<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 December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number: 0-21477
ASPEON, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 52-1945748
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17891 CARTWRIGHT ROAD
IRVINE, CALIFORNIA 92614
(Address of Principal Executive Offices) (Zip Code)
(949) 440-8000
(Issuer's Telephone Number, Including Area code)
JAVELIN SYSTEMS, INC.
-------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No X
------- -------
As of January 31, 2000, there were 9,115,771 shares of the Registrant's common
stock, par value $.01 per share 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 February 14, 2000 under the name
Javelin Systems, Inc. (the "Original Filing"). The disclosures responsive to
all other Items in the Original Filing are not affected by this Amendment but
continue as set forth in the Original Filing without change. Notwithstanding
the foregoing, the disclosures in the Original Filing, as amended by this
Amendment, are subject to updating and supplementation by the disclosures
contained in the filings made by the Company with the Commission for any
period subsequent to the six-month period ended December 31, 1999 covered by
the Original Filing.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASPEON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999*
------------ ------------
(As restated, Note 2)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,798,900 $ 5,641,500
Investments in securities 3,745,000 7,472,000
Accounts receivable - net 17,315,900 16,275,500
Inventories 17,129,000 14,565,700
Prepaid and other current assets 1,929,000 1,354,400
------------ ------------
Total current assets 45,917,800 45,309,100
Property and equipment, net 5,196,800 2,861,400
Goodwill 28,842,300 25,755,200
Other intangible assets 1,092,300 1,266,000
Other assets, net 841,200 891,200
------------ ------------
Total assets $ 81,890,400 $ 76,082,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,788,100 $ 2,056,600
Accounts payable 10,618,000 7,681,800
Accrued expenses 2,296,300 2,446,200
Current maturities of long-term debt 300,000 300,000
Customer deposits 214,000 278,000
Deferred revenues 1,538,200 397,500
Income taxes payable 575,300 1,517,400
------------ -----------
Total current liabilities 17,329,900 14,677,500
------------ -----------
Purchase price payable for acquisitions - 874,000
Long-term debt, net of current portion 1,329,500 900,000
Other 28,600 21,000
Stockholders' equity:
Preferred stock, $0.01 par value:
1,000,000 shares authorized
No shares issued and outstanding
shares--none - -
Common stock, $0.01 par value:
20,000,000 shares authorized
9,115,771 and 8,887,203 issued and outstanding 91,200 88,900
Additional paid-in capital 57,928,600 55,800,700
Deferred compensation - (6,700)
Retained earnings 5,229,900 3,799,700
Accumulated other comprehensive loss (47,300) (72,200)
------------ -----------
Total stockholders' equity 63,202,400 59,610,400
------------ -----------
Total liabilities and stockholders' equity $81,890,400 $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 ENDED MONTHS SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
(As restated, Note 2) (As restated, Note 2)
<S> <C> <C> <C> <C>
Revenues:
Products $ 16,835,100 $ 13,997,500 $ 30,023,400 $ 25,585,400
Services 7,649,100 3,870,000 14,426,300 5,214,300
------------ ------------ ------------ ------------
Total revenues 24,484,200 17,867,500 44,449,700 30,799,700
------------ ------------ ------------ ------------
Cost of revenues:
Products 11,846,700 10,165,400 21,049,800 18,321,700
Services 5,660,500 2,940,400 11,074,300 4,050,900
------------ ------------ ------------ ------------
Total cost of sales 17,507,200 13,105,800 32,124,100 22,372,600
------------ ------------ ------------ ------------
Gross profit 6,977,000 4,761,700 12,325,600 8,427,100
------------ ------------ ------------ ------------
Operating expenses:
Research and development 514,500 285,200 983,700 583,200
Selling and marketing 2,030,700 1,038,700 3,762,700 1,405,400
General and administrative 2,699,600 2,241,900 4,967,300 4,217,600
------------ ------------ ------------ ------------
Total operating expenses 5,244,800 3,565,800 9,713,700 6,206,200
------------ ------------ ------------ ------------
Income from operations 1,732,200 1,195,900 2,611,900 2,220,900
Interest expense (199,600) (234,800) (429,300) (469,300)
Interest income 71,200 7,600 150,800 11,300
Other income (expense) 11,200 (9,700) 11,200 14,700
------------ ------------ ------------ ------------
Income before income taxes 1,615,000 959,000 2,344,600 1,777,600
Provision for income taxes (629,900) (385,000) (914,400) (731,000)
------------ ------------ ------------ ------------
Net income $ 985,100 $ 574,000 $ 1,430,200 $ 1,046,600
============ ============ ============ ============
Net income per common share:
Basic $ 0.11 $ 0.11 $ 0.16 $ 0.22
============ ============ ============ ============
Diluted $ 0.11 $ 0.11 $ 0.16 $ 0.22
============ ============ ============ ============
Shares used in computing net
income per share:
Basic 9,020,679 5,251,180 8,957,059 4,691,368
============ ============ ============ ============
Diluted 9,148,186 5,390,930 9,161,315 4,831,333
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(As restated, Note 2)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
ADDITIONAL DEFERRED EARNINGS OTHER
COMMON STOCK PAID IN STOCK-BASED (ACCUMULATED) COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS TOTAL
--------- -------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1999 8,887,203 $ 88,900 $55,800,700 $ (6,700) $ 3,799,700 $ (72,200) $59,610,400
Exercise of stock options 44,600 500 389,000 389,500
Shares issued in connections
with RGB/Jade earnout 183,968 1,800 1,746,200 1,748,000
Amortization of deferred
stock-based compensation 6,700 6,700
Offering costs (7,300) (7,300)
Comprehensive income 1,430,200 24,900 1,455,100
----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 9,115,771 $ 91,200 $57,928,600 $ -- $ 5,229,900 $ (47,300) $63,202,400
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
ASPEON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
---- ----
