<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 000-21477
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 number)
17891 Cartwright Road
Irvine, California 92614
(Address of principal executive offices) (Zip Code)
(949) 440-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of April 30, 2000, there were 9,381,170 shares of the Registrant's Common
Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASPEON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999*
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,358,400 $ 5,641,500
Investments in securities 2,041,600 7,472,000
Accounts receivable - net 14,466,000 16,000,200
Inventories 16,595,400 14,565,700
Deferred income taxes 530,900 530,900
Other current assets 1,771,600 823,500
------------ ------------
Total current assets 46,763,900 45,033,800
Property and equipment, net 5,541,500 2,861,400
Excess of cost over net assets of purchased businesses 35,021,000 27,021,200
Deferred financing costs 391,600 617,600
Other assets, net 281,900 273,600
============ ============
Total assets $ 87,999,900 $ 75,807,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,310,500 $ 2,056,600
Accounts payable 6,334,600 7,681,800
Accrued expenses 2,544,800 2,446,200
Current maturities of long-term debt 300,000 300,000
Customer deposits 2,700 2,700
Deferred maintenance revenues 1,460,800 397,500
Income taxes payable (1,117,400) 1,517,400
------------ ------------
Total current liabilities 11,836,000 14,402,200
------------ ------------
Deferred rent expense 32,300 21,000
Long-term debt, net of current portion 980,800 1,774,000
Mandatorily redeemable Series A Preferred stock, $0.01 par
Value: authorized shares--1,000,000
Issued and outstanding shares--10,000 shares at March 31,
2000 and none at June 30, 1999 3,993,700
Mandatorily redeemable warrants 3,126,400
Redeemable minority interest 2,520,900
Stockholders' equity:
Common stock, $0.01 par value:
authorized shares--20,000,000
issued and outstanding shares--9,381,170 at March 31,
2000, and 8,887,203 at June 30, 1999 93,800 88,900
Additional paid in capital 65,309,800 55,800,700
Deferred compensation (6,700)
Retained earnings 240,900 3,799,700
Accumulated other comprehensive (loss) (134,700) (72,200)
------------ ------------
Total stockholders' equity 65,509,800 59,610,400
============ ============
Total liabilities and stockholders' equity $ 87,999,900 $ 75,807,600
============ ============
</TABLE>
* The balance sheet at June 30, 1999 has been derived from audited financial
statements.
SEE ACCOMPANYING NOTES.
2
<PAGE>
ASPEON, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Product Sales $ 14,290,600 $ 17,547,000 $ 44,405,700 $ 43,132,400
Services 5,666,600 3,544,000 20,092,900 8,758,200
------------ ------------ ------------ ------------
Total revenues 19,957,200 21,091,000 64,498,600 51,890,600
------------ ------------ ------------ ------------
Cost of sales:
Product Sales 10,754,500 12,430,900 31,876,900 30,752,400
Services 4,769,400 2,942,300 15,843,700 6,993,300
------------ ------------ ------------ ------------
Total cost of sales 15,523,900 15,373,200 47,720,600 37,745,700
------------ ------------ ------------ ------------
Gross profit 4,433,300 5,717,800 16,778,000 14,144,900
------------ ------------ ------------ ------------
Operating expenses:
Research and development 531,200 349,400 1,493,200 932,600
Selling and marketing 1,915,100 1,101,300 5,565,000 2,506,700
General and administrative 3,872,900 2,318,300 8,895,000 6,535,900
------------ ------------ ------------ ------------
Total operating expenses 6,319,200 3,769,000 15,953,200 9,975,200
------------ ------------ ------------ ------------
Income (loss) from operations (1,885,900) 1,948,800 824,800 4,169,700
Interest expense (147,400) (157,300) (424,900) (615,200)
Other income 34,300 8,100 313,000 22,900
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,999,000) 1,799,600 712,900 3,577,400
(Provision) benefit for income taxes 779,600 (664,700) (278,000) (1,395,700)
------------ ------------ ------------ ------------
Net income (loss) (1,219,400) 1,134,900 434,900 2,181,700
Accretion of Series A Preferred Stock discount
and dividends (3,993,700) (3,993,700)
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders $ (5,213,100) $ 1,134,900 $ (3,558,800) $ 2,181,700
============ ============ ============ ============
Earnings (loss) per common share:
Basic $ (0.56) $ 0.16 $ (0.39) $ 0.40
============ ============ ============ ============
Diluted $ (0.56) $ 0.16 $ (0.39) $ 0.39
============ ============ ============ ============
Shares used in computing 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>
SEE ACCOMPANYING NOTES.
