<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998.
REGISTRATION NO. 333-46533
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
AZTEC TECHNOLOGY PARTNERS, INC.
(Exact name of registrant as specified in its charter)
------------------------------
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<S> <C> <C>
DELAWARE 7379 04-3408450
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
52 ROLAND STREET
BOSTON, MASSACHUSETTS 02129
(617) 623-3100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JAMES E. CLAYPOOLE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AZTEC TECHNOLOGY PARTNERS, INC.
52 ROLAND STREET
BOSTON, MASSACHUSETTS 02129
TELEPHONE NO. (617) 623-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
TELEPHONE NO. (202) 663-6000
FACSIMILE NO. (202) 663-6363
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE
TO BE REGISTERED REGISTERED PER SHARE (2) OFFERING PRICE
<S> <C> <C> <C>
Common Stock, par value $.001 per share, to be distributed to
holders of U.S. Office Products Company common stock....... 100,000,000(1) $.875 $87,532,000
<CAPTION>
AMOUNT OF
TITLE OF SECURITIES REGISTRATION
TO BE REGISTERED FEE
<S> <C>
Common Stock, par value $.001 per share, to be distributed to
holders of U.S. Office Products Company common stock....... $25,822 (2)
</TABLE>
(1) Approximate number of shares of Aztec Technology Partners, Inc. common stock
expected to be distributed based upon a distribution ratio of one share of
Aztec Technology Partners, Inc. common stock for every five shares of U.S.
Office Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution.
(2) The Company has previously paid the Securities and Exchange Commission the
registration fee.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
INFORMATION STATEMENT/PROSPECTUS
[LOGO]
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
AZTEC TECHNOLOGY PARTNERS, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of Aztec Technology Partners, Inc. ("Aztec").
Aztec is a Delaware corporation formed by U.S. Office Products that will own
substantially all the assets of, and will be responsible for substantially all
the liabilities associated with, U.S. Office Products' Technology Solutions
division. Pursuant to this distribution (the "Technology Distribution"), all of
the issued and outstanding shares of the common stock, $.001 par value per
share, of Aztec (the "Aztec Common Stock") will be distributed to holders of
record as of the close of business on June 9, 1998 (the "Record Date") of the
common stock, par value $.001 per share, of U.S. Office Products ("U.S. Office
Products Common Stock"). Aztec currently estimates that each such holder will
receive one share of Aztec Common Stock for every five shares of U.S. Office
Products Common Stock held on the Record Date (the "Distribution Ratio").
Fractional shares will be aggregated into whole shares of Aztec Common Stock and
sold on the open market by the Distribution Agent (as defined herein). The
proceeds of such sales will be distributed to holders who otherwise would be
entitled to receive fractional shares. See "The Technology
Distribution--General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of Aztec Common Stock they receive in the
Technology Distribution. There is no current public trading market for the Aztec
Common Stock. Aztec has applied for quotation of the shares of Aztec Common
Stock on the Nasdaq National Market under the symbol "AZTC.".
The Technology Distribution is an element of a comprehensive restructuring
plan adopted by the Board of Directors of U.S. Office Products, including
modifications made by the Board of Directors since first adopting this plan (as
so modified by the "Strategy Restructuring Plan"). The principal elements of the
Strategic Restructuring Plan are (1) a self-tender offer by U.S. Office Products
(the "Tender Offer") to purchase 37,037,037 shares of U.S. Office Products
Common Stock (including shares underlying options for U.S. Office Products'
Common Stock) at $27.00 per share (or, in the case of stock options, at $27.00
minus the exercise price of the options) and the incurrence of debt to pay a
portion of the purchase price in the Tender Offer; (2) after acceptance of
shares in the Tender Offer, the pro rata distribution to U.S. Office Products'
stockholders of shares of four companies that will conduct U.S. Office Products'
current print management, technology solutions, educational supplies and
corporate travel services businesses; and (3) the sale to an affiliate ("CD&R")
of an investment fund managed by Clayton, Dubilier & Rice, Inc. ("CD&R, Inc.")
of equity interests in U.S. Office Products (the "Equity Investment") following
acceptance of shares in the Tender Offer and the Record Date for the
Distributions. In addition to this Information Statement/Prospectus, U.S. Office
Products is distributing a Tender Offer Statement regarding the Tender Offer and
a Proxy Statement regarding stockholder approval of the issuance of securities
in the Equity Investment. See "Additional Information."
All holders of U.S. Office Products Common Stock, including the executive
officers and directors of Aztec, have the right to participate in the Tender
Offer. It is the current intention of all officers or directors who hold shares
or options for U.S. Office Products' Common Stock to tender shares and options
in the Tender Offer.
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 8.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS , 1998
<PAGE>
ADDITIONAL INFORMATION
Aztec has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 (including exhibits, schedules and amendments
thereto, the "Aztec Form S-1") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), with respect to Aztec Common Stock. This
Information Statement/Prospectus, while forming a part of the Aztec Form S-1,
does not contain all of the information set forth in the Aztec Form S-1.
Reference is hereby made to the Aztec Form S-1 for further information with
respect to Aztec and the securities to be distributed to the U.S. Office
Products stockholders in the Technology Distribution. Statements contained
herein concerning the provisions of documents filed as exhibits to the Aztec
Form S-1 are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.
The Aztec Form S-1 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates, or on the Internet at http://www.sec.gov.
Following the Technology Distribution, Aztec will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the SEC that will be available for
inspection and copying at the SEC's public reference facilities referred to
above. Copies of such material can be obtained by mail at prescribed rates by
writing to the Public Reference Branch of the SEC at the address referred to
above.
Additional information regarding the Strategic Restructuring Plan and Aztec
may be found in reports, proxy statements and other information filed by U.S.
Office Products with the SEC, including U.S. Office Products Tender Offer
Statement on Schedule 13E-4 filed on May 4, 1998 and U.S. Office Products Proxy
Statement filed on May 1, 1998.
Aztec intends to furnish its stockholders annual reports containing
financial statements audited by its independent auditor. Aztec does not intend
to furnish its stockholders quarterly reports.
Questions concerning the Technology Distribution should be directed to Mark
D. Director, Executive Vice President-Administration, General Counsel and
Secretary of U.S. Office Products, or Donald H. Platt, Executive Vice President,
Chief Financial Officer and Treasurer of U.S. Office Products, at (202)
339-6700. After the Technology Distribution, holders of Aztec Common Stock
having inquiries related to their investment in Aztec should contact James E.
Claypoole, the Chairman of the Board of Directors and Chief Executive Officer of
Aztec, at (617) 623-3100.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998 the expiration of the twenty-fifth calendar day
following the Technology Distribution (as defined herein), all dealers effecting
transactions in registered securities, whether or not participating in this
distribution, may be required to deliver an Information Statement/Prospectus.
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 1
RISK FACTORS............................................................................................... 8
THE TECHNOLOGY DISTRIBUTION................................................................................ 17
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS.................................................................... 29
DIVIDEND POLICY............................................................................................ 31
CAPITALIZATION............................................................................................. 32
SELECTED FINANCIAL DATA.................................................................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 35
BUSINESS................................................................................................... 42
MANAGEMENT................................................................................................. 51
CERTAIN TRANSACTIONS....................................................................................... 59
PRINCIPAL STOCKHOLDERS..................................................................................... 60
DESCRIPTION OF AZTEC CAPITAL STOCK......................................................................... 61
EXPERTS.................................................................................................... 63
LEGAL MATTERS.............................................................................................. 63
AZTEC TECHNOLOGY PARTNERS, INC. INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY AND NOTES THERETO, THE UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION OF THE COMPANY AND THE NOTES THERETO, AND THE FINANCIAL STATEMENTS
OF CERTAIN COMPANIES ACQUIRED BY THE COMPANY AND THE NOTES THERETO, APPEARING
ELSEWHERE IN THE INFORMATION STATEMENT/PROSPECTUS. THIS INFORMATION
STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE,"
"EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
INFORMATION STATEMENT/PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION
CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS ASSUMES CONSUMMATION OF THE
TRANSACTIONS DESCRIBED UNDER "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS."
