10-Q/A 1 a2032954z10-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 March 31, 2000 [ ] 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 April 30, 2000, there were 9,381,170 shares of 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 II, Item 2. Managements 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 May 15, 2000 (the "Original Filing"). The disclosures responsive to all other Items in the Original Filing are not affected by this Amendment but continue as asset 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 nine-month period ended March 31, 2000 covered by the Original Filing. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASPEON, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 2000 1999* ---- ----- (As restated, Note 2) ASSETS Current assets: Cash and cash equivalents $ 11,358,400 $ 5,641,500 Investments 2,041,600 7,472,000 Accounts receivable - net 14,415,800 16,275,500 Inventories 17,027,200 14,565,700 Prepaid and other current assets 2,280,200 1,354,400 Income tax receivable 1,117,400 - ------------ ------------ Total current assets 48,240,600 45,309,100 Property and equipment, net 5,704,000 2,861,400 Goodwill 36,446,300 25,755,200 Other intangible assets 1,005,400 1,266,000 Other assets, net 778,500 891,200 ------------ ------------ Total assets $ 92,174,800 $ 76,082,900 ============ ============ LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 2,310,500 $ 2,056,600 Accounts payable 6,426,300 7,681,800 Accrued expenses 2,393,900 2,446,200 Current maturities of long-term debt 300,000 300,000 Customer deposits 730,000 278,000 Deferred revenues 1,362,700 397,500 Income taxes payable - 1,517,400 ------------ ------------ Total current liabilities 13,523,400 14,677,500 ------------ ------------ Purchase price payable for acquisitions 3,025,900 874,000 Long-term debt, net of current portion 980,800 900,000 Other 59,600 21,000 Mandatorily redeemable Series A Preferred stock, $0.01 par value: 1,000,000 authorized shares; No shares issued and outstanding 5,441,900 - Mandatorily redeemable warrants 3,426,600 - Mandatorily redeemable minority interest warrants 867,300 - Stockholders' equity: Preferred stock, $0.01 par value: 1,000,000 shares authorized No shares issued and outstanding shares - - Common stock, $0.01 par value: 20,000,000 authorized shares, 9,381,170 and 8,887,203 issued and outstanding 93,800 88,900 Additional paid in capital 65,024,500 55,800,700 Deferred stock-based compensation - (6,700) Retained earnings (accumulated deficit) (134,500) 3,799,700 Accumulated other comprehensive loss (134,500) (72,200) ------------ ------------ Total stockholders' equity 64,849,300 59,610,400 ------------ ------------ Total liabilities, mandatorily redeemable securities and stockholders' equity $ 92,174,800 $ 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
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (As restated, Note 2) (As restated, Note 2) Revenues: Products $13,703,100 $17,547,000 $43,726,400 $43,132,400 Services 5,666,600 3,544,000 20,092,900 8,758,200 ----------- ----------- ----------- ----------- Total revenues 19,369,700 21,091,000 63,819,300 51,890,600 Cost of revenues: Products 10,353,100 12,430,900 31,648,900 30,752,400 Services 4,769,400 2,942,300 15,597,700 6,993,300 ----------- ----------- ----------- ----------- Total cost of revenues 15,122,500 15,373,200 47,246,600 37,745,700 Gross profit 4,247,200 5,717,800 16,572,700 14,144,900 ----------- ----------- ----------- ----------- Operating expenses: Research and development 540,100 349,400 1,523,700 932,600 Selling and marketing 1,918,700 1,101,300 5,681,500 2,506,700 General and administrative 4,114,200 2,318,300 9,081,500 6,535,900 ----------- ----------- ----------- ----------- Total operating expenses 6,573,000 3,769,000 16,286,700 9,975,200 ----------- ----------- ----------- ----------- Income (loss) from operations (2,325,800) 1,948,800 286,000 4,169,700 Interest expense (198,600) (205,600) (627,900) (674,900) Interest income 88,600 54,800 239,400 66,100 Other income (4,700) 1,600 6,500 16,300 ----------- ----------- ----------- ----------- Income (loss) before income taxes (2,440,500) 1,799,600 (96,000) 3,577,200 (Provision) benefit for income taxes 951,800 (664,700) 37,400 (1,395,700) ----------- ----------- ----------- ----------- Net income (loss) (1,488,700) 1,134,900 (58,600) 2,181,500 Accretion of mandatorily redeemable preferred stock discount and dividends (5,441,900) - (5,441,900) - ----------- ----------- ----------- ----------- Net income (loss) available to common shareholders $(6,930,600) $ 