3
<PAGE>
ASPEON, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 434,900 $ 2,181,700
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 1,694,500 656,800
Amortization of goodwill 1,803,500 250,900
Amortization of deferred compensation 6,700 24,800
Deferred rent expense 11,300 8,800
Income tax benefit from exercise of stock options 223,600
Non-cash allowances (216,900) 276,000
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,988,500 (4,962,100)
Inventories (1,923,500) (7,163,600)
Other current assets (867,400) 200
Accounts payable (1,612,200) 230,600
Accrued expenses 60,300 784,300
Income taxes payable (2,634,900) 664,800
Customer deposits (1,194,500)
Deferred maintenance 650,900 700
------------ ------------
Net cash (used in) operating activities (604,300) (8,017,000)
------------ ------------
INVESTING ACTIVITIES
Purchase of equipment (2,932,700) (1,284,600)
Cash paid in connection with acquisitions (6,154,600) (1,972,500)
Investment in securities 5,430,400
Other assets (173,000) (164,600)
------------ ------------
Net cash (used in) investing activities (3,829,900) (3,421,700)
------------ ------------
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 (598,300) (246,000)
Deferred offering costs (1,600) 10,000
Preferred stock and warrants, net of offering costs 9,641,000
Proceeds from public offerings 34,995,700
Exercise of stock options 893,100 255,200
------------ ------------
Net cash provided by financing activities 10,197,200 33,879,500
------------ ------------
CUMULATIVE TRANSLATION ADJUSTMENT (46,100) (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 0
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>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- 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 CONN. W/ ACQUISITION OF MONUMENT 104,802 1,100 2,059,700 --
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- 6,700
OFFERING COSTS -- -- (7,200) --
ACCRETION OF SERIES A PREFERRED STOCK DISCOUNT AND DIVIDENDS -- -- 3,993,700 --
COMPREHENSIVE INCOME -- -- -- --
--------- ------------ ------------ --------
BALANCE AS OF MARCH 31, 2000 9,381,170 $ 93,800 $ 65,309,800 $ --
========= ============ ============ ========
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER
(ACCUMULATED COMPREHENSIVE
DEFICIT) 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 CONN. W/ ACQUISITION OF MONUMENT -- -- 2,060,800
AMORTIZATION OF DEFERRED COMPENSATION -- -- 6,700
OFFERING COSTS -- -- (7,200)
ACCRETION OF SERIES A PREFERRED STOCK DISCOUNT AND DIVIDENDS (3,993,700) -- --
COMPREHENSIVE INCOME 434,900 (62,500) 372,400
------------ ------------ ------------
BALANCE AS OF MARCH 31, 2000 $ 240,900 $ (134,700) $ 65,509,800
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ASPEON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
6
<PAGE>
(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 2. 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 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 3).
In March, 2000 Aspeon acquired all of the outstanding capital stock of Monument
Software Corporation ("Monument") as described in Note 2. 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-KSB
filed with the SEC.
7
<PAGE>
INVENTORIES
Inventories consist primarily of computer hardware and components and are stated
at the lower of cost (first-in, first-out) or market as follows:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Raw materials $ 6,993,700 $ 7,195,600
Work-in-process 431,000 227,000
Finished goods 9,170,700 7,143,100
--------------- ----------------
$ 16,595,400 $ 14,565,700
=============== ===============
</TABLE>
EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Excess of cost over net assets of purchased businesses (goodwill) represents
the excess of purchase price over the fair value of the net assets of
acquired businesses. For the acquisitions of Posnet, CCI, Aspact, RGB, Jade
and Monument, the excess was allocated entirely to goodwill. Management
determined that for these acquired companies, there were no other
identifiable intangible assets, such as workforce, that would require an
allocation of the purchase price. The workforce of the acquired companies
requires limited specialized skills. Goodwill is stated at cost and is
amortized on a straight-line basis over 10 years for DTI, SB, and RCS, over
three years for Monument, and over 25 years for all other acquired companies.
The Company assesses the recoverability of these intangible assets by
determining whether the goodwill can be recovered through projected
undiscounted cash flows of the related operations. The amount of goodwill
impairment, if any, is measured based on projected discounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. To date, management has not identified any
impairment of goodwill.