UNLESS THE CONTEXT OTHERWISE INDICATES THE INFORMATION HEREIN DOES NOT
REFLECT THE PUBLIC OFFERING OF UP TO 4,200,000 SHARES OF COMPANY COMMON STOCK
(EXCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION) BY THE COMPANY
AT A PRICE RANGE OF $12.00 TO $14.00 PER SHARE (THE "OFFERING"). WHERE THE
CONTEXT REQUIRES AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION
HEREIN HAS BEEN ADJUSTED FOR THE DISTRIBUTION RATIO. UNLESS OTHERWISE INDICATED,
ALL REFERENCES TO "COMMON STOCK OUTSTANDING AFTER THE TECHNOLOGY DISTRIBUTION"
ON A PRO FORMA BASIS SHALL MEAN 22,140,000 SHARES OF COMMON STOCK, WHICH IS
CALCULATED AS FOLLOWS: (A) APPROXIMATELY 110,700,000 SHARES OF U.S. OFFICE
PRODUCTS COMMON STOCK OUTSTANDING, WHICH REPRESENTS THE NUMBER OF SHARES OF U.S.
OFFICE PRODUCTS COMMON STOCK AZTEC CURRENTLY ESTIMATES WILL BE OUTSTANDING AT
THE DATE OF THE TECHNOLOGY DISTRIBUTION, WHICH IS CALCULATED AS (I)
APPROXIMATELY 133,800,000 SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK
OUTSTANDING ON APRIL 25, 1998; PLUS (II) APPROXIMATELY 8,900,000 SHARES OF U.S.
OFFICE PRODUCTS COMMON STOCK ASSUMED TO BE ISSUED BY U.S. OFFICE PRODUCTS ON
CONVERSION OF THE U.S. OFFICE PRODUCTS 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE
2001 (THE "2001" NOTES"); PLUS (III) APPROXIMATELY 5,000,000 SHARES OF U.S.
OFFICE PRODUCTS COMMON STOCK ASSUMED TO BE ISSUED BY U.S. OFFICE PRODUCTS ON
EXERCISE OF STOCK OPTIONS ACCEPTED INTO THE SELF-TENDER OFFER; AND LESS (IV)
37,037,037 SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK (INCLUDING SHARES THAT
MAY BE ISSUED ON EXERCISE OF VESTED AND UNVESTED STOCK OPTIONS) TENDERED AND
ACCEPTED UPON COMPLETION OF THE SELF-TENDER OFFER BY U.S. OFFICE PRODUCTS AT
$27.00 PER SHARE (OR, IN THE CASE OF STOCK OPTIONS, AT $27.00 MINUS THE EXERCISE
PRICE OF THE OPTIONS) (THE "TENDER OFFER"), DIVIDED BY (B) THE DISTRIBUTION
RATIO. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "AZTEC" AND THE
"COMPANY" REFER TO AZTEC TECHNOLOGY PARTNERS, INC. AND INCLUDE ALL OF ITS
SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS AND SUBSIDIARIES.
THE COMPANY
Aztec is a single-source provider of a broad range of information technology
("IT") business solutions. Aztec currently consists of ten companies who have
been in business for an average of over 15 years, with a history of superior
client service. These companies offer complementary IT solutions, which allow
Aztec to be a "one-stop" IT solutions provider in the Northeast region of the
United States, while providing personalized services to its clients on a
regional and local basis. Aztec's clients include middle market and Fortune 1000
companies in a wide range of industries (including communications, health care,
financial services, government, manufacturing, pharmaceuticals, professional
services, and technology). In 1997, Aztec, which employs over 1,000 people
(approximately 65% of whom are technical professionals), provided services to
over 2,000 customers. For the fiscal year ended April 26, 1997, Aztec had
revenues of $136.3 million and net income of $6.7 million. Over the same period
of time and taking into account all purchase acquisitions since May 1, 1996, pro
forma revenues would have been $228.9 million and pro forma net income would
have been $9.5 million.
Aztec was initially formed in October 1996 with the acquisition of Bay State
Computer Group ("Bay State") by U.S. Office Products. Since that time, under the
leadership of Aztec's current Chairman and Chief Executive Officer, James E.
Claypoole, nine complementary regional IT solutions companies have
<PAGE>
been acquired. These companies are: (i) Aztec International ("Aztec
International"); (ii) Compel Corporation ("Compel"); (iii) Digital Network
Associates, Inc. ("Digital Network Associates"); (iv) Entra Computer Corp.
("Entra"); (v) Fortran Corp. ("Fortran"); (vi) Mahon Communications Corporation
("Mahon"); (vii) Office Equipment Service, Inc. ("Office Equipment Service");
(viii) Professional Computer Solutions, Inc. ("Professional Computer
Solutions"); and (ix) Professional Network Services, Inc. ("Professional Network
Services"). The Company intends to continue to pursue growth through targeted
strategic acquisitions.
Aztec's broad range of complementary IT business solutions includes: (i)
consulting and engineering services; (ii) systems and network design and
implementation services; (iii) software development and implementation services;
(iv) IT support and operational services; and (v) telephony design and
integration services. Aztec is currently providing this broad range of services
in the Northeast region of the United States, and certain of these services in
the other regions of the United States. Aztec intends to extend its
comprehensive services offerings to the other regions of the United States.
Aztec is dedicated to delivering IT services and support for all the major
technology needs of its clients, which include a variety of operating systems
(NT, Unix, VMS, Netware, SunOS, Digital Open VMS, and OS/2) on a variety of
hardware platforms (Intel, Sun, HP, and Digital). In addition, Aztec supports
its clients' hardware and software needs related to the World Wide Web and
high-end telephony services.
With the rapid evolution of technology, the market for IT solutions has
grown significantly. Based on industry sources that Aztec believes are reliable,
Aztec beleives that the United States market for outsourced IT services is
expected to grow from $13 billion in 1996 to approximately $24 billion in 2001.
Although companies recognize the importance of IT services to their business,
they are often unable to keep pace with the rate of technological change without
outsourcing their IT needs. This trend towards outsourcing has been compounded
by the scarcity of technical professionals in the United States, and has driven
the growth of the outsourced IT solutions industry.
Aztec's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. Aztec intends to grow through a
combination of targeted strategic acquisitions and internal growth. Aztec's
acquisition strategy is to extend its range of services to the regions outside
of the Northeast by acquiring existing, profitable businesses, rather than
start-up operations. Aztec's internal growth strategies include (i) capitalizing
on existing cross-selling opportunities and (ii) expanding its IT solutions
offerings. Aztec plans to encourage and manage cross-selling through a
Company-developed proprietary software communication tool that will permit it to
review and manage sales leads generated at any level of Aztec's operations,
reinforced by compensation incentives.
Aztec's principal executive offices are located at 52 Roland Street, Boston,
Massachusetts 02129, telephone number (617) 623-3100.
BACKGROUND OF THE TECHNOLOGY DISTRIBUTION
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THE DISTRIBUTION.................. Shares of common stock, par value $.001 per share, of
Aztec (the "Company Common Stock" or "Aztec Common
Stock") will, subject to certain conditions, be
distributed to the stockholders of record of U.S. Office
Products (the "Technology Distribution" or
"Distribution") on June 9, 1998 (the "Record Date"). The
Technology Distribution is part of a comprehensive
restructuring plan adopted by the U.S. Office Products
Board of Directors. The principal elements of the plan
including modifications the Board of Directors has made
since first adopting this plan (as so modified, the
"Strategic Restructuring Plan") are:
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2
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- Pursuant to the Tender Offer, U.S. Office Products is
offering to purchase 37,037,037 shares of its common
stock $.001 par value ("U.S. Office Products Common
Stock"), (including shares that may be issued on
exercise of vested and unvested options for U.S.
Office Products Common Stock), at $27.00 per share
(or, in the case of stock options, at $27.00 minus the
exercise price of the options).
- After acceptance of shares in the Tender Offer, U.S.
Office Products will distribute to U.S. Office
Products' shareholders the shares of four separate
companies: Aztec, Workflow Management, Inc., School
Specialty, Inc., and Navigant Inc. (collectively, the
"Spin-Off Companies"). The distributions of the shares
of the Spin-Off Companies are referred to in this
Information Statement/Prospectus as the
"Distributions." The Spin-Off Companies will hold U.S.