(As restated, Note 2)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,430,200 $ 1,046,600
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 2,196,800 530,600
Amortization of deferred compensation 6,700 17,000
Deferred rent expense 7,600 2,400
Non-cash allowances (254,000) 192,200
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (582,700) (4,536,000)
Inventories (2,416,300) (7,577,000)
Other current assets (516,300) 58,200
Other assets 65,300 (61,700)
Accounts payable 2,681,800 4,687,600
Accrued expenses (187,800) 689,300
Income taxes payable (942,100) 567,500
Customer deposits (64,000) (548,400)
Deferred revenues 728,200 (129,100)
------------ ------------
Net cash provided by (used in) operating activities 2,153,400 (5,060,800)
------------ ------------
INVESTING ACTIVITIES
Purchase of equipment (1,715,200) (685,700)
Cash paid in connection with acquisitions (3,759,100) (1,889,800)
Sales of securities 3,727,000 -
------------ ------------
Net cash used in investing activities (1,747,300) (2,575,500)
------------ ------------
FINANCING ACTIVITIES
Net (repayments) under line of credit (268,500) (341,000)
Proceeds from issuances of notes payable (9,100) 5,800
Repayment of notes payable (249,700) (180,500)
Deferred offering costs - (29,400)
Proceeds from public offerings - 8,146,400
Exercise of stock options, net of offering costs 383,700 70,400
------------ ------------
Net cash provided by (used in) financing activities (143,600) 7,671,700
------------ ------------
Effects of exchange rate changes on cash (105,100) (35,400)
------------ ------------
Net increase (decrease) in cash and cash equivalents 157,400 -
Cash and cash equivalents at beginning of period 5,641,500 -
------------ ------------
Cash and cash equivalents at end of period $ 5,798,900 $ -
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax paid $ 1,804,000 $ 161,300
============ ============
Interest paid
$ 200,000 $ 319,100
============ ============
</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 is a leading provider of retail foodservice technology solutions and
services that enable restaurants and retailers to capture, analyze, disseminate
and use information throughout the enterprise, from the point-of-sale (POS) cash
register terminal to the back office to an organization's headquarters. Aspeon
designs, manufactures and markets open system touchscreen POS network-ready
hardware systems and provides POS systems integration services and software
solutions primarily for the foodservice and retail industries.
On November 1, 1996, Aspeon completed an initial public offering (the "IPO") of
850,000 shares of its common stock at $5.00 per share, netting proceeds of
approximately $3.2 million. Proceeds were used to repay debt with an outstanding
balance of approximately $745,000 and for general corporate purposes.
In December 1997, Aspeon acquired all of the outstanding common stock of POSNET
Computers, Inc.("Posnet") and CCI Group, Inc. ("CCI"). Posnet and CCI provide
full turn-key systems integration services, including system consulting,
staging, training, deployment, product support and maintenance.
In March and April 1998, Aspeon established three international subsidiaries to
expand its sales and distribution channels in the international marketplace. The
international subsidiaries are: Aspeon Systems (Europe) Limited ("Aspeon
Europe") headquartered in England; Aspeon Systems International Pte Ltd ("Aspeon
Asia") headquartered in Singapore; and Aspeon Systems Australia Pty Limited
("Aspeon Australia") headquartered in Australia.
In May 1998, Aspeon Asia acquired all of the outstanding common stock of Aspact
IT Services (Singapore) Pte Ltd ("Aspact"). Aspact is headquartered in Singapore
and provides consulting and system integration services.
In November 1998, the Company completed a public offering of 1,395,000 shares of
its common stock at $6.75 per share, netting proceeds to the Company of
approximately $8.1 million. Proceeds to the Company were used to repay
borrowings under a revolving line of credit of approximately $3.2 million, to
purchase all of the outstanding common stock of RGB/Trinet Limited ("RGB") and
Jade Communications Ltd ("Jade"), as described below, and for general corporate
purposes.
In November 1998, Aspeon acquired all of the outstanding common stock of RGB and
Jade. RGB and Jade are headquartered in England and provide complementary Wide
Area Networking (WAN) products and services primarily to large retail,
hospitality, and telecommunications companies.
In February 1999, the Company completed a public offering of 2,375,000 shares of
its common stock at $12.25 per share, netting proceeds to the Company of
approximately $26.9 million. Proceeds to the Company were used to purchase the
outstanding common stock of Dynamic Technologies, Inc. ("DTI") and SB Holdings,
Inc. ("SB"), as described below, and for working capital and general corporate
purposes.
In April 1999, the Company acquired all of the outstanding capital stock of DTI
and all of the outstanding capital stock of SB. DTI and SB provide custom
Internet/Intranet software and services.
In August 1999, the Company acquired all of the outstanding capital stock of
Restaurant Consulting Services, Inc. ("RCS") as described in Note 3. RCS
implements, operates and supports packaged software applications for the
restaurant industry.
Hereinafter, Aspeon and its subsidiaries are referred to as the "Company."
6
<PAGE>
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the SEC. In the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the accompanying unaudited consolidated financial statements
are reflected herein. All such adjustments are normal and recurring in
nature. Interim results are not necessarily indicative of the results for the
full year or for any future interim periods. For more complete financial
information, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-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>
DECEMBER 31, JUNE 30,
1999 1999
---- ----
(As restated, Note 2)
<S> <C> <C>
Raw materials $10,698,400 $ 7,195,600
Work-in-process 601,900 227,000
Finished goods 5,828,700 7,143,100
------------- -------------
$17,129,000 $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.
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.