The Company recorded goodwill amortization of $716,300 and $102,500 for the
quarters ended March 31, 2000 and 1999, respectively, and $1.8 million and
$250,900 for the nine months ended March 31, 2000 and 1999, respectively.
EARNINGS (LOSS) 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
8
<PAGE>
adopted SFAS 128 in the quarter ended December 31, 1997 and has restated all
previously reported per share amounts to conform to the new presentation.
A reconciliation of basic and diluted EPS for the quarters ended March 31, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999
- ---------------------------------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) available to common $(5,213,100) $(5,213,100) $ 1,134,900 $ 1,134,900
shareholders
- ---------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------
Earnings (loss) per share $ (0.56) $ (0.56) $ 0.16 $ 0.16
- ---------------------------------------------------------------------------------------------------
</TABLE>
There were approximately 587,000 options in the quarter ended March 31, 2000
that were not included in the computation of diluted EPS because they were
antidilutive. There were no antidilutive options in 1999.
COMPREHENSIVE INCOME
Effective in the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from nonowner sources. Total comprehensive income
(loss) was $(1.3 million) and $1.1 million for the quarters ended March 31, 2000
and 1999, respectively, and $372,400 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.
9
<PAGE>
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.
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.
2. 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 $3,033,100 in cash. The Company may, in the future, be required to
pay an additional $1.5 million in cash and issue shares of its common stock with
a market value of up to $1.5 million based upon the cumulative net profits of
RCS during the twenty-four months ending August 31, 2001. The acquisition has
been accounted for by the purchase method, and accordingly, the results of
operations of RCS will be included with those of the Company commencing on the
date of acquisition. The purchase price resulted in excess of purchase price
over the fair value of net assets acquired of approximately $3.0 million. Such
excess (which will increase for any contingent payments) is being amortized on a
straight-line basis over 10 years. The final allocation of the purchase price
may vary as additional information is obtained, and accordingly, the ultimate
allocation may differ from that used in the unaudited consolidated financial
statements included herein. The results of operations of RCS prior to August
1999 were not material.
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.
10
<PAGE>
3. PREFERRED STOCK
On March 8, 2000 Aspeon, Inc. 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 stock of the Company at an initial
exercise price of $17.00 per share and a warrant to acquire 1,250,000 shares
of Aspeon Solutions, Inc., a wholly-owned subsidiary of the Company, at an
exercise price of $5.00 per share pursuant to a Securities Purchase Agreement
dated March 7 by and among the Company, Aspeon Solutions, Inc. and the
Purchaser. The warrant holders may cause the issuing entity to redeem the
warrants upon a change of control, as defined. Proceeds to the Company from
the placement amounted to $9.6 million net of offering costs.
Dividends on the Preferred Stock accrue at an annual rate of 6%, are cumulative
and shall be payable on the first day of each calendar quarter commencing on
April 1, 2000. The Company is obligated to redeem the Preferred Stock on the
second anniversary of the closing date. The Preferred Stock is convertible into
Common Stock of the Company at any time at a conversion price of $16.00 per
share, subject to certain adjustments. In addition, the Company and Aspeon
Solutions, Inc. have granted the Purchaser certain registration rights related
to the shares of Common Stock issuable upon conversion of the Preferred Stock
and Common Stock issuable upon exercise of the warrants pursuant to a
Registration Rights Agreement dated March 7, by and among, the Company, Aspeon
Solutions, Inc. and the Purchaser. In addition, under certain circumstances, the
Preferred Stock is convertible into shares of preferred stock of Aspeon
Solutions, Inc. having rights, preferences and privileges substantially
equivalent to the Preferred Stock. The closing price of the Company's common
stock on the date of issuance was $26.25.
The Company allocated the proceeds from the placement among the preferred
stock and the warrants based upon their relative fair market value. In
addition, the Company reduced retained earnings by the accretion for the
preferred stock to reflect the impact of the beneficial conversion feature of
such securities.
4. 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.
5. SEGMENT INFORMATION
In 1999, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The
11
<PAGE>
1999 segment information has been restated to conform to the 2000 presentation.
The Company's four reportable segments are as follows:
(1) Research and development- provides all research and development
activities for the other business segments.