Office Products' current technology solutions, print
management, educational supplies, and corporate travel
services businesses, respectively.
- Following the Record Date, an affiliate ("CD&R") of an
investment fund managed by Clayton, Dubilier & Rice,
Inc. ("CD&R, Inc."), a private investment firm, will
acquire, for $270.0 million, shares of U.S. Office
Products Common Stock representing 24.9% of the
outstanding equity of U.S. Office Products, after
giving effect to the Tender Offer and the issuance of
shares to CD&R and warrants to purchase additional
U.S. Office Products Common Stock (the "Equity
Investment"). CD&R will not acquire any interests in
the Spin-Off Companies.
U.S. Office Products will retain its North American
Office Products Group (which includes the office supply,
office furniture, and office coffee and beverage
services businesses), Mail Boxes Etc., its New Zealand
and Australian operations, and its 49% interest in
Dudley Stationery Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan,
U.S. Office Products plans to undertake the following
transactions (the "Financing Transactions"):
- Pursuant to a tender offer, U.S. Office Products will
purchase any or all of its 5 1/2% Convertible
Subordinated Notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and
accrued interest (the "2003 Note Tender").
- Pursuant to an exchange offer, U.S. Office Products
will exchange any or all of its 2001 Notes for U.S.
Office Products Common Stock (the "2001 Note Offer")
at an exchange rate of 61.483 shares per $1,000
principal amount, which effectively reduces the
conversion price of the 2001 Notes from $19.00 to
$16.17 while the 2001 Note Offer is open.
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3
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- Pursuant to a commitment letter from a group of
lenders, U.S. Office Products plans to enter into a
new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least
$400.0 million in senior subordinated notes in a
private placement.
REASONS FOR THE DISTRIBUTIONS..... The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
- adopt strategies and pursue objectives that are
appropriate to its respective industry and stage of
growth;
- pursue an independent acquisition program that allows
for a more focused use of resources and, where stock
is used as consideration, provide stock of a public
company that is in the same industry as the businesses
being acquired;
- be recognized by the financial community as a distinct
business that can be evaluated more readily and
compared more easily to industry peers; and
- implement more focused incentive compensation packages
that respond to specific industry and market
conditions and enhance employee retention objectives.
The Distributions are also integral to the objectives of
the Equity Investment which is conditioned on completion
of all of the Distributions. See "The Technology
Distribution--Reasons for the Distributions."
SHARES TO BE DISTRIBUTED.......... Approximately 22,140,000 shares of Aztec Common Stock
will be distributed to U.S. Office Products stockholders
in the Technology Distribution. This amount is equal to
(a) approximately 110,700,000 shares of U.S. Office
Products Common Stock expected to be outstanding at the
date of the Technology Distribution, which is equal to
(i) approximately 133,800,000 shares of U.S. Office
Products Common Stock outstanding on April 25, 1998,
plus (ii) approximately 8,900,000 shares of U.S. Office
Products Common Stock assumed to be issued on conversion
of 2001 Notes plus (iii) approximately 5,000,000 shares
of U.S. Office Products Common Stock assumed to be
issued on exercise of stock options accepted in the
Tender Offer, less (iv) 37,037,037 shares (including
shares that may be issued on exercise of vested and
unvested options for U.S. Office Products Common Stock)
to be purchased in the Tender Offer, divided by (b) the
Distribution Ratio. The number of shares to be distrib-
uted could be greater if additional shares of U.S.
Office Products Common Stock are issued prior to the
Record Date pursuant to outstanding convertible debt
securities or stock options of U.S. Office Products.
DISTRIBUTION RATIO................ Each U.S. Office Products stockholder will receive one
share of Aztec Common Stock for every five shares of
U.S. Office Products Common Stock held on the Record
Date.
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4
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<TABLE>
<S> <C>
FRACTIONAL SHARE INTERESTS........ Fractional share interests will be aggregated and sold
by the Distribution Agent and the cash proceeds will be
distributed to those U.S. Office Products stockholders
entitled to a fractional interest. See "The Technology
Distribution--General."
RECORD DATE....................... June 9, 1998.
DISTRIBUTION DATE................. The effective time of the Distributions is expected to
be 12:01 a.m. on June 10, 1998.
MAILING DATE...................... Certificates representing shares of Aztec Common Stock
will be mailed to U.S. Office Products stockholders as
soon as practicable after the effective time of the
Distributions (the "Distribution Date").
DISTRIBUTION AGENT................ American Stock Transfer & Trust Company
TAX CONSEQUENCES.................. Wilmer, Cutler & Pickering expects to deliver an opinion
at the time of the Distributions stating that, subject
to the matters discussed therein, for U.S. federal
income tax purposes the receipt of Aztec Common Stock by
U.S. Office Products stockholders will be tax-free to
U.S. Office Products and the U.S. Office Products
stockholders (except with respect to cash received in
lieu of fractional shares). See "The Technology
Distribution--U.S. Federal Income Tax Consequences of
the Technology Distribution."
ARRANGEMENTS AFTER THE Aztec, U.S. Office Products, and the other Spin-Off
DISTRIBUTIONS................... Companies will enter into an agreement (the
"Distribution Agreement") in connection with the
Technology Distribution pursuant to which, among other
things, (i) equity interests in the U.S. Office Prod-
ucts subsidiaries that engage in the technology
solutions business will be transferred to Aztec, (ii)
liabilities will be allocated among Aztec, U.S. Office
Products, and the other Spin-Off Companies and (iii)
Aztec, U.S. Office Products, and the other Spin-Off
Companies will indemnify one another for liabilities
allocated to them under the Distribution Agreement and a
share of certain other liabilities.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Aztec, U.S. Office Products, and the other Spin-Off
Companies will also enter into an agreement (the "Tax
Allocation Agreement") (i) allocating to each Spin-Off
Company responsibility for its share of U.S. Office
Products' consolidated tax liability for the years that
it was included in U.S. Office Products' consolidated
federal income tax returns, (ii) sharing certain state,
local, and foreign taxes, and (iii) providing for (a)
indemnification by Aztec for certain taxes if they are
assessed against U.S. Office Products as a result of the
Distributions and (b) joint and several indemnification
by Aztec and the other Spin-Off Companies for such taxes
resulting from certain acts taken by Aztec or any of the
other Spin-Off Companies. The liability to U.S. Office
Products for taxes resulting from such acts will be
allocated among the Spin-Off Companies pursuant to a
separate agreement (the "Tax Indemnification
Agreement"). As a consequence, Aztec will be primarily
liable for taxes resulting from acts taken by Aztec and
liable (subject to indemnification by the other Spin-Off
Companies) for any taxes resulting from acts taken by
the other Spin-Off Companies.
Aztec, U.S. Office Products, and the other Spin-Off
Companies will also enter into an agreement (the
"Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "The Spin-Offs From U.S.
Office Products."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 8, including, among others, risks associated with (i) the
potential volatility of the price of Aztec Common Stock, (ii) the fact that
Aztec has not operated as a stand-alone entity separate from U.S. Office
Products, (iii) the ability of Aztec to attract and retain qualified employees,
(iv) Aztec's dependence on acquisitions for its future growth (v) integrating
acquisitions and acquisition financing, and (vi) financing of future
acquisitions.