7
<PAGE>
A reconciliation of basic and diluted net income per share for the three months
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
(As restated, Note 2)
<S> <C> <C> <C> <C>
NET INCOME $ 985,100 $ 985,100 $ 574,000 $ 574,000
---------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 9,020,679 9,020,679 5,251,180 5,251,180
---------------------------------------------------------------------------------------------
Additional shares due to potential
exercise of stock options - 127,507 - 139,750
---------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding 9,020,679 9,148,186 5,251,180 5,390,930
---------------------------------------------------------------------------------------------
Net income per share $ 0.11 $ 0.11 $ 0.11 $ 0.11
---------------------------------------------------------------------------------------------
</TABLE>
COMPREHENSIVE INCOME
Effective in the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components in the Company's consolidated
financial statements. Comprehensive income is defined in SFAS 130 as the
change in equity (net assets) of a business enterprise during the period from
transactions and other events and circumstances from non-owner sources. Total
comprehensive income was $1,074,900 (as restated, Note 2) and $540,000 for
the three months ended December 31, 1999 and 1998, respectively, and
$1,455,100 (as restated, Note 2) and $1,027,700 for the six months ended
December 31, 1999 and 1998. The primary difference from net income as
reported is the change in the cumulative translation adjustment.
SEGMENT INFORMATION
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position but did affect the disclosure of segment information.
RECLASSIFICATIONS
Certain amounts in fiscal 1999 have been reclassified to conform to the fiscal
2000 presentation.
<PAGE>
2. RESTATEMENT
The Company's previously reported results of operations for the three and six
months ended December 31, 1999 have been restated to reflect certain
accounting adjustments. The effects, increase or (decrease), of the
adjustments on the results of operations for the three and six months ended
December 31, 1999 are set forth in the following table:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
----- -----
December 31, 1999
<S> <C> <C>
Products revenues ..................... $ 177,600 $ (91,900)
Products cost of revenues ............. 118,200 (72,500)
--------- ---------
Gross profit .......................... 59,400 (19,400)
Total operating expenses .............. (84,900) 79,600
---------- ---------
Income from operations ................ 144,300 (99,000)
Other income .......................... (259,800) (268,500)
Provision for income taxes ............ (45,000) (143,300)
---------- ---------
Net income ............................ $ (70,500) $(224,200)
========== ==========
Basic net income per share ............ $(0.01) $(0.02)
========== ==========
Diluted net income per share .......... $(0.01) $(0.02)
========== ==========
</TABLE>
Products revenues and products cost of revenues for the six months ended
December 31, 1999 were reduced primarily due to the deferral of revenues
associated with POS units shipped by the Company during the three months
ended December 31, 1999 for which installation work remained as of the end of
the period. Product revenues and cost of revenues for the three months ended
December 31, 1999 increased due to the completion of installation work during
the quarter related to revenues similarly deferred at September 30, 1999, in
excess of amounts deferred at December 31, 1999. Total operating expenses in
the three and six months ended December 31, 1999 were increased primarily to
reflect the impact of increased amortization of intangibles due to purchase
accounting adjustments and expensing of costs previously capitalized by the
Company offset, in part, by the reclassification of a certain recovered
accounts receivable balance previously written-off by the Company from other
income to operating expenses.
8
<PAGE>
3. ACQUISITION OF RCS
In August 1999, the Company acquired all of the outstanding capital stock of
RCS. RCS implements, operates and supports packaged software applications for
the restaurant industry. The aggregate purchase price for the RCS capital stock
consisted of $3,054,400 in cash (including acquisition costs of $21,300). The
Company may, in the future, be required to pay an additional $1,516,600 in cash
and issue shares of its common stock with a market value of up to $1,516,600
based upon the cumulative net profits of RCS during the twenty-four months
ending August 31, 2001. The acquisition has been accounted for by the purchase
method, and accordingly, the results of operations of RCS will be included with
those of the Company commencing on the date of acquisition. The purchase price
resulted in excess of purchase price over the fair value of net assets acquired
of approximately $2,706,200. Such excess is being amortized on a straight-line
basis over 10 years.
9
<PAGE>
4. STOCKHOLDERS' EQUITY
During the six months ended December 31, 1999, 44,600 shares of common stock
were issued upon the exercise of stock options with a weighted average exercise
price of $8.73 per share and 183,968 shares of common stock with a value of
$1,748,000 were issued in connection with earnout provisions of the acquisition
of RGB and Jade.
5. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The segments
and a description of their businesses follows:
The Research and Development segment provides all research and development
activities for the other business segments.
The POS Products segment designs, manufactures and markets open system
touchscreen point-of-sale (POS) network-ready hardware systems. These systems
are sold on a stand-alone basis or integrated as part of an end-to-end solution.
The Solutions Services segment provides retail foodservice technology solutions
and services that enable restaurants and retailers to capture, analyze,
disseminate and use information throughout the enterprise, from the
point-of-sale (POS) cash register terminal to the back office to an
organization's headquarters.
The ASP Services segment provides pre-integrated business application services
customized to meet industry specific needs of the foodservice and retail
industry.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
inter-segment revenues. The Company does not allocate corporate-headquarters
costs or research and development costs to the operating segments. Resources
for research and development are allocated based on budgets. The Company
evaluates the performance of its segments and allocates resources to them
based on net income (loss). Prior and current year information have been
restated to conform to segment information as reported in the Company's Form
10-K for the year ended June 30, 2000.
Information about the Company's reportable segments for the three months ended
December 31, 1999 and 1998 follow (1999 amounts have been restated to reflect
the adjustments described in Note 2).