(2) Hardware products- designs, manufactures and markets open system
touchscreen point-of-sale (POS) network-ready hardware systems. These
systems can be sold on a stand-alone basis or integrated as part of an
end-to-end solution.
(3) Services-integrates hardware and software as part of a bundled
end-to-end solution.
(4) ASP- delivers pre-integrated mission-critical business applications
customized to meet industry specific needs.
Segment data includes intersegment revenues. The Company does not allocate
corporate-headquarters costs or research and development costs to the operating
segments. Resources for research and development are allocated based on budgets.
The Company evaluates the performance of its segments and allocates resources to
them based on net income/loss. No data is included for 1999 for the ASP as it
was not in existence at that time.
The table below presents information about reportable segments for the quarters
ended March 31:
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
2000 DEVELOPMENT PRODUCTS SERVICES ASP TOTAL
<S> <C> <C> <C> <C> <C>
SALES $ 10,454,100 $ 7,827,600 $ 3,309,100 $ 21,590,800
NET INCOME (LOSS) $ (324,000) $ 320,000 $ (105,400) $ (1,040,000) $ (1,149,400)
TOTAL ASSETS $ 34,444,300 $ 27,823,300 $ 25,732,300 $ 87,999,900
</TABLE>
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
1999 DEVELOPMENT PRODUCTS SERVICES ASP TOTAL
<S> <C> <C> <C> <C> <C>
SALES $ 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 sales to total consolidated sales and of total
segment net income to total consolidated net income for the quarters ended March
31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
SALES 2000 1999
<S> <C> <C>
Total segment sales $21,590,800 $22,728,500
Elimination of intersegment sales (1,633,600) (1,637,500)
----------- -----------
Consolidated sales $19,957,200 $21,091,000
=========== ===========
NET INCOME (LOSS)
Total segment net income (loss) $(1,149,400) $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) $(1,219,400) $1,134,900
=========== ===========
</TABLE>
Specified items included in segment profit/loss for the quarters ended March 31:
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
2000 DEVELOPMENT PRODUCTS SERVICES ASP TOTAL
<S> <C> <C> <C> <C> <C>
Interest expense $ 133,700 $ 10,500 $ 3,200 $ 147,400
Depreciation and
amortization expense $ 228,700 $ 322,500 $ 855,600 $ 1,406,800
Income tax expense
(benefit) $ (126,400) $ 124,800 $ (41,100) $ (405,600) $ (448,300)
Expenditures for
additions to
long-lived assets $ 179,900 $ 175,100 $ 5,301,800 $ 5,656,800
</TABLE>
<TABLE>
<CAPTION>
RESEARCH AND HARDWARE
1999 DEVELOPMENT PRODUCTS SERVICES ASP TOTAL
<S> <C> <C> <C> <C> <C>
Interest expense $ 114,400 $ 42,900 $ 157,300
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 $3,222,100
</TABLE>
13
<PAGE>
Revenues and long-lived asset information by geographic area as of and for the
quarters ended March 31:
<TABLE>
<CAPTION>
UNITED
2000 STATES EUROPE ASIA AUSTRALIA TOTAL
<S> <C> <C> <C> <C> <C>
Revenues $13,297,800 $5,617,600 $479,500 $562,300 $19,957,200
Long-lived assets $32,159,500 $7,749,000 $1,195,200 $132,300 $41,236,000
</TABLE>
<TABLE>
<CAPTION>
UNITED
1999 STATES EUROPE ASIA AUSTRALIA TOTAL
<S> <C> <C> <C> <C> <C>
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>
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
Aspeon, Inc. (the "Company") designs, manufactures, and markets open system
touchscreen point-of-sale ("POS") computers and provides POS systems integration
services primarily for the foodservice and retail industries.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended and
Section 21E of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"), and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The Company may experience significant
fluctuations in future operating results due to a number of factors, including,
among other things, the size and timing of individual orders; seasonality of
revenues; employee hiring and retention, particularly with respect to sales and
consulting personnel; lengthy sales and implementation cycles; reduction in
demand for existing products and services and shortening of product life cycles;
the timing of the introduction of products, product enhancements and services by
the Company or its competitors; competition in pricing in the POS systems
industry; market acceptance of new products; service personnel utilization
rates; the ability of the Company to expand its domestic and international
sales, as well as the mix of such sales; foreign currency exchange rates;
changes in the mix of products and services sold; general health of the
restaurant industry, particularly the quick service restaurant segment; the
ability of the Company to generate service agreements; product quality problems;