6
<PAGE>
SUMMARY FINANCIAL DATA (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED
APRIL 26, --------------------------
--------------------
FISCAL YEAR ENDED MARCH 31, PRO
------------------------------------------ FORMA JANUARY 25, JANUARY 24,
1993 1994 1995 1996 1997 1997 (2) 1997 1998
--------- --------- --------- --------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $ 46,152 $ 58,979 $ 88,999 $ 114,055 $ 136,278 $ 228,912 $ 101,295 $ 142,512
Cost of revenues............... 34,121 43,630 65,858 84,113 102,129 169,150 76,049 107,895
--------- --------- --------- --------- --------- --------- ------------ ------------
Gross profit................... 12,031 15,349 23,141 29,942 34,149 59,762 25,246 34,617
Selling, general and
administrative expenses...... 10,139 11,218 14,942 20,510 21,525 39,134 15,637 22,951
Goodwill amortization expense.. 1,651 414
Non-recurring acquisition
costs........................ 2,274 2,274 1,906
--------- --------- --------- --------- --------- --------- ------------ ------------
Operating income............... 1,892 4,131 8,199 9,432 10,350 16,703 7,703 11,252
Interest expense............... 412 297 331 420 324 400 310 169
Interest income................ (75) (54) (118) (416) (168) (169) (167)
Other (income) expense......... (77) (75) (111) (964) (53) (579) 234 (14)
--------- --------- --------- --------- --------- --------- ------------ ------------
Income before provision for
income taxes................. 1,632 3,963 8,097 10,392 10,247 16,882 7,328 11,264
Provision for income taxes
(4).......................... 210 232 401 750 3,524 7,428 1,771 4,692
--------- --------- --------- --------- --------- --------- ------------ ------------
Net income..................... $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,723 $ 9,454 $ 5,557 $ 6,572
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
Per share amounts:
Basic........................ $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.37 $ 0.43 $ 0.32 $ 0.29
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
Diluted...................... $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.36 $ 0.43 $ 0.32 $ 0.28
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
Weighted average shares
outstanding:
Basic........................ 8,852 8,852 9,112 13,509 18,005 22,140(5) 17,196 22,952
Diluted...................... 8,852 8,852 9,141 13,675 18,352 22,140(5) 17,565 23,437
<CAPTION>
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 24,
1997 (2) 1998 (2) 1998(3)
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $ 172,518 $ 191,074 $ 191,074
Cost of revenues............... 127,875 141,631 141,631
------------ ------------ ------------
Gross profit................... 44,643 49,443 49,443
Selling, general and
administrative expenses...... 28,876 31,235 31,235
Goodwill amortization expense.. 1,293 1,293 1,293
Non-recurring acquisition
costs........................ 1,906
------------ ------------ ------------
Operating income............... 12,622 16,969 16,969
Interest expense............... 300 300 41
Interest income................
Other (income) expense......... (232) (252) (252)
------------ ------------ ------------
Income before provision for
income taxes................. 12,554 16,921 17,180
Provision for income taxes
(4).......................... 5,524 7,445 7,559
------------ ------------ ------------
Net income..................... $ 7,030 $ 9,476 $ 9,621
------------ ------------ ------------
------------ ------------ ------------
Per share amounts:
Basic........................ $ 0.32 $ 0.43 $ 0.43
------------ ------------ ------------
------------ ------------ ------------
Diluted...................... $ 0.32 $ 0.43 $ 0.43
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares
outstanding:
Basic........................ 22,140(5) 22,140(5) 22,507(6)
Diluted...................... 22,140(5) 22,140(5) 22,507(6)
</TABLE>
<TABLE>
<CAPTION>
JANUARY
24, 1998
MARCH 31, ---------
--------------------------------- APRIL 30, APRIL 26,
1993 1994 1995 1996 1997 ACTUAL
--------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 31,848
Total assets................................................ 14,890 16,423 28,106 33,945 37,311 142,347
Long-term debt, less current portion........................ 461 461 1,524 799 167 386
Long-term payable to U.S. Office Products................... 4,786 9,957
Stockholder's equity........................................ 5,382 6,745 11,062 10,497 11,626 90,119
<CAPTION>
PRO FORMA
PRO FORMA (7) AS ADJUSTED (3)
-------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 23,869 $ 68,837
Total assets................................................ 134,368 179,336
Long-term debt, less current portion........................ 4,696 386
Long-term payable to U.S. Office Products...................
Stockholder's equity........................................ 87,787 137,065
</TABLE>
- ------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") is included from the dates of their
respective acquisitions. The pro forma financial data reflect acquisitions
completed by Aztec through May 1, 1998. See Note 4 of the Company's Notes to
Consolidated Financial Statements for a description of the number and
accounting treatment of the acquisitions by the Company.
(2) Gives effect to the Technology Distribution and the purchase acquisitions
completed by Aztec since May 1, 1996 as if all such transactions had been
consummated on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) Adjusted to give effect to the sale by the Company of 4,200,000 shares of
Common Stock in the Offering at the assumed initial public offering price
and the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(4) Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(i) of Notes to Pro Forma Combined
Financial Statements included herein.
(6) For calculation of the pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(k) of
Notes to Pro Forma Combined Financial Statements included herein.
(7) Gives effect to the Technology Distribution as if it had been made on
January 24, 1998. The pro forma balance sheet data are not necessarily
indicative of the financial position that would have been achieved had the
Technology Distribution actually then occurred and should not be construed
as representative of future financial position.
7
<PAGE>
RISK FACTORS
The following factors should be considered in addition to other information
included in this Information Statement/Prospectus.
POTENTIAL VOLATILITY OF STOCK PRICE, RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE
As a result of the Technology Distribution, stockholders of U.S. Office
Products are acquiring shares of Aztec Common Stock that are freely tradeable at
the time of this Offering without restrictions or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by "affiliates" of Aztec within the meaning of the Securities Act
will be subject to the resale limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). Because the Technology Distribution is being made
to existing shareholders of U.S. Office Products, who have not made an
affirmative decision to invest in Aztec Common Stock, there can be no assurance
that some or all of those shareholders will not sell the shares of Aztec Common
Stock into the market shortly after the Technology Distribution. In addition,
U.S. Office Products is included in certain broad-based indices tracked by a
number of investment companies and other institutional investors, and such
investors can be expected to sell the shares of Aztec Common Stock they receive
in the Technology Distribution shortly thereafter. Until Aztec Common Stock
issued in the Technology Distribution is fully distributed, the price at which
such stock trades may fluctuate significantly and may be higher or lower than
the price that would be expected on a fully distributed issue.
In addition, upon completion of this Offering and the Technology
Distribution, Aztec will have outstanding (i) 26,340,000 shares of Aztec Common
Stock and (ii) immediately exerciseable options to acquire shares of Aztec
Common Stock (to be determined at the time of the Technology Distribution).
Certain executive officers and directors of Aztec who hold shares of Aztec
Common Stock have agreed not to sell, offer, make any short sale or otherwise
dispose of or enter into any contract, arrangement or other commitment to sell
or otherwise dispose of any Aztec Common Stock without the prior written consent
of BancAmerica Robertson Stephens for a period of 180 days from the date of this
Information Statement/Prospectus (the "Lock-Up Agreements"). All the remaining
shares will be freely tradeable immediately upon completion of the Offering or,
in the case of options, upon vesting and exercise, except that shares held or
acquired by affiliates of Aztec will be subject to the resale limitations of
Rule 144. Following the Technology Distribution, in view of the large number of
shares freely tradeable and available for immediate sale, the market for Aztec
Common Stock could be highly volatile and could adversely affect the trading
price of Aztec Common Stock.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Aztec is the product of the consolidation by U.S. Office Products of ten
regional IT solutions companies. Aztec has not heretofore operated as an
independent entity. The operations of Aztec as a stand-alone, consolidated
entity may place significant demands on Aztec's management, operational, and
technical resources. Prior to the Technology Distribution, certain
administrative functions relating to Aztec's business (including some legal and
accounting services) were handled by U.S. Office Products. Aztec's future
performance will depend on its ability to function as a stand-alone entity and
on its ability to finance and manage expanding operations and to adapt its
information systems to changes in its business. Aztec's expenses may be higher
than when it was a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the operating
results and financial condition would have been had Aztec been a separate,
stand-alone entity during the periods presented or be indicative of the future
operating results and financial condition of Aztec.
ATTRACTION AND RETENTION OF EMPLOYEES
Aztec's business involves the delivery of professional services and is labor
intensive. Aztec's success depends in large part on its ability to attract,
develop, motivate, and retain technical professionals.
8
<PAGE>
Approximately 65% of Aztec's employees are technical professionals. Qualified
technical professionals are in great demand and are likely to remain a limited
resource for the foreseeable future. There can be no assurance that Aztec will
be able to attract and retain sufficient numbers of technical professionals in
the future. Aztec has historically experienced turnover rates which it believes
are consistent with industry norms. It is possible that the spin-off of Aztec
from U.S. Office Products could cause more employees to leave Aztec. An increase
in turnover rates could have a material adverse effect on Aztec's business,
including its ability to secure and complete engagements and obtain new
business, which could have a material adverse effect on Aztec's operating
results and financial condition.
