<PAGE>
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.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASPEON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999*
---- -----
(As restated, Note 2)
ASSETS
<S> <C> <C>
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
============ ============
</TABLE>
* 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
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(As restated, Note 2) (As restated, Note 2)
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
(As restated, Note 2)
<S> <C> <C>
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
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended March 31, 2000
(As restated, Note 2)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
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 $ -
========= ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER
(ACCUMULATED DEFICIT) COMPREHENSIVE LOSS TOTAL
------------------------------------------------- -----------
<S> <C> <C> <C>
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
============ ========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------------- --------------
(As restated, Note 2)
<S> <C> <C>
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
=============== ==============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
BASIC DILUTED BASIC DILUTED
------------ ------------ ----------- -----------
(As restated, Note 2)
<S> <C> <C> <C> <C>
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
============ ============ =========== ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
------------ -----------
March 31, 2000
<S> <C> <C>
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)
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Preferred Stock $ 5,274,500
Warrants, Aspeon, Inc. 3,426,600
Warrants, Aspeon Solutions 867,300
------------
Total net proceeds $ 9,568,400
============
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
RESEARCH AND POS SOLUTIONS ASP
DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL
----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
12
<PAGE>
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):
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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):
<TABLE>
<CAPTION>
RESEARCH AND POS SOLUTIONS ASP
DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL
----------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ASIA AUSTRALIA TOTAL
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------ -----
<S> <C> <C>
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%
====== =====
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/
MARCH 31, (DECREASE)
2000 1999 $ %
---- ----- ----- ------
(Dollars in Millions)
<S> <C> <C> <C> <C>
POS Products $3.3 $5.1 $(1.8) (35.3)%
Solution Services - 0.6 (0.6) (100.0)
ASP Services 0.9 - 0.9 -
</TABLE>
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
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<PAGE>
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):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
------ ------
<S> <C> <C>
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%
====== ======
</TABLE>
(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
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<PAGE>
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED INCREASE/
MARCH 31, (DECREASE)
2000 1999 $ %
---- ---- --- ---
(Dollars in Millions)
<S> <C> <C> <C> <C>
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 -
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X.