the ability of the Company to control costs; the Company's success in
establishing and expanding its direct and indirect distribution channels; the
mix of distribution channels through which the Company's products are sold; and
general economic conditions. Any of these factors could cause operating results
to vary significantly from prior periods. Significant variability in orders
during any period may have a material adverse impact on the Company's cash flow,
and any significant decrease in orders could have a material adverse impact on
the Company's results of operations and financial condition. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance. Fluctuations in the Company's operating results could
cause the price of the Company's Common Stock to fluctuate substantially.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately, and many of which are beyond
the control of the Company. In addition, the business and operations of the
Company are subject to substantial risks which increase the uncertainty inherent
in the forward-looking statements. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
15
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
The following table sets forth certain statements of operations data as
a percentage of total revenues for the three months ended March 31, 2000 and
1999:
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 1999
----- -----
Revenues:
<S> <C> <C>
Product sales 71.6% 83.2%
Service 28.4 16.8
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Cost of product sales (1) 75.3 70.8
Cost of service (1) 84.2 83.0
----- -----
Total cost of revenues 77.8 72.9
----- -----
Gross profit 22.2 27.1
----- -----
Operating expenses:
Research and development 2.7 1.7
Selling and marketing 9.6 5.2
General and administrative 19.4 11.0
----- -----
Total operating expenses 31.7 17.9
----- -----
Operating income (9.5) 9.2
Interest expense, net (0.7) (0.7)
Other income .2
Provision for income taxes 3.9 (3.1)
----- -----
Net income (6.1)% 5.4%
===== =====
</TABLE>
(1) Expressed as a percentage of related revenues, not of total revenues.
REVENUES-PRODUCT SALES. Revenues from product sales decreased by 18.6% to
$14.3 million in 2000 compared to revenues of $17.5 million for 1999. The
change is due primarily to a decrease in product sales at Javelin of $2
million and a decrease at RGB/Jade of $1.3 million. The decrease at Javelin
is attributable primarily to decreases in the number of units sold
(approximately 5,600 units in 2000 compared to 6,250 in 1999). The decrease
at RGB/Jade is due to delays in shipments to certain customers.
16
<PAGE>
REVENUES-SERVICES. Revenues from services increased by 60% to $5.7 million in
2000 compared to revenues of $3.5 million for 1999. The change is due
primarily to an increase in service revenues at DTI and RCS, newly acquired
subsidiaries, of $2.8 million.
GROSS PROFIT. Gross profit decreased by 22.5% to $4.4 million in 2000 compared
to a gross profit of $5.7 million in 1999. The decrease is comprised of the
following:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------- increase/
2000 1999 (decrease)
------------- ------------- ---------------
<S> <C> <C> <C>
Product sales $ 3.5 million $ 5.1 million $ (1.6 million)
Service $ 897,000 $ 602,000 $ 295,000
</TABLE>
The change in gross profit from product sales is primarily attributable to the
decrease in product sales described above and a larger proportion of products
sold directly to end users.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 52% to
$531,200 in 2000 compared to research and development expenses of $349,400 in
1999. The increase is primarily attributable to software development costs of
$228,800 and a decrease of $47,000 relating to the design of new hardware
products. The Company has expensed all software development costs as
technological feasibility has not been achieved.
SELLING AND MARKETING. Selling and marketing expenses increased by 73.9% to
$1.9 million in 2000 compared to selling and marketing expenses of $1.1
million in 1999. The increase is primarily attributable to an increase in
selling and marketing expenses of $448,000. Such expenses consisted primarily
of payroll, tradeshow fees, and travel costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
67.1% to $3.9 million in 2000 compared to general and administrative expenses of
$2.3 million in 1999. The change is due primarily to general and administrative
expenses relating to DTI of $707,000 and RCS of $380,000 offset by a reduction
in expenses at Javelin of $191,200.
INTEREST EXPENSE. Interest expense decreased by $9,900 to $147,400 in 2000
compared to interest expense of $157,300 in 1999. The decrease is due to the use
of a portion of the proceeds from the follow-on offerings completed in October
1998 and February 1999 to repay certain indebtedness.
