,300
Elimination of intersegment
gross profit net of income taxes 82,800 13,200
Elimination of non-segment
expenses, net of income taxes (237,500) (169,900)
------------ ------------
Consolidated net income $ 598,700 $ 472,600
------------ ------------
------------ ------------
</TABLE>
10
<PAGE>
Specified items included in segment profit/loss for the quarters ended September
30:
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
DEVELOPMENT PRODUCTS SOLUTIONS TOTAL
1999
<S> <C> <C> <C> <C>
Interest expense $119,900 $13,300 $133,200
Depreciation
and
amortization expense $200,300 $686,700 $887,000
Income tax expense
(benefit) $(151,800) $449,800 $214,800 $512,800
Expenditures for
additions to
long-lived assets $414,700 $3,771,800 $4,186,500
</TABLE>
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
DEVELOPMENT PRODUCTS SOLUTIONS TOTAL
1998
<S> <C> <C> <C> <C>
Interest expense $211,300 $23,200 $234,500
Depreciation
and
amortization expense $131,500 $113,800 $245,300
Income tax expense $(125,200) $564,800 $16,100 $455,700
Expenditures for
additions to
long-lived assets $209,200 $489,500 $698,700
</TABLE>
11
<PAGE>
Revenues and long-lived asset information by geographic area as of and for the
quarters ended September 30:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ASIA AUSTRALIA TOTAL
1999
<S> <C> <C> <C> <C> <C>
Revenues $13,363,300 $5,920,500 $398,500 $552,600 $20,234,900
Long-lived assets $27,940,200 $6,249,900 $942,000 $138,500 $35,270,600
</TABLE>
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ASIA AUSTRALIA TOTAL
1998
<S> <C> <C> <C> <C> <C>
Revenues $11,092,400 $1,207,800 $293,800 $338,200 $12,932,200
Long-lived assets $8,752,300 $32,200 $351,700 $39,400 $9,175,600
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 foodservice and retail industries.
This Quarterly Report on Form 10-Q 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.
13
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
The following discussion sets forth the historical results of operations and
financial condition of the Company for the quarters ended September 30, 1999 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,
-----------------
1999 1998
------ ------
<S> <C> <C>
Revenues:
Product sales 66.5% 88.4%
Services 33.5 11.6
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Cost of product sales (1) 71.6 70.4
Cost of Services (1) 76.3 82.6
----- -----
Total cost of revenues 73.2 71.7
----- -----
Gross profit 26.8 28.3
----- -----
Operating expenses:
Research and development 2.3 2.3
Selling and marketing 8.5 2.9
General and administrative 10.5 15.2
----- -----
Total operating expenses 21.3 20.4
----- -----
Income from operations 5.5 7.9
Interest expense (0.6) (1.8)
Other income ---- 0.2
Provision for income taxes (1.9) (2.6)
----- -----
Net income 3.0% 3.7%
----- -----
----- -----
</TABLE>
(1) Expressed as a percentage of related revenues, not of total revenues.
REVENUES-PRODUCT SALES. Revenues from product sales increased by 16.1% to $13.5
million in 1999 compared to revenues of $11.6 million for 1998. The change is
due to an increase in product sales at DTI and RGB/Jade, newly acquired
subsidiaries, of $2.5 million, and an increase at the three international
subsidiaries of $735,000 offset by a decrease at Javelin of $1.2 million. The
increase in product sales at the three international subsidiaries is primarily
due to the enhanced acceptance of the product in such markets and the continued
maturation of the
14
<PAGE>
distribution channel. The decrease at Javelin is attributable to a reduction in
shipments of 1,035 units to McDonald's Corporation.
REVENUES-SERVICES. Revenues from services increased by 404.2% to $6.8 million in
1999 compared to revenues of $1.3 million for 1998. The change is due to an
increase in service revenues at DTI and RGB/Jade of $5.2 million.