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
One of Aztec's strategies is to expand its revenues and the markets it
serves through the acquisition of additional businesses. As with all companies
using an acquisition strategy to expand revenues, there can be no assurance that
suitable candidates can be identified, or, if suitable acquisition candidates
are identified, that such acquisitions can be completed on acceptable terms. The
pace of Aztec's acquisition program may be adversely affected by these and other
market factors, and may also be affected by the absence of U.S. Office Products'
legal and accounting support for the acquisitions. Further, Aztec intends to use
Aztec Common Stock to pay for certain of its acquisitions. If the owners of
potential acquisition candidates are not willing to receive shares of Aztec
Common Stock in exchange for their businesses, Aztec's acquisition program could
be adversely affected. Further, Aztec is subject to limitations on the number of
shares it can issue without jeopardizing the tax-free treatment of the
Technology Distribution. See "Possible Limitations on Issuance of Common Stock,"
"Material Amount of Goodwill," and "Inability to Use Pooling of Interests
Accounting."
RISKS RELATED TO INTEGRATION OF ACQUISITIONS
Integration of acquisitions may involve a number of special risks that could
have a material adverse effect on Aztec's operating results and financial
condition, including: adverse short-term effects on its reported operating
results (including restructuring charges associated with the acquisitions and
other expenses associated with a change of control, non-recurring acquisition
costs including accounting and legal fees, investment banking fees, amortization
of acquired intangible assets, recognition of transaction-related obligations,
and various other acquisition-related costs); diversion of management's
attention; difficulties with retention, hiring and training of key personnel;
and risks associated with unanticipated problems or legal liabilities. Although
Aztec will conduct due diligence and generally require representations,
warranties and indemnifications from the former owners of acquired companies,
there can be no assurance that such owners will have accurately represented the
financial and operating conditions of their companies. If an acquired company's
financial or operating results were misrepresented, or the acquired company
otherwise fails to perform as anticipated, the acquisition could have a material
adverse effect on the operating results and financial condition of Aztec.
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION
Aztec currently intends to finance its future acquisitions by using shares
of Aztec Common Stock, cash, borrowed funds, or a combination thereof. If Aztec
Common Stock does not maintain a sufficient market value, if the price of Aztec
Common Stock is highly volatile, or if potential acquisition candidates are
otherwise unwilling to accept Aztec Common Stock as part of the consideration
for the sale of their businesses, Aztec may be required to use more of its cash
resources or more borrowed funds in order to initiate and maintain its
acquisition program. If Aztec does not have sufficient cash resources, its
growth could be limited unless it is able to obtain additional capital through
debt or equity offerings. Prior to the Technology Distribution, Aztec was not
responsible for obtaining external sources of funding. Aztec has entered into a
commitment letter with BankBoston, N.A. regarding a $200.0 million credit
facility for a term of five years to be made available in August 1998 and to be
used for working capital and acquisitions (the "Proposed Credit Facility").
There can be no assurance that Aztec, will be able to satisfy the
9
<PAGE>
conditions to the funding of the Proposed Credit Facility or obtain other
financing if and when it is needed or that any other such financing will be
available on terms it deems acceptable. If Aztec does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. However, the use of equity offerings
in connection with the Technology Distribution will also be subject to certain
limitations on the number of shares that Aztec can issue without jeopardizing
the tax-free treatment of the Technology Distribution. See "Possible Limitations
on Issuances of Common Stock" and "Tax Matters."
Aztec will have 150 million authorized shares of Aztec Common Stock, a
portion of which could be available (subject to the rules and regulations of
federal and state securities laws, applicable limits under U.S. Federal income
tax laws and rules, and rules of the Nasdaq Stock Market) to finance
acquisitions without obtaining stockholder approval for such issuances. The
issuance of additional shares of Aztec Common Stock may have a negative impact
on earnings per share and may negatively impact the market price of Aztec Common
Stock.
RELIANCE ON KEY PERSONNEL
Aztec's operations depend on the continued efforts of James E. Claypoole,
its Chairman and Chief Executive Officer, Ira Cohen, its Chief Operating
Officer, Douglas R. Johnson, its Executive Vice President and Chief Financial
Officer, its operating company presidents, and the senior management of certain
of its operating companies. Furthermore, Aztec's operations will likely depend
on the senior management of certain of the companies that it may acquire in the
future. If any of these people becomes unable to continue in his or her present
role, or if Aztec is unable to attract and retain other skilled professionals,
its business could be adversely affected. Aztec does not currently maintain key
man life insurance policies for any of its officers or other personnel. Aztec
has employment agreements with its Chairman and Chief Executive Officer and its
operating company presidents with initial terms ending in 1999-2000. Thereafter,
such agreements are generally terminable without cause on 30 days' notice by
either Aztec or the employee. Aztec also intends to enter into employment
agreements with Mr. Cohen and Mr. Johnson. In addition, Jonathan J. Ledecky will
serve as a director and employee of Aztec and is expected to provide services to
Aztec after the Technology Distribution pursuant to an employment agreement
expected to be entered into between Mr. Ledecky and Aztec. U.S. Office Products
is permitted to (and will) assign to Aztec certain rights of, and obligations
under, U.S. Office Products' services agreement, as amended, with Mr. Ledecky
dated January 13, 1998 (the "Ledecky Services Agreement") following the
Technology Distribution. See "Management--Ledecky Services Agreement." Mr.
Ledecky will also serve as a director and employee of each of the other Spin-Off
Companies, and is a director or an officer of two other public companies. Mr.
Ledecky may be unable to devote substantial time to the activities of Aztec.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of major
client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel cost increases. Certain of these
factors may also affect the Company's personnel utilization rates which may
cause further variation in quarterly operating results. The timing of revenues
is difficult to forecast because the Company's sales cycle is relatively long
and the Company's services are impacted by both the financial condition and
management decisions of its clients and general economic conditions. Because a
high percentage of the Company's expenses are relatively fixed at the beginning
of any period and the Company's general policy is to not adjust its staffing
levels based upon what it views as short-term circumstances, a variation in the
timing of the initiation or the completion of client assignments, particularly
at or near the end of any quarter, can cause significant variations in operating
results from quarter to quarter and could result in losses for any particular
period. In addition, many of the Company's
10
<PAGE>
engagements are, and may be in the future, terminable by its clients without
penalty. A termination of a major project could require the Company to maintain
under-utilized employees, resulting in a higher than expected percentage of
unassigned professionals, or to terminate the employment of excess personnel.
Due to all of the foregoing factors, there can be no assurance that the
Company's results of operations will not be below the expectations of investors
for any given fiscal period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
Aztec is currently a wholly-owned subsidiary of U.S. Office Products. On or
before the Distribution Date, Aztec, U.S. Office Products, and the other
Spin-Off Companies will enter into the Distribution Agreement, Tax Allocation
Agreement, and Employee Benefits Agreement, and the Spin-Off Companies will
enter into the Tax Indemnification Agreement. See "The Spin-Offs from U.S.
Office Products." These agreements are expected to provide, among other things,
for U.S. Office Products and Aztec to indemnify each other from tax and other
liabilities relating to their respective businesses prior to and following the
Technology Distribution.
Certain indemnification obligations of Aztec and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations to
U.S. Office Products when such a loss occurs, Aztec may be required to reimburse
U.S. Office Products for all or a portion of the losses that otherwise would
have been allocated to such other Spin-Off Company. In addition, the agreements
will allocate certain liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically related to the specific
businesses to be conducted by the Spin-Off Companies and post-Distribution U.S.
Office Products among U.S. Office Products and each of the Spin-Off Companies.
Adverse developments involving U.S. Office Products or the other Spin-Off
Companies, or material disputes with U.S. Office Products following the
Technology Distribution, could have a material adverse effect on Aztec.
