10-Q/A 1 a2032955z10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (AMENDMENT NO. 1) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended September 30, 1999 [ ] 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 ASPEON, 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 No.) 17891 CARTWRIGHT ROAD IRVINE, CALIFORNIA 92614 (Address of Principal Executive Offices) (Zip Code) (949) 440-8000 (Issuer's Telephone Number, Including Area code) JAVELIN SYSTEMS, INC. -------------------------------------------------------------------------------- (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 No X -------- -------- As of October 31, 1999, there were 8,894,803 shares of the Registrant's common stock, par value $.01 per share, were outstanding. This amendment No. 1 on Form 10-Q/A ("the Amendment") amends and restates in full the disclosures made by the registrant, Aspeon, Inc., formerly Javelin Systems, Inc. ("Aspeon", and together with its subsidiaries, the "Company"), in response to "Part I, Item 1. Financial Statements," "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 6(a). Exhibits" in its Form 10-Q as originally filed with the Securities and Exchange Commission (the "Commission") via Edgar transmission on November 12, 1999 under the name Javelin Systems, Inc. (the "Original Filing"). The disclosures responsive to all other Items in the Original Filing are not affected by this Amendment but continue as set forth in the Original Filing without change. Notwithstanding the foregoing, the disclosures in the Original Filing, as amended by this Amendment, are subject to updating and supplementation by the disclosures contained in the filings made by the Company with the Commission for any period subsequent to the three-month period ended September 30, 1999 covered by the Original Filing. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASPEON, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30, 1999 1999* ------------------------------------ (As restated, Note 2) ASSETS Current assets: Cash and cash equivalents $ 4,410,500 $ 5,641,500 Investments 4,594,800 7,472,000 Accounts receivable - net 18,486,200 16,275,500 Inventories 15,265,000 14,565,700 Other current assets 1,697,500 1,354,400 ----------------- ------------- Total current assets 44,454,000 45,309,100 Property and equipment, net 4,652,700 2,861,400 Goodwill 28,385,900 25,755,200 Other intangible assets 1,179,100 1,266,000 Other assets, net 935,500 891,200 ----------------- ----------------- Total assets $ 79,607,200 $ 76,082,900 ================= ================= 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 2,044,600 2,446,200 Current maturities of long-term debt 300,000 300,000 Customer deposits 48,000 278,000 Deferred revenues 1,057,200 397,500 Income taxes payable 1,192,600 1,517,400 ----------------- ---------------- Total current liabilities 17,067,500 14,677,500 ----------------- ---------------- Purchase price payable for acquisitions - 874,000 Long-term debt, net of current portion 2,269,400 900,000 Other 25,000 21,000 Stockholders' equity: Preferred stock, $0.01 par value: 1,000,000 shares authorized no shares issued and outstanding - - Common stock, $0.01 par value: 20,000,000 shares authorized 8,894,803, and 8,887,203 issued and outstanding 88,900 88,900 Additional paid-in capital 55,869,200 55,800,700 Deferred stock-based compensation - (6,700) Retained earnings 4,244,700 3,799,700 Accumulated other comprehensive income (loss) 42,500 (72,200) ----------------- ---------------- Total stockholders' equity 60,245,300 59,610,400 ----------------- ---------------- Total liabilities and stockholders' equity $ 79,607,200 $ 76,082,900 ================= =================
*The balance sheet at June 30, 1999 has been derived from audited financial statements. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 2 ASPEON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 ------ ----- (As restated, Note 2) Revenues: Products $ 13,188,200 $ 11,588,000 Services 6,777,200 1,344,200 ----------------- ------------ Total revenues 19,965,400 12,932,200 ----------------- ------------ Cost of revenues: Products 9,449,100 8,156,300 Services 5,167,800 1,110,500 ----------------- ------------ Total cost of revenues 14,616,900 9,266,800 ----------------- ------------ Gross profit 5,348,500 3,665,400 Operating expenses: Research and development 469,100 298,000 Selling and marketing 1,732,100 366,700 General and administrative 2,267,700 1,975,700 ------------------ ------------ Total operating expenses 4,468,900 2,640,400 ------------------ ------------ Income from operations 879,600 1,025,000 Interest expense (229,700) (234,500) Interest income 79,600 3,700 Other income (expense) - 24,400 ----------------- ------------ Income before income taxes 729,500 818,600 Provision for income taxes (284,500) (346,000) ----------------- ------------- Net income $ 445,000 $ 472,600 ================= ============ Net income per common share: Basic $ 0.05 $ 0.11 ================ ============ Diluted $ 0.05 $ 0.11 ================= ============ Shares used in computing net income: Basic 8,893,432 4,131,556 ================= ============ Diluted 9,174,443 4,271,736 ================= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 ASPEON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---------------- ------------- (As restated, Note 2) OPERATING ACTIVITIES Net income $ 445,000 $ 472,600 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 939,800 245,300 Amortization of deferred stock-based compensation 6,700 9,200 Deferred rent expense 4,000 - Non-cash allowances (156,200) 117,200 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (1,711,800) (2,323,900) Inventories (699,300) (2,066,300) Prepaid and other current assets (284,800) (338,900) Other assets 46,400 (185,100) Accounts payable 1,612,000 2,014,500 Accrued expenses (431,500) 53,900 Income taxes payable (324,800) 302,400 Customer deposits (230,000) (1,032,000) Deferred revenues 247,200 75,200 ---------------- ------------- Net cash used in operating activities (537,300) (2,655,900) ---------------- ------------- INVESTING ACTIVITIES Purchase of equipment (626,400) (308,700) Cash paid in connection with acquisitions (3,759,100) - Investment in securities 2,877,200 - --------------- -------------- Net cash used in investing activities (1,508,300) (308,700) --------------- -------------- FINANCING ACTIVITIES Net borrowings under line of credit 820,300 3,055,000 Repayment of notes payable (174,800) (75,000) Deferred offering costs - (39,400) Exercise of stock options 68,500 8,900 ---------------- ------------- Net cash provided by financing activities 714,000 2,949,500 ---------------- ------------- Effect of exchange rate changes on cash 100,600 15,100 ---------------- ------------- Net decrease in cash and cash equivalents (1,231,000) - Cash and cash equivalents at beginning of period 5,641,500 - ---------------- ------------- Cash and cash equivalents at end of period $ 4,410,500 $ - ================ =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income tax paid $ 750,000 $ 43,600 ================ =============== Interest paid $ 131,200 $ 159,400 ================= ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4 ASPEON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Aspeon, Inc. ("Aspeon"), formerly Javelin Systems, Inc., was incorporated in the State of Delaware on September 19, 1995 under the name of Sunwood Research, Inc. Aspeon 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. Aspeon 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, Aspeon 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, Aspeon 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, Aspeon established three international subsidiaries to expand its sales and distribution channels in the international marketplace. The international subsidiaries are: Aspeon Systems (Europe) Limited ("Aspeon Europe") headquartered in England; Aspeon Systems International Pte Ltd ("Aspeon Asia") headquartered in Singapore; and Aspeon Systems Australia Pty Limited ("Aspeon Australia") headquartered in Australia. In May 1998, Aspeon 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. In November 1998, Aspeon 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. 5 In August 1999, the Company acquired all of the outstanding capital stock of Restaurant Consulting Services, Inc. ("RCS") as described in Note 3. RCS implements, operates and supports packaged software applications for the restaurant industry. Hereinafter, Aspeon 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 unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 2000 filed with the SEC. 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:
SEPTEMBER 30, JUNE 30, 1999 1999 ----------- ----------- (As restated, Note 2) Raw materials $ 7,215,300 $ 7,195,600 Work-in-process 666,500 227,000 Finished goods 7,383,200 7,143,100 ----------- ----------- $15,265,000 $14,565,700 =========== ===========
EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES (AS RESTATED, NOTE 2) 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. Other intangible assets include the estimated value associated with a non-compete agreement, workforce and software acquired in the acquisition of DTI. These items are being amortized on a straight-line basis over periods ranging from two to ten years. 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. 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 three 6 months ended December 31, 1997. A reconciliation of basic and diluted net income per share for the quarters ended September 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------------- ------------------------- BASIC DILUTED BASIC DILUTED --------- --------- -------- --------- (As restated, Note 2) NET INCOME $ 445,000 $ 445,000 $ 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 NET INCOME PER SHARE $ 0.05 $ 0.05 $ 0.11 $ 0.11
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 $559,700 (as restated, Note 2) and $487,700 for the three months 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. RECLASSIFICATIONS Certain amounts in fiscal 1999 have been reclassified to conform to the fiscal 2000 presentation. 7 2. RESTATEMENT The Company's previously reported results of operations for the three months ended September 30, 1999 have been restated to reflect certain accounting adjustments. The effects, increase or (decrease), of the adjustments on the results of operations for the three months ended September 30, 1999 are set forth in the following table: Products revenues .................... $(269,500) Products cost of revenues ............. (190,700) ----------- Gross profit ......................... (78,800) Total operating expenses ............. 164,500 ---------- Income from operations .............. (243,300) Other expenses ............... 8,700 Provision for income taxes ............ 98,300 ---------- Net income ..................... $(153,700) ========== Basic net income per share $(0.02) ======= Diluted net income per share $(0.02) =======
Products revenues and products cost of revenues were reduced primarily due to the deferral of revenues associated with point of sale units shipped by the Company during the three months ended September 30, 1999 for which installation work remained at the end of the period. Total operating expenses were increased primarily to reflect the impact of increased amortization of intangibles due to purchase accounting adjustments; expensing of costs previously capitalized and accrual of general expenses not recorded during the period. 3. 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 $3,054,400 in cash (including acquisition costs of $21,300). 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 $2,706,200. Such excess is being amortized on a straight-line basis over 10 years. 8 4. 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. 5. SEGMENT INFORMATION The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The segments and a description of their businesses follows: The Research and Development segment provides all research and development activities for the other business segments. The POS Products segment designs, manufactures and markets open system touchscreen point-of-sale (POS) network-ready hardware systems. These systems are sold on a stand-alone basis or integrated as part of an end-to-end solution. The Solutions Services segment 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. The ASP Services segment provides pre-integrated business application services customized to meet industry specific needs of the foodservice and retail industry. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes inter-segment 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). Prior and current year information have been restated to conform to segment information as reported in the Company's Form 10-K for the year ended June 30, 2000. Information about the Company's reportable segments for the three months ended September 30, 1999 and 1998 are as follows (fiscal 1999 amounts restated to reflect adjustments described in Note 2):
RESEARCH AND POS SOLUTIONS ASP DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL 1999 REVENUES - $10,737,300 $ 7,853,000 $3,901,900 $ 22,492,200 NET INCOME (LOSS) $ (250,700) $ 627,400 $ (73,700) $ 296,700 $ 599,700 TOTAL ASSETS - $60,009,300 $ 14,899,000 $4,698,900 $ 79,607,200 1998 REVENUES - $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