INCOME TAXES. Provision for federal, state and foreign income taxes decreased by
$1.4 million to a benefit of $779,600 in 2000 compared to a provision for income
tax of $664,700 in 1999. The decrease is attributable to the overall decrease in
income before income taxes of $3.8 million.
17
<PAGE>
NINE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
The following table sets forth certain statements of operations data as a
percentage of total revenues for the nine months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
MARCH 31,
---------------
2000 1999
----- -----
Revenues:
<S> <C> <C>
Product sales 68.8% 83.1%
Service 31.2 16.9
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Cost of product sales (1) 71.8 71.3
Cost of service (1) 78.9 79.9
----- -----
Total cost of revenues 74.0 72.7
----- -----
Gross profit 26.0 27.3
----- -----
Operating expenses:
Research and development 2.3 1.8
Selling and marketing 8.6 4.9
General and administrative 13.8 12.6
----- -----
Total operating expenses 24.7 19.3
----- -----
Operating income 1.3 8.0
Interest expense (0.7) (1.2)
Other income 0.5 0.1
Provision for income taxes (0.4) (2.7)
----- -----
Net income 0.7% 4.2%
===== =====
</TABLE>
(1) Expressed as a percentage of related revenues, not of total revenues.
REVENUES-PRODUCT SALES. Revenues from product sales increased by 3% to $44.4
million in 2000 compared to revenues of $43.1 million for 1999. The change is
due to an increase in product sales at the three international subsidiaries of
$1.9 million, an increase at RGB/Jade of $1 million, an increase at DTI, a newly
acquired subsidiary, of $1.9 million offset by a decrease at CCI of $1.3 million
and a decrease at Javelin of $2.1 million. The increase in product sales at the
three international subsidiaries is primarily due to the enhanced acceptance of
the product in such markets and the continued maturation of the distribution
channel. The decrease at CCI is primarily attributable to a delay in shipments
to a customer. The decrease at Javelin is due primarily to a lower number of
units sold (approximately 17,400 in 2000 compared to 17,700 units in 1999) and
the decrease in average unit sales price of $69.
18
<PAGE>
REVENUES-SERVICES. Revenues from services increased by 129.4% to $20.1 million
in 2000 compared to revenues of $8.8 million for 1999. The change is primarily
attributable to increases in service revenues at DTI and RCS, newly acquired
subsidiaries, of $2.8 million, and an increase at RGB/Jade of $3 million.
GROSS PROFIT. Gross profit increased by 18.6% to $16.8 million in 2000 compared
to a gross profit of $14.1 million in 1999. The increase is comprised of the
following:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-------------------------------
2000 1999 Increase
-------------- -------------- -------------
<S> <C> <C> <C>
Product sales $ 12.5 million $ 12.4 million $ 148,800
Service $ 4.2 million $ 1.8 million $ 2.5 million
</TABLE>
The change in gross profit from product sales is primarily attributable to the
increase in product sales described above and a larger proportion of products
sold directly to end users.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 60.1%
to $1,493,200 in 2000 compared to research and development expenses of $932,600
in 1999. The increase is primarily attributable to software development costs of
$500,700 and additional costs of $60,000 relating to the design of new hardware
product. The Company has expensed all software development costs as
technological feasibility has not been achieved.
SELLING AND MARKETING. Selling and marketing expenses increased by 122% to $5.6
million in 2000 compared to selling and marketing expenses of $2.5 million in
1999. The increase is primarily attributable to sales and marketing costs
of $1.2 million where additional personnel were employed to expand the direct
sales force and increase advertising costs associated with growing the business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
36.1% to $8.9 million in 2000 compared to general and administrative expenses of
$6.5 million in 1999. The change is due to an increase in general and
administrative expenses relating to DTI of $707,000 and RCS of $380,000, an
increase in amortization of goodwill of $1.5 million offset by a decrease of
general and administrative expenses relating to Javelin and CCI of $2 million.
The increase in the amortization of goodwill resulted from the acquisitions of
RGB, Jade, DTI and RCS. The decrease of general and administrative expenses at
Javelin and CCI resulted from the continued consolidation of administrative
functions.
INTEREST EXPENSE. Interest expense decreased by $190,300 to $424,900 in 2000
compared to interest expense of $615,200 in 1999. The decrease is due to the use
of a portion of the proceeds from the follow-on offerings completed in October
1998 and February 1999 to repay certain indebtedness.