The terms of the agreements that will govern the relationships among Aztec,
U.S. Office Products and the other Spin-Off Companies will be established by
U.S. Office Products in consultation with management of Aztec and the other
Spin-Off Companies prior to the Distributions and while Aztec and the other
Spin-Off Companies are wholly-owned subsidiaries of U.S. Office Products. The
terms of these agreements, including the allocation of general corporate and
securities liabilities among U.S. Office Products, Aztec, and the other Spin-Off
Companies, may not be the same as they would be if the agreements were the
result of arms'-length negotiations. In addition, the agreements must contain
certain terms specified in U.S. Office Products' agreement with CD&R relating to
the Equity Investment and must otherwise be reasonably acceptable to CD&R. CD&R
will not be a stockholder in any of the Spin-Off Companies and its interests may
be adverse to those of the Spin-Off Companies. See "The Spin-Offs from U.S.
Office Products." Accordingly, there can be no assurance that the terms and
conditions of the agreements will not be more or less favorable to Aztec than
those that might have been obtained from unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors (the "U.S. Office Products Board"), will receive
options for shares of each of the Spin-Off Companies exercisable for up to 7.5%
of the common stock of each Spin-Off Company. See "Management--Ledecky Services
Agreement." As a result, Mr. Ledecky has interests in the Distributions that
differ in certain respects from, and may conflict with, the interests of other
stockholders of U.S. Office Products and Aztec.
TAX MATTERS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions, (including the Technology Distribution) will qualify
as tax-free spin-offs under Section 355 of the Internal Revenue Code of 1986, as
11
<PAGE>
amended, (the "Code"), and will not be taxable under Section 355(e) of the Code.
U.S. Office Products will not complete the Technology Distribution unless it
receives the Tax Opinion. The Tax Opinion will be based on certain assumptions
and the accuracy as of the time of the Distributions of factual representations
made by U.S. Office Products, the Spin-Off Companies and CD&R, and certain other
information, data, documentation and other materials as Wilmer, Cutler &
Pickering has deemed necessary. See "Technology Distribution--U.S. Federal
Income Tax Consequences of the Technology Distribution."
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling has not been, and
will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the Technology Distribution. Accordingly, the IRS and/or a court
could reach a conclusion that differs from the conclusions in the Tax Opinion.
If the Technology Distribution fails to qualify under Section 355 as a
tax-free spin-off, each holder of U.S. Office Products Common Stock on the
Record Date will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the Distribution Date) of the
Aztec Common Stock distributed to such holder of U.S. Office Products Common
Stock including fractional shares. In addition, U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
Aztec Common Stock on the Distribution Date and U.S. Office Products' adjusted
tax basis in the Aztec Common Stock on the Distribution Date. If U.S. Office
Products were to recognize gain on the Technology Distribution, such gain would
likely be substantial.
If the Technology Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements for a tax-free spin-off, U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Aztec Common Stock on the Distribution Date and U.S. Office
Products' adjusted tax basis in the Aztec Common Stock on the Distribution Date.
If U.S. Office Products were to recognize gain on the Technology Distribution,
such gain would likely be substantial. However, no gain or loss will be
recognized by holders of U.S. Office Products Common Stock (except with respect
to cash received in lieu of fractional shares).
ABSENCE OF PUBLIC MARKET
Prior to the Technology Distribution and the Offering there will be no
public market for the Company Common Stock. The initial public offering price of
the Aztec Common Stock in the Offering will be determined through negotiations
among the Company and the underwriters of the Offering and may not be indicative
of the market price for the Aztec Common Stock after the Offering and the
Technology Distribution. The trading price of the Aztec Common Stock also could
be subject to wide fluctuations in response to variations in the Aztec's
quarterly operating results, changes in earnings estimates by analysts,
conditions in the Aztec's businesses, general market or economic conditions or
other factors. In addition, in recent years the stock market has experienced
extreme price and volume fluctuations. These fluctuations have had a substantial
effect on the market prices for many companies, often unrelated to the operating
performance of the specific companies. Such market fluctuations could have a
material adverse effect on the market price of the Aztec Common Stock. See
"--Potential Volatility of Stock Price, Risks Associated With Shares Eligible
for Immediate Sale."
RAPID TECHNOLOGICAL CHANGE
As with all IT solutions companies, Aztec's success will depend in part on
its ability to develop IT solutions that keep pace with continuing changes in
IT, evolving industry standards, and changing client preferences. There can be
no assurance that Aztec will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed,
Aztec will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render
Aztec's services uncompetitive or obsolete. Aztec's failure to address these
developments could have a material adverse effect on Aztec's operating results
and financial condition.
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COMPETITION
The IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues, and have greater name
recognition than does the Company. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior managers, the price at which
others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future. See
"Business--Competition."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, Aztec will enter into the Tax
Allocation Agreement with U.S. Office Products and the other Spin-Off Companies,
which will provide that Aztec and the other Spin-Off Companies will jointly and
severally indemnify U.S. Office Products for any losses associated with taxes
related to the Distributions ("Distribution Taxes") if an action or omission (an
"Adverse Tax Act") of any of the Spin-Off Companies materially contributes to a
final determination that any or all of the Distributions are taxable. Aztec will
also enter into the Tax Indemnification Agreement with the other Spin-Off
Companies under which the Spin-Off Company that is responsible for the Adverse
Tax Act will indemnify the other Spin-Off Companies for any liability to
indemnify U.S. Office Products under the Tax Allocation Agreement. As a
consequence, Aztec will be liable for any Distribution Taxes resulting from any
Adverse Tax Act by Aztec and liable (subject to indemnification by the other
Spin-Off Companies) for any Distribution Taxes resulting from an Adverse Tax Act
by the other Spin-Off Companies. If there is a final determination that any or
all of the Distributions are taxable and it is determined that there has not
been an Adverse Tax Act by either U.S. Office Products or any of the Spin-Off
Companies, U.S. Office Products and each of the Spin-Off Companies will be
liable for its pro rata portion of the Distribution Taxes based on the value of
each company's common stock after the Distributions. As a result, Aztec could
become liable for a pro rata portion for Distribution Taxes with respect to not
only the Technology Distribution but any of the other Distributions. See "The
Spin-Offs from U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement" and "The Technology Distribution--U.S. Federal Income
Tax Consequences of the Technology Distribution" for a detailed discussion of
the Tax Allocation Agreement, the Tax Indemnification Agreement and U.S. federal
income tax consequences of the Technology Distribution.
RISKS RELATED TO ALLOCATION FOR CERTAIN LIABILITIES
Under the Distribution Agreement, Aztec will be liable for (i) any
liabilities arising out of or in connection with the business conducted by it or
its subsidiaries, (ii) its liabilities under the Employee Benefits Agreement,
Tax Allocation Agreement and related agreements described under "The Spin-Offs
From U.S. Office Products", (iii) the U.S. Office Products debt that has been
allocated to the Company (see "The Spin-Offs From U.S. Office
Products--Distribution Agreement--Debt"), (iv) liabilities under the securities
laws relating to the Prospectus related to the Offering and portions of this
Information Statement/Prospectus, as well as other securities law liabilities
related to the Aztec business that arise from information supplied to U.S.
Office Products (or that should have been supplied, but was not) by Aztec, (v)
U.S. Office Products' liabilities for earn-outs from acquisitions in respect of
Aztec and its subsidiaries, (vi) Aztec's costs and expenses related to the
Offering and its bank credit facility, and (vii) $1.0 million of the transaction
costs (including legal, accounting, investment banking and financial advisory)
and other fees incurred by U.S. Office Products in connection with its Strategic
Restructuring Plan. Each of the other
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Spin-Off Companies will be similarly obligated to U.S. Office Products. Aztec
and the other Spin-Off Companies have also agreed to bear a pro rata portion of
(i) U.S. Office Products' liabilities under the securities laws (other than
claims relating solely to a specific Spin-Off Company or relating specifically
to the continuing businesses of U.S. Office Products) and (ii) U.S. Office
Products' general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the conduct of a particular
distributed or retained subsidiary's business) (the "Shared Liabilities"). If
one of the other Spin-Off Companies defaults on an obligation owed to U.S.
Office Products, the other non-defaulting Spin-Off Companies will be obligated
on a pro rata basis to pay such obligation ("Default Liability"). As a result of
the Shared Liabilities and Default Liability, Aztec could be obligated to U.S.