<TABLE>
<CAPTION>
RESEARCH AND POS SOLUTION ASP
DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL
----------- -------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
1999
Revenues - $15,827,300 $ 9,801,000 $3,606,100 $29,234,400
Net income (loss) $ (325,300) $ 843,000 $ 511,400 $ 74,200 $ 1,103,300
Total assets - $61,185,900 $14,980,400 $5,724,100 $81,890,400
1998
Revenues - $ 9,764,500 $ 8,983,200 - $18,747,700
Net income (loss) $ (170,700) $ 633,500 $ 240,800 - $ 703,600
Total assets - $19,165,000 $23,778,800 - $42,943,800
</TABLE>
10
<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 December 31, 1999 and 1998 is as follows (1999 amounts have been
restated to reflect the adjustments described in Note 2):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues
Total segment revenues $ 29,234,400 $ 18,747,700
Elimination of inter-segment revenues (4,750,300) (880,200)
------------ ------------
Consolidated revenues $ 24,484,200 $ 17,867,500
============ ============
Net income
Total segment net income $ 1,103,600 $ 703,600
Elimination of intersegment
gross profit net of income taxes 133,700 145,700
Elimination of non-segment
expenses, net of income taxes (252,200) (275,300)
------------ ------------
Consolidated net income $ 985,100 $ 574,000
============ ============
</TABLE>
Specified items included in segment profit/loss for the quarters ended December
31, 1999 and 1998 (1999 amounts have been restated to reflect the adjustments
described in Note 2):
<TABLE>
<CAPTION>
RESEARCH AND POS SOLUTION ASP
DEVELOPMENT PRODUCTS SERVICES SERVICES TOTAL
------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
1999
Interest expense - $ 186,300 $ 12,100 $ 1,200 $ 199,600
Interest income - $ 71,200 - - $ 71,200
Depreciation and amortization expense - $ 278,200 $ 273,000 $ 705,700 $ 1,256,900
Income tax expense (benefit) $ (175,000) $ 467,800 $ 260,900 $ 76,200 $ 629,900
Expenditures for additions to long-lived
assets - $ 409,000 $ 1,005,400 $ 629,000 $ 2,043,400
1998
Interest expense - $ 191,500 $ 43,300 - $ 234,800
Interest income - $ 7,600 - - $ 7,600
Depreciation and amortization expense - $ 141,000 $ 144,200 - $ 285,200
Income tax expense $ (114,500) $ 425,000 $ 161,500 - $ 472,000
Expenditures for additions to long-lived
assets - $ 202,800 $ 3,019,300 - $ 3,222,100
</TABLE>
11
<PAGE>
Revenues and long-lived asset information by geographic area as of and for the
quarters ended December 31, 1999 and 1998 (1999 amounts have been restated to
reflect the adjustments described in Note 2):
<TABLE>
<CAPTION>
UNITED STATES EUROPE ASIA AUSTRALIA TOTAL
------------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 15,815,600 $ 7,056,600 $ 830,000 $ 782,000 $ 24,484,200
Long-lived assets $ 27,833,300 $ 7,063,900 $ 1,109,000 $ 144,400 $ 36,150,600
1998
Revenues $ 11,505,000 $ 5,700,000 $ 270,800 $ 391,700 $ 17,867,500
Long-lived assets $ 9,377,900 $ 3,177,700 $ 370,900 $ 43,000 $ 12,969,500
</TABLE>
6. SUBSEQUENT EVENTS
MONUMENT ACQUISITION
In March 2000, the Company acquired all of the outstanding capital stock of
Monument Software Corporation ("Monument"). The aggregate purchase price for
Monument consisted of $1,579,000 in cash (including acquisition costs of
$79,000) and 104,802 shares of common stock with a value of $2,060,700.
MANDATORILY REDEEMABLE SERIES A PREFERRED STOCK
In March 2000, the Company completed a private placement in which the Company
sold an aggregate of 10,000 shares of Series A Convertible Exchangeable
Preferred Stock (the "Preferred Stock"), a warrant to acquire 583,334 shares of
common stock of the Company at an initial exercise price of $17.00 per share and
a warrant to acquire 1,250,000 shares of common stock of Aspeon Solutions, Inc.,
a wholly-owned subsidiary of the Company, at an exercise price of $5.00 per
share. Proceeds to the Company amounted to $9,568,400, net of $431,600 in
issuance costs.
<PAGE>
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>
<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. As a result of the
defaults, the Company will be required to accrete the Preferred Stock to its
redemption value of $9,850,000, plus accrued but unpaid dividends at the 1.5%
default rate, in the second quarter of fiscal 2001.
The Company currently is negotiating with the Preferred Stockholders to attempt
to obtain a waiver of the defaults under the terms of the Preferred Stock and
related agreements. However, no assurances can be made that the Company will be
successful in its efforts to obtain a waiver of the defaults. If the Company is
not able to obtain a waiver of defaults from the Preferred Stockholders, and the
Preferred Stockholders elect to pursue the default remedies described above, the
Company would be forced to seek financing to obtain the funds necessary to pay
to the Preferred Stockholders the redemption amount of the Preferred Stock and
the accrued 1.5% penalty amounts. If the Company is not able to obtain financing
on satisfactory terms, the Company may be required to terminate its
12
<PAGE>
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 of the Company's business, financial condition and
results of operations.
NOTES RECEIVABLE FROM OFFICER
In April and August 2000, the Company executed a $300,000 unsecured and $400,000
secured note receivable (collectively the "Notes") with its CEO. The $400,000
note was collateralized by certain assets of the CEO and bore interest at the
rate of 6.6% annum. The principal and interest of the Notes were paid in full in
September 2000.