9 A reconciliation of total segment revenues to total consolidated revenues and of total segment net income to total consolidated net income for the three months ended September 30, 1999 and 1998 is as follows (fiscal 1999 amounts restated to reflect adjustments described in Note 2):
1999 1998 ------------- ------------ REVENUES Total segment revenues $ 22,492,200 $ 14,531,400 Elimination of inter-segment revenues (2,526,800) (1,599,200) ------------- ------------ Consolidated revenues $ 19,965,400 $ 12,932,200 ============= ============ NET INCOME Total segment net income $ 599,700 $ 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 $ 445,000 $ 472,600 ============ ============
Specified items included in segment profit/loss for the three months ended to September 30, 1999 and 1998 are as follows (fiscal 1999 amounts restated to reflect adjustments described in Note 2):
RESEARCH AND POS SOLUTIONS ASP DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL 1999 Interest expense - $229,000 $ - $ 700 $ 229,700 Interest income - $(86,000) $ 6,400 - $ (79,600) Depreciation and amortization expense - $200,300 $238,900 $ 500,600 $ 939,800 Income tax expense (benefit) $(129,200) $183,100 $ 52,100 $ 178,500 $ 284,500 Expenditures for additions to long-lived assets - $428,100 $ 46,100 $3,712,200 $4,186,400 1998 Interest expense - $211,300 $ 22,200 1,000 $ 234,500 Interest income - $ (2,900) - (800) $ (3,700) 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
Revenues and long-lived asset information by geographic area as of and for the three months ended September 30, 1999 and 1998 (fiscal 1999 amounts restated to reflect adjustments described in Note 2):
UNITED STATES EUROPE ASIA AUSTRALIA TOTAL 1999 Revenues $13,069,200 $5,920,500 $423,000 $552,700 $19,965,400 Long-lived assets $27,925,600 $6,209,600 $942,000 $138,500 $35,215,700 1998 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
10 6. SUBSEQUENT EVENTS MONUMENT ACQUISITION In March 2000, the Company acquired all of the outstanding capital stock of Monument Software Corporation ("Monument"). The aggregate purchase price for Monument consisted of $1,579,000 in cash (including acquisition costs of $79,000) and 104,802 shares of common stock with a value of $2,060,700. The acquisition has been accounted for by the purchase method. MANDATORILY REDEEMABLE SERIES A PREFERRED STOCK In March 2000, the Company completed a private placement in which the Company sold an aggregate of 10,000 shares of Series A Convertible Exchangeable Preferred Stock (the "Preferred Stock"), a warrant to acquire 583,334 shares of common stock of the Company at an initial exercise price of $17.00 per share and a warrant to acquire 1,250,000 shares of common stock of Aspeon Solutions, Inc., a wholly-owned subsidiary of the Company, at an exercise price of $5.00 per share. Proceeds to the Company amounted to $9,568,400, net of $431,600 in issuance costs. The net proceeds from the issuance of the Preferred Stock was allocated based on the relative fair values of each equity instrument using an independent valuation as follows: Preferred Stock $ 5,274,500 Warrants, Aspeon, Inc. 3,426,600 Warrants, Aspeon Solutions 867,300 ----------- Total net proceeds $ 9,568,400 ===========
The Preferred Stock conversion price was less than the market value of the Company's common stock on the date of issuance; accordingly, the Company recorded a beneficial conversion feature equal to the difference between the conversion price and the fair value of the common stock, multiplied by the number of shares into which the Preferred Stock is convertible (intrinsic value). The resultant value was limited to the amount allocated to the Preferred Stock of $5,274,500 and was charged to retained earnings, to the extent available, and paid in capital on the issuance date, and increased the net loss available to common stockholders. The Preferred Stock discount that resulted from the allocation of the net proceeds to the other equity instruments issued is being accreted over the minimum period from the date of issuance to the date on which the Preferred Stock can first be redeemed (March 2002), and has increased the net loss available to common stockholders. The Preferred Stockholders have the following rights: i) the right of first offer for the subsequent sale of equity securities by the Company, as defined, through March 2001, ii) the right to exchange Preferred Stock for equity securities subsequently issued by the Company, through September 2001, iii) the option to exchange the Preferred Stock for shares of the preferred stock of Aspeon Solutions following an initial public offering and based on the trading volume of the Company's common stock, as defined, and iv) registration rights for the shares of common stock issuable upon the conversion of the Preferred Stock. The Preferred Stock also contains the following preferences: i) cumulative dividends at an annual rate of 6%, payable quarterly in cash or common stock at the option of the Company commencing in April 2000, ii) liquidation preference equal to the original issuance price plus unpaid dividends, iii) conversion into common stock at any time after March 2000 at a conversion price equal to the lower of (a) $16.00 or (b) the average of the three lowest closing bid prices of the Company's common stock during the 10 day period prior to the conversion, iv) redemption of the Preferred Stock by the Company in March 2002 at the original issuance price ($1,000 per share) plus unpaid dividends, or at the option of the Company if certain conditions remain satisfied, as defined, in shares of common stock, and v) mandatory redemption if certain events occur, as defined, at a redemption price equal to 125% of the original issuance price plus unpaid dividends. In August 2000, $150,000 (150 shares of Preferred Stock stated value) plus accrued and unpaid dividends, were converted into 53,054 shares of the Company's common stock. In October 2000, a notice of default was received from the Preferred Stockholders due to the Company's failure to timely file its Form 10-K and the suspension of trading of the Company's common stock by Nasdaq. In accordance with the provisions of the Preferred Stock agreement, the Company is required to pay 1.5% of the stated value of the Preferred Stock ($9,850,000) for each thirty calendar day period during which the default remains. As a result of the defaults not being cured within ten days of the default notice, the conversion price of the Preferred Stock was reduced and the Preferred Stockholders have the right to require the Company to redeem the Preferred Stock. In addition, as a result of the defaults, the Company will be required to accrete the Preferred Stock to its redemption value of $9,850,000, plus accrued but unpaid dividends at the 1.5% default