Office Products in respect of obligations and liabilities not related to its
business or operations and over which neither it nor its management has or has
had any control or responsibility. The aggregate of the Shared Liabilities and
Default Liability for which any Spin-Off Company may be liable is, however,
limited to $1.75 million. See "--Potential Liability for Taxes Related to the
Distributions" and "The Spin-Offs From U.S. Office Products." The Company's pro
rata share of Shared Liabilities and Default Liability is described in the
Section captioned "The Spin-Offs from U.S. Office Products--The Distribution
Agreement--Liabilities."
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
Section 355(e) of the Code, which was added in 1997, generally provides that
a company that distributes shares of a subsidiary in a spin-off that is
otherwise tax-free will incur U.S. federal income tax liability if 50% or more,
by vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired by one or more persons
acting pursuant to a plan or series of related transactions that include the
spin-off. Stock acquired by certain related persons is aggregated in determining
whether the 50% test is met. There is a presumption that any acquisition
occurring two years before or after the spin-off is pursuant to a plan that
includes the spin-off. However, the presumption may be rebutted by establishing
that the spin-off and such acquisition are not part of a plan or series of
related transactions. As a result of the provisions of Section 355(e), there can
be no assurance that issuances of stock by Aztec, including issuances in
connection with an acquisition of another business by Aztec, will not create a
tax liability for U.S. Office Products.
Aztec has entered into a Tax Allocation Agreement and a Tax Indemnification
Agreement pursuant to which Aztec will be liable to U.S. Office Products and the
other Spin-Off Companies if its actions or omissions materially contribute to a
final determination that the Technology Distribution is taxable. See "The
Spin-Offs from U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement."
This limitation could adversely affect the pace of Aztec's acquisitions and
its ability to issue Aztec Common Stock for other purposes, including equity
offerings.
MATERIAL AMOUNT OF GOODWILL
Approximately $63.9 million, or 47.5% of Aztec's pro forma total assets as
of January 24, 1998 represents goodwill. Goodwill represents the excess of cost
over the fair market value of net assets acquired in business combinations
accounted for under the purchase method of accounting. Aztec currently amortizes
goodwill on a straight line method over a period ranging from 25-40 years with
the amount amortized in a particular period constituting a non-cash expense that
reduces Aztec's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain future acquisitions,
may not be deductible for tax purposes. In addition, Aztec will be required to
periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Aztec would be required to write down
the carrying value of the goodwill and incur a related charge to its income. A
reduction in net income resulting
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from the amortization or write down of goodwill could have a material and
adverse impact upon the market price of Aztec Common Stock.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations accounted for under the pooling-of-interests method. As a result of
Aztec being a wholly-owned subsidiary of U.S. Office Products prior to the
Technology Distribution, Aztec will be unable to satisfy this criterion for a
period of two years following the Technology Distribution. Therefore, Aztec will
be precluded from completing business combinations accounted for under the
pooling-of-interests method for a period of two years and any business
combinations completed by Aztec during such period will be accounted for under
the purchase method resulting in the recording of goodwill. The amortization of
the goodwill will reduce income reported by Aztec below that which would have
been reported if the pooling-of-interests method had been used by Aztec.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of Aztec's acquisitions have not been
established by independent appraisals, but generally have been determined
through arm's-length negotiations between Aztec's management and representatives
of such acquired companies. The consideration paid for each such company has
been and will continue to be based primarily on the value of such company as a
going concern and not on the value of the acquired assets. Valuations of
acquired companies determined solely by appraisals of the acquired assets
typically would have been less than the consideration paid for the companies. No
assurance can be given that the future performance of such companies will be
commensurate with the consideration paid. Aztec does not expect to value future
acquisitions on the basis of asset appraisals. Therefore, this risk will apply
to future acquisitions as well.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Aztec Board has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by Aztec stockholders. The
rights of the holders of Aztec Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of preferred stock. While Aztec
has no present intention to issue shares of preferred stock, such issuance,
while providing desired flexibility in connection with possible acquisitions or
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Aztec and entrenching current management. In
addition, such preferred stock may have other rights, including economic rights
senior to those of the Aztec Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Aztec
Common Stock.
A number of provisions of Aztec's Certificate of Incorporation and By-Laws
and the Delaware General Corporation Law and regulations relating to matters of
corporate governance, certain rights of directors and the issuance of preferred
stock without stockholder approval, may be deemed to have and may have the
effect of making more difficult, and thereby discourage, a merger, tender offer,
proxy contest or assumption of control and change of incumbent management, even
when stockholders other than Aztec's principal stockholders consider such a
transaction to be in their best interest.
In addition, the Aztec Board of Directors is evaluating the adoption of a
shareholder rights plan (a "Rights Plan") pursuant to which stockholders would
receive the right to acquire a fractional share of preferred stock upon certain
events, including the acquisition of more than 15% of the shares of outstanding
Aztec Common Stock, or the commencement of a tender offer for the purchase of
more than 15% of the outstanding Aztec Common Stock. The effect of such a Rights
Plan would be to defer takeover attempts for Aztec that were not approved in
advance by the Aztec Board of Directors.
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INTELLECTUAL PROPERTY RIGHTS
The success of certain operating companies within Aztec is dependent in part
on certain methodologies these companies use in designing, installing, and
integrating computer software and systems and other proprietary intellectual
property rights. These operating companies rely on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties, enter into confidentiality agreements with their key
employees, and limit distribution of proprietary information. There can be no
assurance that the steps taken by these operating companies in this regard will
be adequate to deter misappropriation of proprietary information or that these
operating companies will be able to detect unauthorized use and take appropriate
steps to enforce their intellectual property rights.
Although Aztec believes that its services do not infringe the intellectual
property rights of others and that it has all rights necessary to utilize the
intellectual property employed in its business, Aztec is subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require Aztec to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property, or acquire licenses to
the intellectual property that is the subject of an asserted infringement claim.
NO DIVIDENDS
The Company has never paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Aztec's ability to
pay dividends will be restricted by the Proposed Credit Facility. See "Dividend
Policy."
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
Several of Aztec's operating companies are using billing or other software
that is not Year 2000 compliant. Aztec has not quantified the costs of
addressing its Year 2000 issues, but it believes that the necessary adaptations
of these systems can be completed in the next 18 months, and that the costs of
achieving compliance will not be material. If Aztec is unable to make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the consequences of untimely resolution or the costs of complying
could have an adverse impact on Aztec's business or operations.
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THE TECHNOLOGY DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
the close of business on June 9, 1998 (the "Record Date"), will receive one
share of Aztec Common Stock for every five shares of U.S. Office Products Common
Stock held on the Record Date. The Aztec Common Stock will be distributed on
behalf of U.S. Office Products by American Stock Transfer & Trust Company as the
Distribution Agent. No certificates or scrip representing fractional shares of
Aztec Common Stock will be issued. Following the announcement of the proration
results of the Tender Offer, fractional share interests will be aggregated and
sold by the Distribution Agent at such time as it shall determine in open-market
transactions effected through broker-dealers selected by it. The cash proceeds
will be distributed to those stockholders entitled to a fractional interest with
the distribution of payment for the tendered shares or as soon as practical
thereafter. Certificates representing shares of Aztec Common Stock are expected
to be distributed on June 15, 1998.
Aztec is a newly formed subsidiary of U.S. Office Products that will, as of
the Distribution Date, hold substantially all of the businesses and assets of,
and will be responsible for substantially all of the liabilities associated
with, U.S. Office Products' Technology Solutions division. See "The Spin-Offs
From U.S. Office Products--The Distribution Agreement." Aztec will include the
businesses of the following wholly-owned subsidiaries of U.S. Office Products:
Aztec International; Bay State; Compel; Digital Network Associates; Entra;
Fortran; Mahon; Office Equipment Service; Professional Computer Solutions; and
Professional Network Services. Immediately prior to the Technology Distribution,
U.S. Office Products will hold all the issued and outstanding shares of Aztec
Common Stock. Approximately 22,140,000 shares of Aztec Common Stock will be
distributed to U.S. Office Products stockholders in the Technology Distribution.