1,134,900 $(5,500,500) $ 2,181,500 =========== =========== =========== =========== Net income (loss) per common share: Basic $ (0.75) $ 0.16 $ (0.61) $ 0.40 =========== =========== =========== =========== Diluted $ (0.75) $ 0.16 $ (0.61) $ 0.39 =========== =========== =========== =========== Shares used in computing net income earnings (loss) per share: Basic 9,268,478 6,951,212 9,060,863 5,444,549 =========== =========== =========== =========== Diluted 9,268,478 7,237,141 9,060,863 5,633,269 =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 ASPEON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ (As restated, Note 2) OPERATING ACTIVITIES Net income (loss) $ (58,600) $ 2,181,700 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,731,700 907,700 Amortization of deferred compensation 6,700 24,800 Deferred rent expense 38,600 8,800 Income tax benefit from exercise of stock options - 223,600 Non-cash allowances (291,000) 276,000 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 2,313,700 (4,962,100) Inventories (2,273,800) (7,163,600) Other current assets (867,500) 200 Income tax receivable (1,117,400) - Other assets 33,000 (164,600) Accounts payable (1,509,900) 230,600 Accrued expenses (90,200) 784,300 Income taxes payable (1,517,400) 664,800 Customer deposits 452,000 (1,194,500) Deferred revenues 552,700 700 ------------ ------------ Net cash (used in) operating activities (597,400) (8,181,600) INVESTING ACTIVITIES Purchase of equipment (2,878,200) (1,284,600) Cash paid in connection with acquisitions (6,105,400) (1,972,500) Investment in securities 5,430,400 ------------ ------------ Net cash (used in) investing activities (3,553,200) (3,257,100) FINANCING ACTIVITIES Net borrowings (repayments) under line of credit 253,900 (1,178,900) Proceeds from issuances of notes payable (9,100) 43,500 Repayment of notes payable (598,500) (246,000) Deferred offering costs - 10,000 Preferred stock and warrants, net of offering costs 9,568,400 - Proceeds from public offerings - 34,995,700 Exercise of stock options 893,100 255,200 ------------ ------------ Net cash provided by financing activities 10,107,800 33,879,500 ------------ ------------ Effect of exchange rate changes on cash (240,300) (229,500) ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,716,900 22,211,300 ------------ ------------ Cash and cash equivalents at beginning of period 5,641,500 - Cash and cash equivalents at end of period $ 11,358,400 $ 22,211,300 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income tax paid $ 2,513,800 $ 402,700 ============ ============ Interest paid $ 308,500 $ 728,700 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4 ASPEON, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For The Nine Months Ended March 31, 2000 (As restated, Note 2)
ADDITIONAL COMMON STOCK PAID-IN DEFERRED SHARES AMOUNT CAPITAL COMPENSATION --------- ---------- ----------- ------------ Balance as of July 1, 1999 8,887,203 $ 88,900 $55,800,700 $ (6,700) Exercise of stock options 117,900 1,100 897,800 - Shares issued in connection with RGB/JADE earnout 271,265 2,700 2,565,100 - Shares issued in connection with acquisition of Monument 104,802 1,100 2,059,700 - Amortization of deferred compensation - - - 6,700 Offering costs - - (7,200) - Mandatorily redeemable preferred stock beneficial conversion feature - - 3,708,400 - Accretion of mandatorily redeemable preferred stock discount and dividends - - - - Comprehensive income - - - - --------- ---------- ----------- ------------ Balance as of March 31, 2000 9,381,170 $ 93,800 $65,024,500 $ - ========= ========== =========== ============
RETAINED ACCUMULATED EARNINGS OTHER (ACCUMULATED DEFICIT) COMPREHENSIVE LOSS TOTAL ------------------------------------------------- ----------- Balance as of July 1, 1999 $ 3,799,700 $ (72,200) $59,610,400 Exercise of stock options - - 898,900 Shares issued in connection with RGB/JADE earnout - - 2,567,800 Shares issued in connection with acquisition of Monument - - 2,060,800 Amortization of deferred compensation - - 6,700 Offering costs - - (7,200) Mandatorily redeemable preferred stock beneficial conversion feature (3,708,400) - - Accretion of mandatorily redeemable preferred stock discount and dividends (167,200) - (167,200) Comprehensive loss (58,600) (62,300) (120,900) ------------ ---------- ------------ Balance as of March 31, 2000 $ (134,500) $ (134,500) $64,849,300 ============ ========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5 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 Solutions, Inc., a wholly-owned subsidiary, is the first "Next Generation" Application Service Provider (ASP) focused on delivering pre-integrated mission-critical business applications customized to meet industry-specific needs. Javelin Systems, a division of Aspeon, is a leading provider of integrated touchscreen computers and system integration services to the global foodservice industry. 