rate, in the second quarter of fiscal 2001. The Company currently is negotiating with the Preferred Stockholders to attempt to obtain a waiver of the defaults under the terms of the Preferred Stock and related agreements. However, no assurances can be made that the Company will be successful in its efforts to obtain a waiver of the defaults. If the Company is not able to obtain a waiver of defaults from the Preferred Stockholders, and the Preferred Stockholders elect to pursue the default remedies described above, the Company would be forced to seek financing to obtain the funds necessary to pay to the Preferred Stockholders the redemption amount of the Preferred Stock and the accrued 1.5% penalty amounts. If the Company is not able to obtain financing on satisfactory terms, the Company may be required to terminate its operations and sell its assets and dissolve, reduce planned capital expenditures, reduce planned levels of advertising and promotion, scale back its manufacturing or other operations or enter into 11 arrangements on terms which it would not otherwise accept, and any of these occurrences could have a material adverse effect of the Company's business, financial condition and results of operations. NOTES RECEIVABLE FROM OFFICER In April and August 2000, the Company executed a $300,000 unsecured and $400,000 secured note receivable (collectively the "Notes") with its CEO. The $400,000 note was collateralized by certain assets of the CEO and bore interest at the rate of 6.6% annum. The principal and interest of the Notes were paid in full in September 2000. LINE OF CREDIT COVENANT DEFAULT At June 30, 2000, the Company was in default of certain non-financial covenants under its line of credit facility. In October 2000, the Company obtained a waiver on all defaults through June 30, 2000 pursuant to certain terms and conditions including accelerating term loan repayments, accruing interest on the term loan at the default rate of 11.5%, and limiting borrowings to approximately $3,538,000. SALE OF ASPACT In August 2000, the Company executed a sale agreement with the then current director of Aspact (the "Purchaser"). The initial purchase price is $350,000 that is payable to the Company in monthly installments of $14,600 commencing in July 2001. In the event the Purchaser consummates an initial public offering or disposes of all or substantially all of Aspact's common stock, the Purchaser will be required to pay: a) the unpaid balance of the initial consideration and b) 50% of the net proceeds received from the initial public offering less the amount paid under a), in an amount not to exceed $200,000. Concurrent with the sale agreement, the Purchaser was terminated as an employee of the Company. SUSPENSION OF TRADING In October 2000, the Nasdaq Stock Market ("Nasdaq") suspended trading in the Company's Common Stock while it sought additional information from the Company. On October 11, 2000, Nasdaq sent a letter to the Company stating that that Company's Common Stock would be delisted from Nasdaq if the Company did not file its Form 10-K for the fiscal year ended June 30, 2000 with the Securities and Exchange Commission ("SEC") by October 18, 2000. The Form 10-K was not filed with the SEC by the October 18, 2000 deadline. On November 9, 2000, the Company participated in a hearing before the Nasdaq Listing Qualifications Panel which was held for the purpose of evaluating whether the Company's Common Stock may continue to be listed on Nasdaq or if it will be delisted. On December 11, 2000 the Company received a letter from the Nasdaq stating the Company must be in compliance with all SEC filings by December 18, 2000. LITIGATION In October 1999, the Company and two former officers of a subsidiary of the Company were named as defendants in a breach of contract and intentional tort action brought by an individual who claims rights to computer software products once offered for sale by subsidiaries of the Company. The plaintiff is seeking payment of one half of all the sales proceeds of the commercial software product line of "Special Delivery" sold since February 1997 and makes claim to one half of the asset purchase price (as apportioned to the "Special Delivery" asset) paid by the Company to the shareholders of the subsidiary in April 1999. The Company and its subsidiaries have indemnification rights against one of the selling shareholders in connection with his representations and warranties made about "Special Delivery" in various documents. Although the Company and its subsidiaries support the selling shareholder's position as it relates to the plaintiff in this action, cross-claims have been filed against the selling shareholder, for indemnification and contribution, for further protection. Management is unable to determine whether the outcome of this complaint will have a material impact on the Company's consolidated 12 financial position, results of operations or cash flows. In October and November 2000, the Company, the Company's Chief Executive Officer, and its former Chief Financial Officer were sued in the United States District Court for the Central District of California for alleged violations of the Securities Exchange Act of 1934. The plaintiffs seek class action status. The complaints do not specify the amount of damages sought. According to press releases, other plaintiffs are purported to have filed similar lawsuits against the Company and its officers or former officers. Management is unable to determine whether the outcome of these complaints or associated legal costs will have a material impact on the Company's consolidated financial position, results of operations, or cash flows. 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 This Quarterly Report on Form 10-Q/A 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 following discussion should be read in conjunction with the Company's consolidated financial statements and the related notes thereto and the other financial information included in the Company's Form 10-K. This discussion contains forward-looking statements that include risk and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under the heading "Risk Factors" in Item I of the Company's Form 10-K filed on November 30, 2000. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations. The Company assumes no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. BUSINESS Aspeon, Inc. ("Aspeon"), formerly known as Javelin Systems, Inc., was incorporated in the State of Delaware on September 19, 1995 under the name of Sunwood Research, Inc. Aspeon Solutions, Inc., a wholly-owned subsidiary, is an application service provider ("ASP") providing services which enable software applications to be deployed, managed, supported and upgraded from centrally located servers, rather than individual computers. Javelin Systems, a division of Aspeon, is a provider of integrated touchscreen computers and system integration services to the foodservice and retail industries. Aspeon's background as a developer of point of sale systems, communications solutions, and enterprise applications, has allowed the Company to gain contracts in the ASP market. In December 1997, Aspeon acquired CCI Group, Inc. and Posnet Computers; both companies focused on providing point of sale solutions to large restaurant chains including White Castle, AFC, Red Robin and Jamba Juice. These acquisitions formed the basis of Aspeon's POS Products and Solution Services businesses. Aspeon began its globalization initiative in 1998, first opening Aspeon sales and support offices in the United Kingdom (UK) and Australia. In November 1998, Aspeon acquired RGB/Jade, a networking solutions provider with customers such as Marks and Spencer, WH Smith, Body Shop and Bass pubs. Although primarily retail focused, Jade has relationships with major non-retail customers including Reuters and British Telecom. Aspeon launched another UK subsidiary, Teneo, in an effort to expand its service management and wide area network solutions business. By late 1998, Aspeon was positioned globally to provide both point of sale and communications solutions to the retail and restaurant industries, but realized it lacked the expertise in enterprise software and infrastructure, which 13 would be necessary to complete the Company's end-to-end vision. The Company was not in a position to build a large enterprise consulting practice due to the difficulty of hiring and retaining the hundreds of consultants needed to serve its large clients. Aspeon began evaluating alternative business models and identified the ASP Services business as suitable for its vertical focus since it could develop a pre-integrated, vertically-focused suite of software applications that could be delivered through the Internet in a hosted environment. In 1999, Aspeon began developing its ASP Services business. In April 1999, Aspeon acquired Dynamic Technologies, Inc. and SB Holdings, Inc. (collectively "DTI"), Philadelphia-based providers of hosted messaging, customer relationship management, and custom software solutions to a variety of customers in the Delaware Valley area including Aventis and Right Management. This acquisition served as the platform for Aspeon's ASP Services offering by providing application development, implementation, and support capabilities. In August 1999, Aspeon acquired Restaurant Consulting Services ("RCS"), a provider of technology outsourcing services including Oracle Financials hosting and communications management to customers such as Champs Entertainment, Inc., Fuddruckers, Chart House, and Xando-Cosi. The Company has attempted to assemble a high caliber management team and build an ASP infrastructure designed to rapidly scale as companies increasingly turn to outsourcers, like Aspeon, to satisfy their internal information technology ("IT") needs. All of the acquisitions were accounted for by the purchase method, and accordingly, the results of operations of these subsidiaries have been included with those of the Company commencing on the dates of acquisition. Goodwill resulting from these acquisitions is amortized on a straight-line basis over periods of 3 to 25 years. The Company's principal business activities are: (1) POS Products - designs, manufactures and markets open system touchscreen 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. (2) Solutions Services - provides retail foodservice technology solutions and services that enable restaurants and retailers to capture, analyze, disseminate and use information throughout the enterprise, from the POS cash register terminal to the back office to an organization's headquarters. (3) ASP Services - provides pre-integrated business application services customized to meet industry specific needs of the foodservice and retail industry. REVENUES POS PRODUCTS POS Products revenues consist primarily of sales of POS hardware, software and peripheral equipment including printers and personal computers. The replacement cycle for hardware in the POS foodservice industry is generally long, and consequently, revenues for hardware products to a specific end-user tend to be non-recurring. The Company may experience significant variations in POS Products revenue in any quarterly or annual period. SOLUTIONS SERVICES Solutions Services revenues consist primarily of staging and design, installation, maintenance and repair and consulting services. Maintenance and repair contract Solution Services tend to be recurring while services such as staging, design and installation tend not to be recurring. Installation services are not always a required service to be provided for in connection with the sale of the Company's POS Products. Maintenance services are typically provided for under the terms of a single or multi-year maintenance agreement. 14 ASP SERVICES ASP Services revenues consists primarily of information technology outsourcing, hosting, remote services, help desk and consulting services. Revenues are classified into two categories: recurring or multi-year contractually based revenue, and revenue generated via non-recurring agreements. Services such as consulting tend not to be recurring. ASP Services also include certain purchases of equipment procured by the Company on behalf of a customer. Typically, these purchases are passed through to the customer with a nominal markup on the cost to the Company. Management anticipates that Solution Services and ASP Services revenues in the future will increase as a percentage of total revenues. As sales of hardware products and services to specific end-users become more significant relative to total revenues, the Company may experience significant variations in any quarterly or annual reporting period. These variations may result from, among other things, delays in installations or the Company's inability to timely address any problems with installations that have been completed or are near completion. Any of these factors could cause the Company's results of operations to fluctuate significantly from period to period, including on a quarterly basis. COST OF REVENUES POS PRODUCTS POS Products cost of revenues consists primarily of POS hardware, software and peripheral equipment costs. POS hardware costs consist of the acquisition costs of non-Aspeon product line hardware that is resold by the Company and the costs of components and payroll and related costs for assembly, manufacturing, purchasing, quality control and repairs of Aspeon products. Sales of non-Aspeon hardware generally carry a lower gross margin