LINE OF CREDIT COVENANT DEFAULT
At June 30, 2000, the Company was in default of certain non-financial covenants
under its line of credit facility. In October 2000, the Company obtained a
waiver on all defaults through June 30, 2000 pursuant to certain terms and
conditions including accelerating term loan repayments, accruing interest on the
term loan at the default rate of 11.5%, and limiting borrowings to approximately
$3,538,000.
SALE OF ASPACT
In August 2000, the Company executed a sale agreement with the then current
director of Aspact (the "Purchaser"). The initial purchase price is $350,000
that is payable to the Company in monthly installments of $14,600 commencing in
July 2001. In the event the Purchaser consummates an initial public offering or
disposes of all or substantially all of Aspact's common stock, the Purchaser
will be required to pay: a) the unpaid balance of the initial consideration and
b) 50% of the net proceeds received from the initial public offering less the
amount paid under a), in an amount not to exceed $200,000. Concurrent with the
sale agreement, the Purchaser was terminated as an employee of the Company.
SUSPENSION OF TRADING
In October 2000, the Nasdaq Stock Market ("Nasdaq") suspended trading in the
Company's Common Stock while it sought additional information from the
Company. On October 11, 2000, Nasdaq sent a letter to the Company stating
that that Company's Common Stock would be delisted from Nasdaq if the Company
did not file its Form 10-K for the fiscal year ended June 30, 2000 with the
Securities and Exchange Commission ("SEC") by October 18, 2000. The Form 10-K
was not filed with the SEC by the October 18, 2000 deadline. On November 9,
2000, the Company participated in a hearing before the Nasdaq Listing
Qualifications Panel which was held for the purpose of evaluating whether the
Company's Common Stock may continue to be listed on Nasdaq or if it will be
delisted. On December 11, 2000, the Company received a letter from the Nasdaq
stating the Company must be in compliance with all SEC filings by December
18, 2000.
LITIGATION
In October 1999, the Company and two former officers of a subsidiary of the
Company were named as defendants in a breach of contract and intentional tort
action brought by an individual who claims rights to computer software products
once offered for sale by subsidiaries of the Company. The plaintiff is seeking
payment of one half of all the sales proceeds of the commercial software product
line of "Special Delivery" sold since February 1997 and makes claim to one half
of the asset purchase price (as apportioned to the "Special Delivery" asset)
paid by the Company to the shareholders of the subsidiary in April 1999. The
Company and its subsidiaries have indemnification rights against one of the
selling shareholders in connection with his representations and warranties made
about "Special Delivery" in various documents. Although the Company and its
subsidiaries support the selling shareholder's position as it relates to the
plaintiff in this action, cross-claims have been filed against the selling
shareholder, for indemnification and contribution, for further protection.
Management is unable to determine whether the outcome of this complaint will
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
13
<PAGE>
In October and November 2000, the Company, the Company's Chief Executive
Officer, and its former Chief Financial Officer were sued in the United States
District Court for the Central District of California for alleged violations of
the Securities Exchange Act of 1934. The plaintiffs seek class action status.
The complaints do not specify the amount of damages sought. According to press
releases, other plaintiffs are purported to have filed similar lawsuits against
the Company and its officers or former officers. Management is unable to
determine whether the outcome of these complaints or associated legal costs will
have a material impact on the Company's consolidated financial position, results
of operations, or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
This Quarterly Report on Form 10-Q 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 filed on November 30, 2000.
This discussion contains forward-looking statements that include risk and
uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of any
number of factors, including those set forth under the heading "Risk Factors"
in Item I of the Company's Form 10-K filed on November 30, 2000. Such
forward-looking statements represent management's current expectations and
are inherently uncertain. Investors are warned that actual results may differ
from management's expectations. The Company assumes no obligation to update
the forward-looking information to reflect actual results or changes in the
factors affecting such forward-looking information.
BUSINESS
Aspeon, Inc. ("Aspeon"), formerly known as Javelin Systems, Inc., was
incorporated in the State of Delaware on September 19, 1995 under the name of
Sunwood Research, Inc. Aspeon Solutions, Inc., a wholly-owned subsidiary, is
an application service provider ("ASP") providing services which enable
software applications to be deployed, managed, supported and upgraded from
centrally located servers, rather than individual computers. Javelin Systems,
a division of Aspeon, is a provider of integrated touchscreen computers and
system integration services to the foodservice and retail industries.
Aspeon's background as a developer of point of sale systems, communications
solutions, and enterprise applications, has allowed the Company to gain
contracts in the ASP market.
In December 1997, Aspeon acquired CCI Group, Inc. and Posnet Computers; both
companies focused on providing point of sale solutions to large restaurant
chains including White Castle, AFC, Red Robin and Jamba Juice. These
acquisitions formed the basis of Aspeon's POS Products and Solution Services
businesses.
Aspeon began its globalization initiative in 1998, first opening Aspeon sales
and support offices in the United Kingdom (UK) and Australia. In November 1998,
Aspeon acquired RGB/Jade, a networking solutions provider with customers such as
Marks and Spencer, WH Smith, Body Shop and Bass pubs. Although primarily retail
focused, Jade has relationships with major non-retail customers including
Reuters and British Telecom. Aspeon launched another UK subsidiary, Teneo, in an
effort to expand its service management and wide area network solutions
business.
By late 1998, Aspeon was positioned globally to provide both point of sale and
communications solutions to the retail and restaurant industries, but realized
it lacked the expertise in enterprise software and infrastructure, which 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
14
<PAGE>
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 provider of hosted messaging,
customer relationship management, and custom software solutions to a variety of
customers in the Delaware Valley area including Aventis and Right Management.
This acquisition served as the platform for Aspeon's ASP Services offering by
providing application development, implementation, and support capabilities.
In August 1999, Aspeon acquired Restaurant Consulting Services ("RCS"), a
provider of technology outsourcing services including Oracle Financials hosting
and communications management to customers such as Champs Entertainment, Inc.,
Fuddruckers, Chart House, and Xando-Cosi.