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: 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, Aspeon completed a public offering of 1,395,000 shares of its common stock at $6.75 per share, netting proceeds of approximately $8.1 million. Proceeds 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, Aspeon completed a public offering of 2,375,000 shares of its common stock at $12.25 per share, netting proceeds of approximately $26.9 million. Proceeds 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, Aspeon 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, Aspeon 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. On March 8, 2000 Aspeon completed a private placement of securities with Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, 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 6 stock of the Company and a warrant to acquire 1,250,000 shares of Aspeon Solutions, Inc., a wholly-owned subsidiary of the Company. Proceeds to the Company for this placement amounted to $9.6 million net of offering costs (see note 4). In March, 2000 Aspeon acquired all of the outstanding capital stock of Monument Software Corporation ("Monument") as described in Note 3. Monument specializes in the rapid implementation of enterprise-class financial systems with an emphasis on Oracle Financials. Hereinafter, Aspeon and its subsidiaries are referred to as the "Company." BASIS OF PRESENTATION The accompanying 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-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:
MARCH 31, JUNE 30, 2000 1999 --------------- -------------- (As restated, Note 2) Raw materials $ 6,993,700 $ 7,195,600 Work-in-process 431,000 227,000 Finished goods 9,602,500 7,143,100 --------------- -------------- $ 17,027,200 $ 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, Jade and RCS, 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. 7 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. A reconciliation of basic and diluted net income per share for the three months ended March 31, 2000 and 1998 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 BASIC DILUTED BASIC DILUTED ------------ ------------ ----------- ----------- (As restated, Note 2) Net income (loss) available to common shareholders $(6,930,600) $(6,930,600) $ 1,134,900 $ 1,134,900 Weighted average common shares outstanding 9,268,478 9,268,478 6,951,212 6,951,212 Additional shares due to potential exercise of stock options - - - 285,929 Diluted weighted average common shares outstanding 9,268,478 9,268,478 6,951,212 7,237,141 ------------ ------------ ----------- ----------- Net income (loss) per share $ (0.75) $ (0.75) $ 0.16 $ 0.16 ============ ============ =========== ===========
There were approximately 587,000 options in the three months ended March 31, 2000 that were not included in the computation of diluted net loss per share because they were anti-dilutive. There were no anti-dilutive options in 1999. COMPREHENSIVE INCOME (LOSS) 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 non-owner sources. Total comprehensive income (loss) was $(1.6 million) (as restated, Note 2) and $1.1 million for the three months ended March 31, 2000 and 1999, respectively, and ($120,900) (as restated, Note 2) and $2.1 million for the nine months ended March 31, 2000 and 1999. 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 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which will become effective for the Company in fiscal 2001. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company does not expect the adoption of FAS 133 to have a material impact on its reported consolidated financial condition or results of operations. RECLASSIFICATIONS Certain amounts in fiscal 1999 have been reclassified to conform to the fiscal 2000 presentation. 2. RESTATEMENT The Company's previously reported results of operations for the three and nine months ended March 31, 2000 have been restated to reflect certain accounting adjustments. The effects, increase or (decrease), of the adjustments on results of operations for the three and nine months ended March 31, 2000 are set forth in the following table:
Three Months Nine Months Ended Ended ------------ ----------- March 31, 2000 Products revenues $ (587,500) $ (679,400) Products cost of revenues (401,400) (473,900) ----------- ----------- Gross profit (186,100) (205,500) Total operating expenses 253,800 333,400 ----------- ----------- Income from operations (440,900) (538,900) Other expense 1,600 270,100 Provision for income taxes (172,200) (315,500) ----------- ----------- Net income (269,300) (493,500) Accretion of preferred stock discount and dividends 1,448,400 1,448,400 ----------- ----------- Net income available to common shareholders $(1,717,700) $(1,941,900) ----------- ----------- Basic net income per share $ (0.19) $ (0.21) =========== =========== Diluted net income per share $ (0.19) $ (0.21) =========== ===========
Products revenues and products cost of revenues for the three and nine months ended March 31, 2000 were reduced primarily due to the deferral of revenues associated with POS units shipped by the Company during the three months ended March 31, 2000 for which installation work remained as of the end of the period. Total operating expenses were increased primarily to reflect the impact of unrecorded compensation expense associated with certain employee stock option grants during the three months ended March 31, 2000, increased amortization of intangibles due to purchase accounting adjustments, expensing operating costs previously capitalized by the Company and accrual of general expenses not originally recorded. The adjustment to increase the accretion of the preferred stock discount and dividends for the three months ended March 31, 2000 reflects the increase in the amount recorded for the beneficial conversion feature (Note 4) determined based on an independent valuation obtained by the Company. 9 3. ACQUISITIONS 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. In March 2000, the Company acquired all of the outstanding capital stock of Monument. Monument specializes in the rapid implementation of enterprise-class financial systems with an emphasis on Oracle Financials. The aggregate purchase price for the Monument capital stock consisted of $1.6 million in cash and $2.1 million in stock. The acquisition has been accounted for by the purchase method, and accordingly, the results of operations of Monument have been 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 $3.6 million. Such excess is being amortized on a straight-line basis over three 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 Monument prior to March 2000 were not material. 4. 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 10 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 could 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 arrangements on terms which it would not otherwise accept, and any of these occurrences could have a material adverse effect on the Company's business, financial condition and results of operations. 5. STOCKHOLDERS' EQUITY During the nine months ended March 31, 2000, 117,900 shares of common stock were issued upon the exercise of stock options with a weighted average exercise price of $7.62 per share, 271,265 shares of common stock with a value of $2.6 million were issued in connection with earnout provisions of the acquisition of RGB and Jade and 104,802 shares were issued in connection with the purchase of Monument with a value of $2.1 million. 11 6. 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 March 31, 2000 and 1999 is as follows (fiscal 2000 amounts restated to reflect adjustments described in Note 2):
RESEARCH AND POS SOLUTIONS ASP DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL ----------- --------- ---------- --------- ----------- 2000 Revenues - $ 13,359,500 $ 7,635,700 $ 3,022,800 $ 24,018,000 Net income (loss) $ (350,600) $ (260,800) $ (314,300) $ (493,000) $ (1,418,700) Total assets - $ 70,580,500 $15,986,700 $ 5,607,600 $ 92,174,800 1999 Revenues - $ 11,886,800 $10,841,700 - $ 22,728,500 Net income (loss) $ (224,200) $ 729,800 $ 540,100 - $ 1,045,700 Total assets - $ 40,780,200 $25,584,100 - $ 66,364,300
12 A reconciliation of total segment revenues to total consolidated sales and of total segment net income to total consolidated net income for the three months ended March 31, 2000 and 1999 is as follows (fiscal 2000 amounts restated to reflect adjustments described in Note 2):
2000 1999 ----------- ----------- Total segment revenues $24,018,000 $22,728,500 Elimination of intersegment revenues (4,648,300) (1,637,500) ----------- ----------- Consolidated revenues $19,369,700 $21,091,000 =========== =========== Net income (loss) Total segment net income (loss) $(1,418,700) $ 1,254,300 Elimination of intersegment gross profit net of income taxes 153,200 153,900 Elimination of non-segment expenses, net of income taxes (223,200) (273,300) ----------- ----------- Consolidated net income (loss) $(1,488,700) $ 1,134,900 =========== ===========