than do other product sales. The cost of the components incorporated in the Aspeon product line represents in excess of 80% of the total cost of such products, which is consistent with prior fiscal years. The cost of five components represents in excess of 75% of the total component costs included in the Aspeon product line. SOLUTIONS SERVICES Solutions Services cost of revenues consists primarily of payroll and related costs for technical and support staff providing staging, installation, maintenance and other services. Cost of revenues per contract increases as new installations under the contract are completed. Consequently, until the Company has a larger volume of matured service contracts, gross margins on such service revenues will be lower than the Company believes can be realized by its service operations. Additionally, because the Company's service business should generate higher revenues and higher margins in periods in which the Company handles significant system deployments, and because contracts for such deployments are non-recurring in nature, the Company anticipates that revenues and gross margins from its service business will fluctuate from period to period. ASP SERVICES ASP Services cost of revenues consists primarily of payroll and related costs for the technical and support staff providing information technology outsourcing, hosting, remote services, help desk and consulting services. Cost of revenues also includes certain utility charges (i.e., telephone) associated with providing remote services and help desk. In anticipation of gaining new customers, the Company has invested in the ASP Services business by incurring costs necessary to meet the needs of a higher level of service revenues. ASP Services cost of revenues also includes costs associated with purchases of equipment procured by the Company on behalf of a customer. Typically, these purchases are passed through to the customer with a nominal markup on the cost to the Company. 15 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 (RESTATED) COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 The following discussion sets forth the historical results of operations and financial condition of the Company for the three months 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 (1999 amounts restated to reflect adjustments described in Note 2):
THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 ----- ----- Revenues: POS Products 66.1% 89.6% Solution Services 14.4 10.4 ASP Services (1) 19.5 - ----- ----- Total revenues 100.0 100.0 ----- ----- Cost of revenues: POS Products (2) 71.6 70.4 Solutions Services (2) 79.9 82.6 ASP Services (1)(2) 73.6 - ---- ---- 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 8.7 2.8 General and administrative 11.4 15.3 ---- ---- Total operating expenses 22.4 20.4 ---- ---- Income from operations 4.4 7.9 Interest expense (0.7) (1.8) Interest income - - Other income - 0.2 Provision for income taxes (1.5) (2.6) ----- ----- Net income 2.2% 3.7% ===== =====
(1) ASP Services for the three months ended September 30, 1999 includes approximately $1.1 million and $1.0 million, respectively, of non-POS equipment related transactions, which are categorized within the ASP Services segment. (2) Expressed as a percentage of related revenues, not of total revenues. REVENUES - POS PRODUCTS. Revenues from POS Product sales increased $1.6 million, or 13.8%, to $13.2 million for the three months ended September 30, 1999 compared to $11.6 million for the same period a year ago. As a percentage of total revenues, POS Product sales accounted for 66.1% and 89.6% for the three months ended September 30, 1999 and 1998, respectively. The increase reflects the continued maturation of the Company's indirect distribution channels offset, in part, by a reduction in shipments of 1,035 units to McDonald's Corporation. REVENUES - SOLUTIONS SERVICES. Revenues from Solution Services increased $1.5 million, or 113.9%, to $2.9 million for the three months ended September 30, 1999 compared to $1.4 million for the same period a year ago. As a percentage of total revenues, Solutions Services accounted for 14.4% and 10.4% for the three months ended September 30, 1999 and 1998, respectively. The increase reflects the impact one significant new contract for which deployment and installation services were provided coupled with a significant "one-time" hardware deployment contract commencing during the quarter offset, in part, by one significant fiscal 1999 customer contract which ended during the quarter. REVENUES - ASP SERVICES. Revenues from ASP Services amounted to $3.9 million for the three months ended September 30, 1999. As a percentage of total revenues, ASP Services accounted for 19.5% of total revenues 16 for the three months ended September 30, 1999. ASP Services revenues reflect the impact of the Company's April 1999 acquisition of DTI coupled with its August 1999 acquisition of RCS. GROSS PROFIT. Gross profit increased $1.6 million, or 45.9%, to $5.3 million for the three months ended September 30, 1999 compared with $3.7 million for the same period a year ago. The increase is comprised of the following (1999 amounts restated to reflect adjustments described in Note 2):
THREE MONTHS ENDED INCREASE/ SEPTEMBER 30, (DECREASE) 1999 1998 $ % ---- ---- - - POS Products $3.7 $3.5 $0.2 5.7% Solution Services $0.6 0.2 $0.4 200.0% ASP Services $1.0 - $1.0 -
The increase in gross profit from POS Products sales is primarily attributable to a larger proportion of units sold at a higher gross profit directly to end users offset, in part, by fewer unit sales to McDonalds Corporation as discussed above. The increase in gross profit from Solutions Services is due primarily to an increase in gross profit from sales at CCI and RGB/Jade. Gross profits from ASP Services reflects gross profits associated with the acquired operation of DTI and RCS in April 1999 and August 1999, respectively, for the three months ended September 30, 1999. RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.2 million, or 57.4%, to $0.5 million for the three months ended September 30, 1999 compared to $0.3 million for the same period a year ago. As a percentage of total revenues, research and development expenses amounted to 2.3% for the three months ended September 30, 1999 and 1998. The increase is primarily attributable to additional development costs relating to the design of new POS Products hardware and DTI costs of $0.1 million. SELLING AND MARKETING. Selling and marketing expenses increased $1.4 million, or 372.3%, to $1.7 million for the three months ended September 30, 1999 compared to $0.4 million for the same period a year ago. As a percentage of total revenues, selling and marketing expenses amounted to 8.7% and 2.8%, for the three months ended September 30, 1999 and 1998, respectively. The increase is primarily attributable to sales and marketing costs at ASP Services and Solutions Services of approximately $0.8 million, additional personnel employed to expand the direct sales forces of the three international subsidiaries and CCI and increased advertising costs associated with the growth of the business. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $0.3 million, or 14.8%, to $2.3 million for the three months ended September 30, 1999 compared to $2.0 million for the same period a year ago. As a percentage of total revenues, general and administrative expenses amounted to 11.4% and 15.3%, for the three months ended September 30, 1999 and 1998, respectively. The increase is due to an increase in general and administrative expenses associated with DTI, RCS and RGB/Jade of $0.5 million, an increase in amortization of goodwill of $0.5 million offset, in part, by a decrease of general and administrative expenses relating to Aspeon and CCI of $0.8 million. 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 Aspeon and CCI resulted from the continued consolidation of administrative functions. INTEREST EXPENSE. Interest expense decreased approximately $5,000 to $229,700 for the three months ended September 30, 1999 compared with $234,500 for the same period a year ago. The decrease is due to the use of a portion of the proceeds from the October 1998 and February 1999 common stock public offerings to repay certain indebtedness. INTEREST INCOME. Interest income increased approximately $76,000 to $79,600 for the three months ended September 30, 1999 compared to $3,700 for the same period a year ago. The increase primarily reflects the impact of interest earned on invested proceeds from the Company's February 1999 common stock public offering. INCOME TAXES. Provision for federal, state and foreign income taxes decreased approximately $61,000 to $285,000 for the three months ended September 30, 1999 compared to $346,000 for the same period a year ago. The decrease is attributable to the overall decrease in income before income taxes of $89,000 offset, in part, by an increase in 17 income before income taxes from the Company's foreign subsidiaries which operate in jurisdictions with lower income tax rates than those in the United States. LIQUIDITY AND CAPITAL RESOURCES The following discussion of liquidity and capital resources has been updated to add certain disclosures provided for in the Company's Form 10-K for the year ended June 30, 2000. In June 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 in June 2001 and consisted of a line of credit of up to $6,000,000 and a term loan of $1,500,000. The credit facility contains a .50% per annum unused line of credit fee, which is based on the difference between the borrowing capacity and outstanding balance. 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 in June 2001. At June 30, 2000, borrowings outstanding under the term loan amounted to $900,000. The Company is not permitted to pay cash dividends to common stockholders under the terms of the credit facility without approval of the unrelated financial institution. Under the terms of the credit facility, the Company is permitted to 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% (9.5% as of June 30, 2000). Borrowings under the line of credit are collateralized by substantially all the assets of the Company. At June 30, 2000, borrowings outstanding under the line amounted to $2,497,000. The credit facility contains certain restrictive financial and non-financial covenants. The Company is required to maintain a stated current ratio, net worth, senior debt service coverage ratio and total debt service coverage ratio. At June 30, 2000, the Company was in default of certain non-financial covenants. In October 2000, the Company obtained a waiver on all defaults through June 30, 2000 pursuant to certain terms and conditions including accelerating term loan repayments, accruing interest on the term loan at the default rate of 11.5%, and limiting borrowings to approximately $3,538,000. 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 (8.0% at June 30, 2000). The credit facility was renewed in October 2000 and expires in August 2001. As of September 30, 1999, borrowings outstanding under the line amounted to $917,000 with approximately $883,000 available for future borrowings. At June 30, 2000, borrowings under the line amounted to $692,000 with approximately $1,108,000 available for future borrowings. In March 2000, the Company completed a private placement in which the Company sold an aggregate of 10,000 shares of Series A Convertible Exchangeable Preferred Stock (the "Preferred Stock"), a warrant to acquire 583,334 shares of common stock of the Company at an initial exercise price of $17.00 per share and a warrant to acquire 1,250,000 shares of common stock of Aspeon Solutions, Inc. ("Aspeon Solutions"), a wholly-owned subsidiary of the Company, at an exercise price of $5.00 per share. Proceeds to the Company amounted to $9,568,400, net of $431,600 in issuance costs. In October 2000, a notice of default was received from the Preferred Stockholders due to the Company's failure to timely file its Form 10-K and the suspension of trading of the Company's common stock by Nasdaq. In accordance with the provisions of the Preferred Stock agreement, the Company is required to pay 1.5% of the stated value of the Preferred Stock ($9,850,000) for each thirty calendar day period during which the default remains ($147,800 per month). As a result of the defaults not being cured within ten days of the default notice, the conversion price of the Preferred Stock was reduced and the Preferred Stockholders have the right to require the Company to redeem the Preferred Stock. In the event that the Preferred Stockholders exercise their right to require that the Company redeem the Preferred Stock, no assurances can be made that the Company will be able to obtain the funds necessary to meet such redemption obligation. In October 2000, The Nasdaq Stock Market ("Nasdaq") suspended trading in the Company's Common Stock while it sought additional information from the Company. On October 11, 2000, Nasdaq sent a letter to the 18 Company stating that that Company's Common Stock would be delisted from Nasdaq if the Company did not file its Form 10-K for the fiscal year ended June 30, 2000 with the Securities and Exchange Commission ("SEC") by October 18, 2000. The Form 10-K was not filed with the SEC by the October 18, 2000 deadline. On November 9, 2000, the Company participated in a hearing before the Nasdaq Listing Qualifications Panel which was held for the purpose of evaluating whether the Company's Common Stock