The Company has attempted to assemble a high caliber management team and build
an ASP infrastructure designed to rapidly scale as companies increasingly turn
to outsourcers, like Aspeon, to satisfy their internal information technology
("IT") needs.
All of the acquisitions were accounted for by the purchase method, and
accordingly, the results of operations of these subsidiaries have been included
with those of the Company commencing on the dates of acquisition. Goodwill
resulting from these acquisitions is amortized on a straight-line basis over
periods of 3 to 25 years.
The Company's principal business activities are:
(1) POS Products - designs, manufactures and markets open system
touchscreen POS network-ready hardware systems. These systems can
be sold on a stand-alone basis or integrated as part of an
end-to-end solution.
(2) Solutions Services - provides retail foodservice technology
solutions and services that enable restaurants and retailers to
capture, analyze, disseminate and use information throughout the
enterprise, from the POS cash register terminal to the back office
to an organization's headquarters.
(3) ASP Services - provides pre-integrated business application
services customized to meet industry specific needs of the
foodservice and retail industry.
REVENUES
POS PRODUCTS
POS Products revenues consist primarily of sales of POS hardware, software and
peripheral equipment including printers and personal computers. The replacement
cycle for hardware in the POS foodservice industry is generally long, and
consequently, revenues for hardware products to a specific end-user tend to be
non-recurring. The Company may experience significant variations in POS Products
revenue in any quarterly or annual period.
SOLUTIONS SERVICES
Solutions Services revenues consist primarily of staging and design,
installation, maintenance and repair and consulting services. Maintenance and
repair contract Solution Services tend to be recurring while services such as
staging, design and installation tend not to be recurring. Installation services
are not always a required service to be provided for in connection with the sale
of the Company's POS Products. Maintenance services are typically provided for
under the terms of a single or multi-year maintenance agreement.
ASP SERVICES
ASP Services revenues consists primarily of information technology outsourcing,
hosting, remote services, help desk and consulting services. Revenues are
classified into two categories: recurring or multi-year contractually based
revenue, and revenue generated via non-recurring agreements. Services such as
consulting tend not to be recurring.
ASP Services also include certain purchases of equipment procured by the Company
on behalf of a customer. Typically, these purchases are passed through to the
customer with a nominal markup on the cost to the Company.
15
<PAGE>
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 December 31,
1999 and 1998. The following table sets forth certain statements of
operations data as a percentage of total revenues for the periods indicated:
16
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 (RESTATED) COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1998
The following discussion sets forth the historical results of operations and
financial condition of the Company for the three months ended December 31,
1999 and 1998. The following table sets forth certain statements of
operations data as a percentage of total revenues for the periods indicated
(1999 amounts restated to reflect adjustments described in Note 2):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
------- --------
<S> <C> <C>
Revenues:
POS Products 68.8% 78.3%
Solutions Services 16.5 21.7
ASP Services (1) 14.7 -
------- --------
Total revenues 100.0 100.0
------- --------
Cost of revenues:
POS Products (2) 70.4 72.6
Solutions Services (2) 84.7 76.0
ASP Services (1)(2) 62.1 -
------- --------
Total cost of revenues 71.5 73.3
------- --------
Gross profit 28.5 26.7
------- --------
Operating expenses:
Research and development 2.1 1.6
Selling and marketing 8.3 5.8
General and administrative 11.0 12.6
------- --------
Total operating expenses 21.4 20.0
------- --------
Income from operations 7.1 6.7
Interest expense (0.8) (1.3)
Interest income 0.3 -
Other income - (0.1)
Provision for income taxes (2.6) (2.1)
------- --------
Net income 4.0% 3.2%
======= ========
</TABLE>
(1) ASP Services for the three months ended December 31, 1999 includes
approximately $0.5 million and $0.4 million, respectively, of non-POS
equipment 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 $2.8
million, or 20.3%, to $16.8 million for the three months ended December 31,
1999 compared to $14.0 million for the same period a year ago. As a
percentage of total revenues, POS Product sales accounted for 68.8% and 78.3%
for the three months ended December 31, 1999 and 1998, respectively. The
increase reflects the continued maturation of the Company's indirect
distribution channels and increased POS unit sales in the Javelin division.
REVENUES - SOLUTIONS SERVICES. Revenues from Solution Services increased $0.2
million, or 4.5%, to $4.0 million for the three months ended December 31,
1999 compared to $3.8 million for the same period a year ago. As a percentage
of total revenues, Solutions Services accounted for 16.5% and 21.7%
for the three months ended December 31, 1999 and 1998, 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 $3.6 million
for the three months ended December 31, 1999. As a percentage of total
revenues, ASP Services accounted for 14.7% for the three months ended
December 31, 1999. ASP Services revenues reflect the impact of the Company's
April 1999 acquisition of DTI coupled with its August 1999 acquisition of RCS.
17
<PAGE>
GROSS PROFIT. Gross profit increased 2.2 million, or 46.5%, to $7.0 million
for the three months ended December 31, 1999 compared to gross profit of $4.8
million for the same period a year ago. The increase is comprised of the
following (1999 amounts restated to reflect adjustments described in Note 2):
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/
DECEMBER 31, (DECREASE)
1999 1998 $ %
---- ---- - -
<S> <C> <C> <C> <C>
POS Products $5.0 $3.8 $ 1.2 31.6%
Solution Services $0.6 1.0 $(0.4) (40.0)%
ASP Services $1.4 - $ 1.4 -
</TABLE>
The increase in gross profit from POS Products sales is primarily
attributable to the increase in units sales described above coupled with a
larger proportion of units 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 for the three
months ended December 31, 1999 reflects gross profits 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 80.4%, to $0.5 million for the three months ended December 31,
1999 compared to $0.3 million for the same period a year ago. As a percentage
of total revenues, research and development expenses amounted to 2.1% and
1.6% for the three months ended December 31, 1999 and 1998, respectively. The
increase is primarily attributable to additional development costs relating
to the design of new POS Products hardware during the quarter.