Specified items included in segment profit/loss for the quarters ended March 31, 2000 and 1999 (fiscal 2000 amounts restated to reflect adjustments described in Note 2):
RESEARCH AND POS SOLUTIONS ASP DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL ----------- -------- -------- ---------- ----- 2000 Interest expense $ - $ 184,900 $ 10,500 $ 3,200 $ 198,600 Interest income $ - $ (72,400) $ - $ (16,200) $ (88,600) Depreciation and amortization expense $ 255,400 $ 295,800 $ 908,300 $1,459,500 Income tax expense (benefit) $ (183,700) $(1,198,500) $ 197,500 $ 232,900 $ (951,800) Expenditures for additions to long-lived assets $ 208,400 $ 203,700 $ 5,244,700 $5,656,800 1999 Interest expense $ - $ 169,800 $ 35,300 $ 500 $ 205,600 Interest income $ - $ (54,800) $ - $ - $ (54,800) Depreciation and amortization expense $ 164,800 $ 212,300 - $ 377,100 Income tax expense $ (74,000) $ 309,700 $ 178,200 - $ 413,900 Expenditures for additions to long-lived assets $ - $ 462,800 $4,987,500 - $5,450,300
Revenues and long-lived asset information by geographic area as of and for the three months ended March 31, 2000 and 1999 (fiscal 2000 amounts restated to reflect adjustments described in Note 2):
UNITED STATES EUROPE ASIA AUSTRALIA TOTAL 2000 Revenues $12,710,200 $5,617,600 $ 479,500 $562,400 $19,369,700 Long-lived assets $32,160,200 $7,743,200 $1,195,200 $132,300 $41,230,900 1999 Revenues $12,943,900 $7,456,800 $ 396,600 $293,700 $21,091,000 Long-lived assets $ 9,697,900 $4,051,700 $ 366,900 $ 51,400 $14,167,900
7. SUBSEQUENT EVENTS 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. 13 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. Nasdaq has not yet determined whether the Company's Common Stock may continue to be listed on Nasdaq or if it will be delisted. 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 Nasdaq stating that the Company must be in compliance with all SEC filing 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 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. 14 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 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 1 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. Aspeon 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 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"), a Philadelphia-based providers of hosted messaging, customer relationship management, and custom software 15 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. In January 2000, Aspeon created Aspeon Solutions, Inc. as a wholly-owned subsidiary to centralize and continue to develop its ASP Services. In March 2000, Aspeon acquired Monument, a provider of rapid implementation services of financial systems with an emphasis on Oracle Financials. 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. 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 16 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. RESULTS OF OPERATIONS The following discussion sets forth the historical results of operations and financial condition of the Company for the three months ended March 31, 2000 and 1998. The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated: 17 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 The following discussion sets forth the historical results of operations and financial condition of the Company for the three months ended March 31, 2000 and 1999. The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated (fiscal 2000 amounts restated to reflect the adjustment described in Note 2):
THREE MONTHS ENDED MARCH 31, 2000 1999 ------ ----- Revenues: POS Products 70.8% 83.2% Solutions Services 13.6 16.8 ASP Services (1) 15.6 - ------ ----- Total revenues 100.0 100.0 ------ ----- Cost of revenues: POS Products (2) 75.6 70.8 Solutions Services (2) 102.1 83.0 ASP Services (1)(2) 68.5 - ------ ----- Total cost of revenues 78.1 72.9 ------ ----- Gross profit 21.9 27.1 ------ ----- Operating expenses: Research and development 2.8 1.7 Selling and marketing 9.9 5.2 General and administrative 21.2 11.0 ------ ----- Total operating expenses 33.9 17.9 ------ ----- Income from operations (12.0) 9.2 Interest expense (1.0) (1.0) Interest income 0.3 0.3 Other income - - Income tax (expense) benefit 4.9 (3.1) ------ ----- Net income (8.1)% 5.4% ====== =====