may continue to be listed on Nasdaq or if it will be delisted. On December 11, 2000 the Company received a letter from the Nasdaq stating the Company must be in compliance with all SEC filings by December 18, 2000. No assurances can be given that the Company's Common Stock will be traded on Nasdaq or any other exchange or market at any time in the future. If the Company's Common Stock does not trade on any exchange or market in the future, then stockholders of the Company may lose their investment in the Company and it will be more difficult for the Company to raise funds in the future through the issuance of capital stock. As of September 30, 1999, the Company had cash and cash equivalents of $4.4 million and working capital of $27.4 million. As of September 30, 2000, the Company had cash and cash equivalents of approximately $3.3 million. Cash used in operating activities for the three months ended September 30, 1999 amounted to $0.5 million 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 $0.7 million and consisted primarily of the proceeds from the borrowings under the line of credit. Cash used in operating activities for the year ended June 30, 2000 amounted to approximately $2.1 million and was primarily attributable to the use of cash to fund the Company's net loss and inventory. This was partially offset by an increase in accounts payable and accrued expenses. Cash used in investing activities for the year ended June 30, 2000 amounted to approximately $5.5 million and consisted primarily of cash used to acquire the outstanding common stock of RCS and Monument, payment of various earn-out provisions associated with acquired businesses and the purchase of equipment. Cash provided by financing activities for the year ended June 30, 2000 amounted to approximately $11.1 million and consisted primarily of the gross proceeds from the issuance of $10.0 million of Preferred Stock in March 2000. Proceeds from the Preferred Stock have been used primarily to acquire Monument, settle future contingent payments associated with RCS, hire management and staff personnel, expand corporate facilities and fund ASP Services operations. The Company has sustained significant losses during fiscal 2000 and has experienced negative cash flows from operations since its inception. The Company's ability to meet its obligations in the ordinary course of business is dependent upon its ability to re-initiate trading of its Common Stock, return to profitability, obtain a waiver of preferred stock defaults, replace the existing domestic line of credit and raise additional financing through public or private equity financings and evaluate potential strategic opportunities. Management must re-initiate trading of the Company's Common Stock and retain its listing on the Nasdaq. Management believes it can satisfy all SEC filing requirements, including but not limited to certain quarterly filing requirements on Form 10-Q communicated to the Nasdaq Panel on November 9, 2000. However, no assurances can be made that the Company will not be delisted by the Nasdaq prior, or subsequent, to filing all information with the SEC. Management has instituted certain business initiatives to streamline operations and generate future on-going cost savings. In June 2000, the Company recorded a $3,900,000 charge for severance costs associated with the termination of senior management personnel in the ASP Services segment. Management anticipates annual cash savings from this initiative of approximately $1,800,000. The Company also anticipates monthly cost savings of approximately $100,000 associated with management's decision to exit the retail ASP operations and focus solely on the foodservice ASP operations. The Company has delayed plans to consolidate and outsource data center functions for ASP Services resulting in the elimination of measurable up-front costs which would otherwise have been incurred. The Company has also delayed and reduced the budgeted dollars associated with its corporate 19 wide marketing and advertising campaign. However, no assurances can be made that these initiatives will return the Company to profitability in the immediate future. Management believes that through an inventory reduction program and aggressive receivable collection efforts it may generate between $5.0 million to $7.5 million of cash. Management has developed and implemented a POS sales rebate program effective in the first quarter of fiscal 2001. However, there can be no assurance that the Company's rebate program will generate significant sales volumes and inventory reductions of POS products. The Company has recorded an income tax receivable in excess of $2.0 million as of June 30, 2000 reflecting, in part, the carryback of losses incurred during the fiscal year. However, there can be no assurance that the Company will collect this money in the immediate future. Management intends to replace its existing domestic line of credit with a new facility to fund its working capital needs. However, no assurances can be made that such financing can be successfully completed on terms acceptable to the Company. In addition, the management of the Company's UK subsidiaries has renewed its existing line of credit which will expire in August 2001. Management continues to evaluate raising additional financing through public or private equity financings. If additional funds are raised through the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or that if available, such financing will include terms favorable to our stockholders or the Company. If such financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. Management continues to evaluate exit strategy opportunities relating to the sale of the Company or certain subsidiaries. However, there can be no assurance that any opportunity to sell the Company, or any of its divisions, would be approved by the stockholders of the Company. Furthermore, there can be no assurance that such transaction can be successfully completed on terms acceptable to the Company. 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 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. 20 The Year 2000 Issue could also have an effect 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 effect 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 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. ASPEON, INC. December 18, 2000 /s/ Richard P. Stack -------------------------- ------------------------------------- Date Richard P. Stack Chief Executive Officer and President December 18, 2000 /s/ Edmund Brooks -------------------------- ------------------------------------- Date Edmund Brooks Chief Executive Officer of Javelin Systems 21 EXHIBIT INDEX 27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X. 22