SELLING AND MARKETING. Selling and marketing expenses increased $1.0 million,
or 95.5%, to $2.0 million for the three months ended December 31, 1999
compared to $1.0 million for the same period a year ago. As a percentage of
total revenues, selling and marketing expenses amounted to 8.3% and 5.8%, for
the three months ended December 31, 1999 and 1998, respectively. The increase
is primarily attributable to sales and marketing costs within the ASP
Services segment coupled with additional personnel employed to expand the
direct sales forces and increased advertising costs associated with the
growth of the business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$0.5 million, or 20.4%, to $2.7 million for the three months ended December
31, 1999 compared to $2.2 million for the same period a year ago. As a
percentage of total revenues, general and administrative expenses amounted to
11.0% and 12.5%, for the three months ended December 31, 1999 and 1998,
respectively. The increase is due to an increase in general and
administrative expenses associated with ASP Services of $0.8 million, an
increase in amortization of goodwill of $0.6 million offset, in part, by a
decrease of general and administrative expenses relating to POS Products and
Solutions Services of $0.6 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 POS Products and Solutions
Services resulted from the continued consolidation of administrative
functions.
INTEREST EXPENSE. Interest expense decreased $35,200 to $199,600 for the
three months ended December 31, 1999 compared with $234,800 for the same
period a year ago. The decrease is due to the use of a portion of the
proceeds from the October 1998 and February 1999 common stock public
offerings to repay certain indebtedness.
INTEREST INCOME. Interest income increased $63,600 to $71,200 for the three
months ended December 31, 1999 compared to $7,600 for the same period a year
ago. The increase primarily reflects the impact of interest earned on
invested proceeds from the Company's February 1999 common stock public
offering.
INCOME TAXES. Provision for federal, state and foreign income taxes increased
$244,900 to $629,900 for the three months ended December 31, 1999 compared to
$385,000 for the same period a year ago. The increase is attributable to the
overall increase in income before income taxes of $656,000 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
18
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1999 (RESTATED) AS COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998
The following discussion sets forth the historical results of operations and
financial condition of the Company for the six months ended December 31, 1999
and 1998. The following table sets forth certain statements of operations
data as a percentage of total revenues for the periods indicated (1999
amounts restated to reflect adjustments described in Note 2):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Revenues:
POS Products 67.5% 83.1%
Solutions Services 15.6 16.9
ASP Services (1) 16.9 -
------ ------
Total revenues 100.0 100.0
------ ------
Cost of revenues:
POS Products (2) 70.9 71.6
Solutions Services (2) 82.7 77.7
ASP Services (1)(2) 68.0 -
------ ------
Total cost of revenues 72.3 72.6
------ ------
Gross profit 27.7 27.4
------ ------
Operating expenses:
Research and development 2.2 1.9
Selling and marketing 8.5 4.6
General and administrative 11.2 13.7
------ ------
Total operating expenses 21.9 20.2
------ ------
Income from operations 5.8 7.2
Interest expense (0.9) (1.5)
Interest income 0.3 -
Other income - -
Provision for income taxes (2.1) (2.4)
------ ------
Net income 3.1% 3.3%
====== ======
</TABLE>
(1) ASP Services for the six months ended December 31, 1999 includes
approximately $1.6 million and $1.4 million, respectfully, 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 $4.4
million, or 17.3%, to $30.0 million for the six months ended December 31,
1999 compared to $25.6 million for the same period a year ago. As a
percentage of total revenues, POS Product sales accounted for 67.5% and
83.1% for the six months ended December 31, 1999 and 1998, 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.
REVENUES - SOLUTIONS SERVICES. Revenues from Solution Services increased $1.7
million, or 32.7%, to $6.9 million for the six months ended December 31, 1999
compared to $5.2 million for the same period a year ago. As a percentage of
total revenues, Solutions Services accounted for 15.6% and 16.9%
for the six months ended December 31, 1999 and 1998, 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 $7.5 million
for the six months ended December 31, 1999. As a percentage of total
revenues, ASP Services accounted for 16.9% for the six months ended December
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<PAGE>
31, 1999. ASP Services revenues reflect the impact of the Company's April
1999 acquisition of DTI coupled with its August 1999 acquisition of RCS.