(1) ASP services for the three months ended March 31, 2000 includes approximately $250,000 and $165,000, respectively, of non-POS equipment related transactions, which are categorized within the ASP segment. (2) Expressed as a percentage of related revenues, not of total revenues. REVENUES - POS PRODUCTS. Revenues from POS Product sales decreased $3.8 million, or 21.9%, to $13.7 million for the three months ended March 31, 2000 compared to $17.5 million for the same period a year ago. As a percentage of total revenues, POS Product sales accounted for 70.8% and 83.2% for the three months ended March 31, 2000 and 1999, respectively. POS Products revenues during the quarter have been adversely impacted by an industry-wide slowdown for POS hardware units as a result of soft demand following the Year 2000 buildup. REVENUES - SOLUTIONS SERVICES. Revenues from Solution Services decreased $0.9 million, or 24.5%, to $2.6 million for the three months ended March 31, 2000 compared to $3.5 million for the same period a year ago. As a percentage of total revenues, Solutions Services accounted for 13.6% and 16.8% for the three months ended March 31, 2000 and 1999, respectively. The decrease reflects the impact of one significant fiscal 1999 customer contract which ended in the first quarter of fiscal 2000, offset, in part, by one significant new customer contract acquired in the first quarter of 18 fiscal 2000 for which deployment and installation services were provided. REVENUES - ASP SERVICES. Revenues from ASP Services amounted to $3.0 million for the three months ended March 31, 2000. As a percentage of total revenues, ASP Services accounted for 15.6% for the three months ended March 31, 2000. ASP Services revenues reflect the impact of the Company's fiscal 1999 acquisition of DTI and its August 2000 acquisition of RCS. GROSS PROFIT. Gross profit decreased 1.5 million, or 25.7%, to $4.2 million for the three months ended March 31, 2000 compared to gross profit of $5.7 million for the same period a year ago. The increase is comprised of the following:
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 $ % ---- ----- ----- ------ (Dollars in Millions) POS Products $3.3 $5.1 $(1.8) (35.3)% Solution Services - 0.6 (0.6) (100.0) ASP Services 0.9 - 0.9 -
The decrease in gross profit from POS Products revenues is primarily attributable to lower product sales as described above offset, in part, by a larger proportion of POS Products sold at a higher gross profit directly to end users. The decrease in gross profit from Solutions Services is due primarily to lower margins associated with one significant customer contract obtained during fiscal 2000 offset, in part, by higher margins on certain consulting contracts during the quarter. Gross profit from ASP Services reflects costs associated with the acquired operations of DTI and RCS in April 1999 and August 1999, respectively. RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.2 million, or 54.6%, to $0.5 million for the three months ended March 31, 2000 compared to $0.3 million for the same period a year ago. As a percentage of total revenues, research and development expenses amounted to 2.8% and 1.7% for the three months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable hardware development costs and activities associated with certain management reporting service applications. SELLING AND MARKETING. Selling and marketing expenses increased $0.8 million, or 74.2%, to $1.9 million for the three months ended March 31, 2000 compared to $1.1 million for the same period a year ago. As a percentage of total revenues, selling and marketing expenses amounted to 9.9% and 5.2%, for the three months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable to ASP sales infrastructure costs, including payroll, benefits and travel coupled with tradeshow and advertising costs incurred to promote Javelin's Viper POS product and the new ASP Services business. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $1.8 million, or 77.5%, to $4.1 million for the three months ended March 31, 2000 compared to $2.3 million for the same period a year ago. As a percentage of total revenues, general and administrative expenses amounted to 21.2% and 11.0%, for the three months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable to infrastructure costs, including payroll and related taxes, travel, rent and utilities associated with the ASP Services business, the full year impact of goodwill amortization associated with fiscal 1999 acquisitions and amortization associated with fiscal 2000 acquisitions. INTEREST EXPENSE. Interest expense for the three months ended March 31, 2000 and 1999 remained consistent at approximately $200,000 primarily