INCOME TAXES. Provision for federal, state and foreign income taxes decreased by
$1.1 million to $278,000 in 2000 compared to a provision for income tax of $1.4
million in 1999. The decrease is attributable to the overall decrease in income
before income taxes of $2.9 million as well as
19
<PAGE>
increases in income from the Company's foreign subsidiaries operating in
jurisdictions with lower income tax rates than those in the United States.
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, the Company and its U.S. subsidiaries obtained a credit
facility of $7.5 million from a financial institution. The credit facility
expires on June 8, 2001 and consists of a line of credit of up to $6.0 million
and a term loan of $1.5 million. Under the line of credit, the Company may
borrow up to 80% of eligible receivables (as defined) and 50% of eligible
inventory (as defined) with monthly interest based upon the prime rate of a
national financial institution plus 1.75% (10.75% as of March 31, 2000). As of
March 31, 2000 borrowings outstanding under the line amounted to $2.3 million
with approximately $2.2 million available for future borrowings. Borrowings
under the term loan are collateralized by substantially all of the assets of the
Company and bear interest at 13.65% per annum. The Company is required to pay
$25,000 per month under the term loan with all unpaid principal and interest due
on June 8, 2001.
Jade has a line of credit facility of $1.8 million from an unrelated financial
institution. Borrowings under the line of credit are collateralized by all of
the assets of Jade and bear interest at 2% over the U.K. Base rate (as defined).
As of March 31, 2000, there were no borrowings outstanding under the line.
In November 1998, the Company completed a public offering of 1,395,000 shares of
its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.1 million. Proceeds to the Company were used to repay
borrowings under the revolving line of credit of approximately $3.2 million, to
purchase all of the outstanding common stock of RGB and Jade and for general
corporate purposes.
In February 1999, the Company completed a public offering of 2,375,000 shares of
its common stock at $12.25 per share, netting proceeds to the Company of
approximately $26.9 million. Proceeds to the Company were used for working
capital and general corporate purposes.
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 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 3).
As of March 31, 2000, the Company had cash and cash equivalents of $11.4 million
and working capital of $34.9 million.
Cash used in operating activities for the nine months ended March 31, 2000
amounted to $604,300 and consisted primarily of increases in inventories and
income taxes payable and a
20
<PAGE>
decrease in trade accounts payable. Cash used in investing activities for the
nine months ended March 31, 2000 amounted to $3.8 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 $10.2 million and consisted primarily of
the proceeds from the issuance of preferred stock completed in March 2000.
The Company recently announced the formation of Aspeon Solutions, Inc., a wholly
owned subsidiary, focusing on delivering mission-critical business applications
customized to meet industry-specific needs. It is the intention of the Aspeon
Solutions to expand into several vertical markets. Such expansion will require
significant capital investments. If the Company or its subsidiary is unable to
secure the required capital, the expansion of the subsidiary will have to be
curtailed and/or abated. The Company believes that, except for the expansion of
Aspeon Solutions, Inc., it has adequate financial resources to meet its capital
requirements for the next twelve months.
NEW ACCOUNTING STANDARD
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.
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.
21
<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.
May 12, 2000 /s/ Richard P. Stack
- -------------------------- ---------------------------
Date Richard P. Stack
Chief Executive Officer
and President
May 12, 2000 /s/ Horace M. Hertz
- -------------------------- ---------------------------
Date Horace M. Hertz
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 11,358,400
<SECURITIES> 2,041,600
<RECEIVABLES> 14,730,300
<ALLOWANCES> 264,300
<INVENTORY> 16,595,400
<CURRENT-ASSETS> 46,763,900
<PP&E> 9,540,200
<DEPRECIATION> 3,998,700
<TOTAL-ASSETS> 87,999,900
<CURRENT-LIABILITIES> 11,836,000
<BONDS> 1,013,100
9,641,000
0
<COMMON> 93,800
<OTHER-SE> 65,416,000
<TOTAL-LIABILITY-AND-EQUITY> 87,999,900
<SALES> 19,957,200
<TOTAL-REVENUES> 19,957,200
<CGS> 15,523,900
<TOTAL-COSTS> 21,798,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 147,400
<INCOME-PRETAX> (1,999,000)
<INCOME-TAX> (779,600)
<INCOME-CONTINUING> (1,219,400)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,993,700)
<CHANGES> 0
<NET-INCOME> (5,213,100)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