GROSS PROFIT. Gross profit increased $3.9 million, or 46.3%, to $12.3 million
for the six months ended December 31, 1999 compared to gross profit of $8.4
million for the same period a year ago. The increase is comprised of the
following (1999 amounts restated to reflect adjustments described in Note 2):
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCREASE/
DECEMBER 31, (DECREASE)
1999 1998 $ %
---- ---- - -
<S> <C> <C> <C> <C>
POS Products $8.7 $7.2 $ 1.5 20.8%
Solution Services $1.2 1.2 $ - -
ASP Services $2.4 - $ 2.4 -
</TABLE>
The increase in gross profit from POS Products sales is primarily
attributable to the overall increase in the number of POS units sold through
the Javelin division coupled with a larger proportion of units sold at a
higher gross profit directly to end users. Gross profit from Solutions
Services reflects the impact of lower margins associated with one significant
customer contract obtained during fiscal 2000 offset, in part, by certain
higher margin consulting contracts. Gross profit from ASP Services for the
six months ended December 31, 1999 reflects gross profits associated with the
acquired operations of DTI and RCS in April 1999 and August 1999,
respectively.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.4
million, or 68.7%, to $1.0 million for the six months ended December 31, 1999
compared to $0.6 million for the same period a year ago. As a percentage of
total revenues, research and development expenses amounted to 2.2% and 1.9%
for the six months ended December 31, 1999 and 1998, 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 $2.4 million,
or 167.7%, to $3.8 million for the six months ended December 31, 1999
compared to $1.4 million for the same period a year ago. As a percentage of
total revenues, selling and marketing expenses amounted to 8.5% and 4.6%, for
the six months ended December 31, 1999 and 1998, respectively. The increase
is primarily attributable to sales and marketing costs within the ASP
Services segment coupled with additional personnel employed to expand the
direct sales forces and increased advertising costs associated with the
growth of the business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$0.8 million, or 17.8%, to $5.0 million for the six months ended December 31,
1999 compared to $4.2 million for the same period a year ago. As a percentage
of total revenues, general and administrative expenses amounted to 11.2% and
13.7%, for the six months ended December 31, 1999 and 1998, respectively. The
increase is due to an increase in general and administrative expenses
associated with ASP Services of $1.1 million, an increase in amortization of
goodwill of $1.0 million offset, in part, by a decrease of general and
administrative expenses relating to POS Products and Solutions Services. The
increase in the amortization of goodwill resulted from the acquisitions of
RGB, Jade, DTI and RCS. The decrease in general and administrative expenses
at POS Products and Solutions Services resulted from the continued
consolidation of administrative functions throughout the period.
INTEREST EXPENSE. Interest expense decreased $40,000 to $429,300 for the six
months ended December 31, 1999 compared with $469,300 for the same period a
year ago. The decrease is due to the use of a portion of the proceeds from
the October 1998 and February 1999 common stock public offering offerings to
repay certain indebtedness.
INTEREST INCOME. Interest income increased $139,500 to $150,800 for the six
months ended December 31, 1999 compared to $11,300 for the same period a year
ago. The increase primarily reflects the impact of interest earned on
invested proceeds from the Company's February 1999 common stock public
offering.
INCOME TAXES. Provision for federal, state and foreign income taxes increased
$183,400 to $914,400 for the six months ended December 31, 1999 compared to
$731,000 for the same period a year ago. The increase is attributable to the
overall increase in income before income taxes of $567,000 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
20
<PAGE>
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 December 31, 1999, 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.
In October 2000, The Nasdaq Stock Market ("Nasdaq") suspended trading in the
Company's Common Stock while it sought additional information from the
Company. On October 11, 2000, Nasdaq sent a letter to the Company stating
that that Company's Common Stock would be delisted from Nasdaq if the Company
did not file its Form 10-K for the fiscal year ended June 30, 2000 with the
Securities and Exchange Commission ("SEC") by October 18, 2000. The Form 10-K
was not filed with the SEC by the October 18, 2000 deadline. On November 9,
2000, the Company participated in a hearing before the Nasdaq Listing
Qualifications Panel which was held for the purpose of evaluating whether the
Company's Common Stock may continue to be listed on Nasdaq or if it will be
delisted. On December 11, 2000, the Company received a letter from the Nasdaq
stating the Company must be in compliance with all SEC filings by December
18, 2000. No assurances can be given that the
21
<PAGE>
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 December 31, 1999, the Company had cash and cash equivalents of $5.8
million and working capital of $28.5 million. As of September 30, 2000, the
Company had cash and cash equivalents of approximately $3.3 million.
Cash provided by operating activities for the six months ended December 31,
1999 amounted to $2.2 million and consisted primarily of income before
depreciation and amortization and increases in accounts payable offset by
increases in trade receivables and inventories. Cash used in investing
activities for the six months ended December 31, 1999 amounted to $1.7
million and consisted primarily of cash used to acquire the outstanding
common stock of RCS and the purchase of equipment net of proceeds from sales
of investments. Cash used in financing activities for the six months ended
December 31, 1999 amounted to $143,600 and consisted primarily of repayments
of borrowings under the line of credit and notes payable.
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 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
22
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a. The Annual Meeting of stockholder of the Company was held on December 22,
1999 (the "Annual Meeting").
b. Richard P. Stack and Robert Nichols were elected to serve as directors of
the Company at the Annual Meeting. In addition, the terms of Jay L. Kear and
Andrew F. Puzder continued after the Annual Meeting.
c. The following table sets forth the results of voting by proxy or ballot
for each of the proposals voted on at the Annual Meeting.
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTAIN
--- ------- -------- -------
<S> <C> <C> <C> <C>
1. Election of Directors:
Richard P. Stack 7,559,212 314,070
Robert Nichols 7,559,212 314,070
2. To approve an amendment to the
Company's Certificate of
Incorporation to change the
Company's name to "Aspeon, Inc." 7,524,176 66,530 282,576
3. To approve an increase in the
authorized number of shares
under the Company's 1997 Equity
Incentive Plan by 1,000,000
shares 3,283,447 1,875,474 2,625,183 89,178
4. To approve
PriceWaterhouseCoopers as the
Company's independent auditors 7,843,871 11,002 18,409
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). 27.1 Financial Data Schedule in accordance with Article 5 of
Regulation S-X.
(b). No reports on Form 8-K were filed during the three months ended
December 31, 1999
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ASPEON, INC.
December 18, 2000 /s/ Richard P. Stack
---------------------------- -------------------------------------
Date Richard P. Stack
Chief Executive Officer and President
December 18, 2000 /s/ Edmund Brooks
---------------------------- -------------------------------------
Date Edmund Brooks
Chief Executive Officer of
Javelin Systems
23
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule in accordance with Article 5 of Regulation S-X.
24