reflecting the amortization deferred financing costs. INTEREST INCOME. Interest income increased $33,800 to $88,600 for the three months ended March 31, 2000 compared to $54,800 for the same period a year ago. The increase primarily reflects the impact of interest earned on invested proceeds from the Company's March 2000 preferred stock issuance. INCOME TAXES. The Company had an income tax benefit of approximately $952,000 for the three months ended March 31, 2000 compared to a provision for federal, state and foreign income taxes of $665,000 for the same 19 period a year ago. The income tax benefit results from the carry-back of certain losses incurred by the Company during the quarter. NINE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 The following discussion sets forth the historical results of operations and financial condition of the Company for the nine months ended March 31, 2000 and 1999. The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated (fiscal 2000 amounts restated to reflect the adjustments described in Note 2):
NINE MONTHS ENDED MARCH 31, 2000 1999 ------ ------ Revenues: POS Products 68.5% 83.1% Solutions Services 15.0 16.9 ASP Services (1) 16.5 - ------ ------ Total revenues 100.0 100.0 ------ ------ Cost of revenues: POS Products (2) 72.4 71.3 Solutions Services (2) 88.1 79.9 ASP Services (1)(2) 68.2 - ------ ------ Total cost of revenues 74.0 72.7 ------ ------ Gross profit 26.0 27.3 ------ ------ Operating expenses: Research and development 2.4 1.8 Selling and marketing 8.9 4.9 General and administrative 14.2 12.6 ------ ------ Total operating expenses 25.5 19.3 ------ ------ Income from operations 0.5 8.0 Interest expense (0.7) (1.3) Interest income 0.4 0.2 Other income - - Provision for income taxes - (2.7) ------ ------ Net income 0.2% 4.2% ====== ======
(1) ASP services for the nine months ended March 31, 2000 includes approximately $1.8 million and $1.6 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 $0.6 million, or 1.4%, to $43.7 million for the nine months ended March 31, 2000 compared to $43.1 million for the same period a year ago. As a percentage of total revenues, POS Product sales accounted for 68.5% and 83.1% for the nine months ended March 31, 2000 and 1999, respectively. The increase reflects the continued maturation of the Company's indirect distribution channels and a net increase in POS unit sales in the Javelin division offset by the adverse impact of an industry-wide slowdown for POS hardware units as a result of soft demand following the Year 2000 buildup. REVENUES - SOLUTIONS SERVICES. Revenues from Solution Services increased $0.8 million, or 9.2%, to $9.6 million for the nine months ended March 31, 2000 compared to $8.8 million for the same period a year ago. As a percentage of total revenues, Solutions Services accounted for 15.0% and 16.9% for the nine months ended March 31, 2000 and 20 1999, respectively. The increase reflects the impact of one significant new customer contract acquired in the first quarter of fiscal 2000 for which deployment and installation services were provided offset, in part, by one significant fiscal 1999 customer contract which ended in the first quarter of fiscal 2000. REVENUES - ASP SERVICES. Revenues from ASP Services amounted to $10.5 million for the nine months ended March 31, 2000. As a percentage of total revenues, ASP Services accounted for 16.5% for the nine months ended March 31, 2000. ASP Services revenues reflect the impact of the Company's fiscal 1999 acquisition of DTI and August 2000 acquisition of RCS. GROSS PROFIT. Gross profit increased 2.4 million, or 17.2%, to $16.5 million for the nine months ended March 31, 2000 compared to gross profit of $14.1 million for the same period a year ago. The increase is comprised of the following:
NINE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 $ % ---- ---- --- --- (Dollars in Millions) POS Products $12.2 $12.4 $(0.2) (1.6)% Solution Services $ 1.1 1.8 $(0.7) (38.9)% ASP Services $ 3.3 - $ 3.3 -