GROSS PROFIT. Gross profit increased by 48.1% to $5.4 million in 1999 compared
to a gross profit of $3.7 million in 1998. The increase is comprised of the
following:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
------------------------------
1999 1998 INCREASE
------------- --------------- --------
<S> <C> <C> <C>
Product sales $3.8 million $3.4 million $ 386,200
Services $1.6 million $233,700 $ 1.4 million
</TABLE>
The change in gross profit from product sales is due to an increase in gross
profit from the sale of hardware at DTI and RGB/Jade of $604,000, an increase in
gross profit at the three international subsidiaries of $196,000 offset by a
decrease in gross profit at Javelin of $419,100.
The change in gross profit from service revenues is due to gross profit on
services provided by DTI and RGB/Jade of $1.4 million.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 57.4%
to $469,100 in 1999 compared to research and development expenses of $298,000 in
1998. The increase is primarily attributable to software development costs
incurred at DTI of $88,400 and additional costs of $35,500 at Javelin relating
to the design of new hardware product. The Company has expensed all software
development costs as technological feasability has not been achieved.
SELLING AND MARKETING. Selling and marketing expenses increased by 368.7% to
$1.7 million in 1999 compared to selling and marketing expenses of $366,700 in
1998. The increase is primarily attributable to sales and marketing costs at DTI
and RGB/Jade of $740,400, additional personnel employed to expand the direct
sales forces of the three international subsidiaries and of CCI and increased
advertising costs associated with the growth of the business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
7.1% to $2.1 million in 1999 compared to general and administrative of $2.0
million in 1998. The change is due to an increase in general and administrative
expenses relating to DTI and RGB/Jade of $516,300, an increase in amortization
of goodwill of $438,200 offset by a decrease of general and administrative
expenses relating to Javelin and CCI of $845,000. The increase in the
amortization of goodwill resulted from the acquisitions of RGB, Jade, DTI and
RCS. The decrease of general and administrative expenses at Javelin and CCI
resulted from the continued consolidation of administrative functions.
15
<PAGE>
INTEREST EXPENSE. Interest expense decreased by $101,300 to $133,200 in 1999
compared to interest expense of $234,500 in 1998. The decrease is due to the use
of a portion of the proceeds from the follow-on offerings completed in October
1998 and February 1999 to repay certain indebtedness.
INCOME TAXES. Provision for federal, state and foreign income taxes increased by
$36,800 to $382,800 in 1999 compared to $346,000 in 1998. The increase is
attributable to the overall increase in income before income taxes of $162,900
as well as increases in income before income taxes from the Company's foreign
subsidiaries operating in jurisdictions with lower income tax rates than those
in the United States.
LIQUIDITY AND CAPITAL RESOURCES
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% as of September 30, 1999). As of
September 30, 1999 borrowings outstanding under the line amounted to $2.0
million with approximately $2.6 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, 1999, Jade has a line of credit facility of $1,800,000 from
an unrelated financial institution. Borrowings under the line of credit are
collateralized by all of the assets of Jade and bear interest at 2% over the
U.K. Base rate (as defined). As of September 30, 1999, borrowings outstanding
under the line amounted to $917,000 with approximately $883,000 available for
future borrowings.
In November 1998, the Company completed a public offering of 1,395,000 shares of
its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.1 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 and Jade and for general
corporate purposes.
In February 1999, the Company completed a public offering of 2,375,000 shares of
its common stock at $12.25 per share, netting proceeds to the Company of
approximately $26.9 million.
16
<PAGE>
Proceeds to the Company were used for the acquisition of DTI and SB, working
capital and general corporate purposes.
As of September 30, 1999, the Company had cash and cash equivalents of $4.4
million and working capital of $27.4 million.
Cash used in operating activities for the quarter ended September 30, 1999
amounted to $514,500 and consisted primarily of increases in trade receivables
and inventories. Cash used in investing activities for the quarter ended
September 30, 1999 amounted to $1.5 million and consisted primarily of cash used
to acquire the outstanding common stock of RCS and the purchase of equipment.