The decrease in gross profit from POS Products revenues are primarily attributable to a moderate increase in product sales for the period offset by the impact of increased fixed costs associated with payroll and related costs for domestic manufacturing personnel coupled with the fixed cost component of Javelin products. The decrease in gross profit from Solutions Services is primarily attributable to lower margins associated with one significant customer contract obtained during fiscal 2000 offset, in part, by higher margin consulting contracts. ASP Services gross margins reflect the impact of higher margin consulting engagements offset, in part, by fixed payroll and related costs associated with technical support and service employees. RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.6 million, or 63.47%, to $1.5 million for the nine months ended March 31, 2000 compared to $0.9 million for the same period a year ago. As a percentage of total revenues, research and development expenses amounted to 2.4% and 1.8% for the nine months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable to additional development costs and activities relating to the design of new POS Products hardware certain management reporting service applications during the period. SELLING AND MARKETING. Selling and marketing expenses increased $3.2 million, or 126.7%, to $5.7 million for the nine months ended March 31, 2000 compared to $2.5 million for the same period a year ago. As a percentage of total revenues, selling and marketing expenses amounted to 8.9% and 4.9%, for the nine months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable to ASP sales infrastructure costs, including payroll, benefits and travel coupled with tradeshow and advertising costs incurred to promote Javelin's Viper POS product and the new ASP Services business. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $2.6 million, or 38.9%, to $9.1 million for the nine months ended March 31, 2000 compared to $6.5 million for the same period a year ago. As a percentage of total revenues, general and administrative expenses amounted to 14.2% and 12.6%, for the nine months ended March 31, 2000 and 1999, respectively. The increase is primarily attributable to infrastructure costs, including payroll and related taxes, travel, rent and utilities associated with the ASP Services business, the full year impact of goodwill amortization associated with fiscal 1999 acquisitions and amortization associated with fiscal 2000 acquisitions. INTEREST EXPENSE. Interest expense decreased $47,000 to $627,900 for the nine months ended March 31, 2000 compared with $674,900 for the same period a year ago. The decrease is due to the repayment of certain indebtedness during the first nine months of fiscal 2000. INTEREST INCOME. Interest income increased $173,300 to $239,400 for the nine months ended March 31, 2000 compared to $66,100 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 and March 2000 offering. 21 INCOME TAXES. The Company had an income tax benefit of approximately $37,000 for the nine months ended March 31, 2000 compared to a provision for federal, state and foreign income taxes of $1.4 million for the same period a year ago. The income tax benefit results from the carry-back of certain losses incurred by the Company during the quarter offset, in part, by an increase in 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 March 31, 2000, there were no borrowings outstanding under the line. 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. 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. 22 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 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 March 31, 2000, the Company had cash and cash equivalents of $1.4 million and working capital of $34.7 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 nine months ended March 31, 2000 amounted to $0.6 million and consisted primarily of increases in inventories and income taxes payable and decrease in trade accounts payable. Cash used in investing activities for the nine months ended March 31, 2000 amounted to $3.6 million and consisted primarily of cash used to acquire equipment and the outstanding common stock of RCS and Monument Software. Cash provided by financing activities for the nine months ended March 31, 2000 amounted to $10.1 million and consisted primarily of the proceeds from the issuance of preferred stock completed in March 2000. 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 wide 23 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. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will become effective for the Company in fiscal 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company does not expect the adoption of SFAS No. 133 to have a material impact on its reported consolidated financial condition or 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) Reports on Form 8-K The Company filed a report on Form 8-K under Item 2 of such form dated March 9, 2000 for the private placement of securities. 24 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 25 EXHIBIT INDEX 27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X.