Cash provided by financing activities for the quarter ended September 30, 1999
amounted to $714,200 and consisted primarily of the proceeds from the borrowings
under the line of credit.
The Company believes that it has adequate financial resources to meet its
capital requirements for the next twelve months.
YEAR 2000
Some older computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than 2000. This failure to use four digits to define the applicable year has
created what is commonly referred to as the "Year 2000 Issue" and could cause a
system failure or miscalculations causing disruption of operations, including a
temporary inability to process transactions or engage in similar normal business
activities.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 Issue. The Company does not believe that it
has a material exposure to the Year 2000 Issue with respect to its own products
or information systems since its products and systems correctly define the Year
2000. The Company has not made any material expenditure to address the Year 2000
Issue and does not anticipate that it will be required to make any such
expenditure in the future. The Company has contacted most of its significant
suppliers and service providers to determine the extent to which it is
vulnerable to their failure to address the Year 2000 Issue. Although the Company
has received verbal assurances from some of these third parties that their
systems are year 2000 compliant, the Company has not yet received written
assurances from any of them. Although the Company does not believe its
operations will be significantly disturbed even if third parties to whom it has
relationships are not year 2000 compliant, there can be no assurance that any
year 2000 compliance problems of its suppliers and resellers of its products
will not negatively affect the Company's financial performance. If the Company's
suppliers are unable to provide it sufficient quantities of materials or goods
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. If resellers of the Company's products are adversely
affected by any failure to become year 2000 compliant
17
<PAGE>
and are therefore unable to purchase anticipated quantities of the Company's
products on a timely basis, the Company may seek to replace these resellers.
Because uncertainty exists concerning the potential costs and effects associated
with any year 2000 compliance, the Company intends to continue to make efforts
to ensure that third parties to whom it has relationships are year 2000
compliant.
The Year 2000 Issue could also have an affect on the Company's revenues. Demand
for the Company's products and services may decline after January 1, 2000, as
the Company may not be able to incorporate its products and services into a
Year 2000 driven POS retrofit. Similarly, many companies may spend substantial
resources to prevent or minimize problems associated with the Year 2000 Issue
and therefore may choose not to, or not have the budget capacity to, upgrade
their current POS systems for some period of time. Any lessening of demand for
the Company's products and services could have a material adverse affect on the
Company's business, financial condition and results of operations.
PART II. OTHER INFORMATION
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, 1999
18
<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 14, 1999 /s/ Richard P. Stack
- ------------------------------------ -------------------------------------
Date Richard P. Stack
Chief Executive Officer
and President
November 14, 1999 /s/ Horace M. Hertz
- ------------------------------------ -------------------------------------
Date Horace M. Hertz
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule in accordance with Article 5 of Regulation
S-X.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,410,500
<SECURITIES> 4,594,800
<RECEIVABLES> 18,971,700
<ALLOWANCES> 226,900
<INVENTORY> 15,075,900
<CURRENT-ASSETS> 44,523,500
<PP&E> 7,132,700
<DEPRECIATION> 2,724,300
<TOTAL-ASSETS> 79,794,100
<CURRENT-LIABILITIES> 17,100,700
<BONDS> 0
0
0
<COMMON> 88,900
<OTHER-SE> 60,310,100
<TOTAL-LIABILITY-AND-EQUITY> 79,794,100
<SALES> 20,234,900
<TOTAL-REVENUES> 20,234,900
<CGS> 14,807,600
<TOTAL-COSTS> 19,112,000
<OTHER-EXPENSES> 141,400
<LOSS-PROVISION> (195,000)
<INTEREST-EXPENSE> 133,200
<INCOME-PRETAX> 981,500
<INCOME-TAX> 382,800
<INCOME-CONTINUING> 598,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 598,700
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