This amount is equal to (a) approximately 110,700,000 shares of U.S. Office
Products Common Stock expected to be outstanding at the date of the Technology
Distribution, which is equal to (i) approximately 133,800,000 shares of U.S.
Office Products Common Stock outstanding on April 25, 1998, plus (ii)
approximately 8,900,000 shares of U.S. Office Products Common Stock assumed to
be issued on conversion of 2001 Notes plus (iii) approximately 5,000,000 shares
of U.S. Office Products Common Stock assumed to be issued on exercise of stock
options accepted in the Tender Offer, less (iv) 37,037,037 shares (including
shares that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be purchased in the Tender Offer, divided by
(b) the Distribution Ratio of one share of Aztec Common Stock distributed for
every five shares of U.S. Office Products Common Stock. The number of shares to
be distributed could be greater if additional shares of U.S. Office Products
Common Stock are issued prior to the Technology Distribution pursuant to
outstanding convertible debt securities or stock options of U.S. Office
Products.
THE STRATEGIC RESTRUCTURING PLAN
The Technology Distribution is part of the Strategic Restructuring Plan. The
principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products is offering to purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares
that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) at $27.00 per share (or, in the case of
stock options, at $27.00 minus the exercise price of the options), and
will incur additional indebtedness to pay a substantial portion of the
purchase price for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office Products
stockholder will receive such stockholder's pro rata share of the stock of
each Spin-Off Company.
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- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes Etc.,
its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
plans to undertake the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products will purchase any
or all of its 2003 Notes for a purchase price of 94.5% of the principal
amount and accrued interest.
- Pursuant to the 2001 Note Offer, U.S. Office Products will exchange any or
all of its 2001 Notes for U.S. Office Products Common Stock at an exchange
rate of 61.483 shares per $1,000 principal amount, which effectively
reduces the conversion price on the 2001 Notes from $19.00 to $16.17 while
the offer is open.
- Pursuant to a commitment letter from a group of lenders, U.S. Office
Products plans to enter into a new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least $400.0 million in
senior subordinated notes in a private placement.
REASONS FOR THE DISTRIBUTIONS
The U.S. Office Products Board has approved the Strategic Restructuring
Plan, including the Distributions. The U.S. Office Products Board determined
that separation of the businesses of the Spin-Off Companies and the continuing
business of U.S. Office Products as part of the Strategic Restructuring Plan
would have advantages for the Spin-Off Companies and U.S. Office Products. The
Distributions will allow U.S. Office Products and the Spin-Off Companies to
adopt strategies and pursue objectives that are more appropriate to their
respective industries and geographic territories. After the Distributions, U.S.
Office Products will be focused on a narrower group of businesses that involve
primarily the distribution of office products and business services. Each of the
Spin-Off Companies will be focused primarily on its individual business.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the technology solutions business
using U.S. Office Products Common Stock. Sellers were thus required to accept
stock in a business that included office products, corporate travel services,
print management and educational supply businesses. Following the Technology
Distribution, Aztec will be able to offer stock in its own business, which will
be substantially the same as the businesses Aztec expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
The Distributions will also allow U.S. Office Products and the Spin-Off
Companies to offer their respective employees more focused incentive
compensation packages. The incentive compensation packages (which are expected
to consist primarily of stock options) will offer the officers and other key
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employees of each Spin-Off Company equity interests in a company whose
performance is tied directly to the business for which they work. Aztec's
ability to issue stock options (as well as other equity) will be subject to
certain limitations in order to avoid triggering certain adverse federal income
tax consequences. See "U.S. Federal Income Tax Consequences of the Technology
Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as completion of the Tender Offer). The U.S. Office
Products Board of Directors recognized that U.S. Office Products was making a
transition from an acquisition-oriented company to a business more focused on
growth through improvement and expansion of existing operations. The U.S. Office
Products Board concluded that the investment by CD&R in U.S. Office Products,
and support of the management of U.S. Office Products by CD&R, Inc., would
contribute to U.S. Office Products' development. CD&R, Inc. has substantial
experience in providing companies in which its affiliates invest with financial
and managerial advisory services aimed at building value and improving
operational, marketing, and financial performance. CD&R, Inc. is also
experienced in advising and assisting companies in managing high levels of debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products is
offering to repurchase 37,037,037 shares (including shares that may be issued on
exercise of vested and unvested stock options) of U.S. Office Products Common
Stock at a price of $27.00 per share (or, in the case of stock options, at
$27.00 minus the exercise price of the options). Acceptance of and payment for
shares of U.S. Office Products Common Stock under the Tender Offer will be
subject to a number of conditions. These conditions include: (i) a minimum of
37,037,037 shares (including shares that may be issued on exercise of vested and
unvested options for U.S. Office Products Common Stock) of U.S. Office Products
Common Stock being validly tendered and not withdrawn; (ii) U.S. Office Products
having obtained financing sufficient to fund the Tender Offer; (iii) all
conditions to the completion of the Equity Investment having been satisfied or
waived, except for completion of the Tender Offer and the Distributions; (iv)
registration statements relating to the Distributions having become effective;
and (v) all other conditions to the completion of the Distributions, including
U.S. Office Products having received an opinion of Wilmer, Cutler & Pickering
regarding the tax treatment of the Distributions, having been satisfied, except
for completion of the Tender Offer.
If all eligible shares of U.S. Office Products Common Stock are validly
tendered by stockholders and option holders in the Tender Offer, the proration
percentage (that is, the percentage of validly tendered shares of U.S. Office
Products Common Stock that would be purchased in the Tender Offer) would be
approximately 22.5%. This percentage assumes that all 2001 notes are exchanged
for shares of U.S. Office Products Common Stock in the 2001 Note Offer, all such
shares are tendered in the Tender Offer, and all 2003 Notes are tendered and
accepted for purchase in the 2003 Note Tender.
U.S. Office Products expects to finance the aggregate tender price through a
combination of a new senior credit facility for $1.225 billion (the "USOP Credit
Facility"), the net proceeds of the Equity Investment, and issuance of $400.0
million of senior subordinated debt securities in a private placement. U.S.
Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $440.0 million. Approximately $362.0 million
was outstanding under U.S. Office Products existing bank credit facility as of
March 20, 1998. U.S. Office Products has entered into a commitment for the USOP
Credit Facility.
The Record Date for the Distributions will occur after acceptance of shares
under the Tender Offer. Accordingly, U.S. Office Products stockholders who
tender their shares of U.S. Office Products Common Stock in the Tender Offer
will not receive the Distributions to the extent their U.S. Office Products
shares are accepted in the Tender Offer. Because the Tender Offer is for only
37,037,037 shares of U.S. Office Products Common Stock (including shares that
may be issued on exercise of vested and unvested options for U.S. Office
Products Common Stock), only a portion of the shares tendered by any U.S. Office
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Products stockholder is likely to be accepted. U.S. Office Products stockholders
who tender their shares are therefore likely to receive the Distributions with
respect to a portion of their shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible debentures of
U.S. Office Products and of shares of U.S. Office Products Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements; and (c) warrants ("Common Stock Warrants") representing the right to
purchase one share of U.S. Office Products Common Stock for each share of U.S.
Office Products Common Stock purchased by CD&R at the date of the closing under
the Investment Agreement (the "Closing Date") and for each share of U.S. Office
Products Common Stock into which the Special Warrants become exercisable. The
Special Warrants are exercisable from and after the Closing Date until the 12th
anniversary thereof, subject to certain limitations, and the Common Stock
Warrants are exercisable from and after the second anniversary of the Closing
Date until such 12th anniversary. The aggregate exercise price of the Common
Stock Warrants is $405.0 million.
CD&R has contracted to purchase a 24.9% equity interest in U.S. Office
Products, including the shares issued to CD&R (the "Initial CD&R Acquisition").
CD&R's percentage ownership of U.S. Office Products will not increase or
decrease depending on the actual number of shares of U.S. Office Products Common
Stock outstanding on the closing date of the Initial CD&R Acquisition. The
Special Warrants will be issued to allow CD&R to maintain its 24.9% ownership
interest if (i) any 2001 Notes that remain outstanding after the 2001 Note Offer
were converted into U.S. Office Products Common Stock at the conversion price in
effect after adjusting for the Tender Offer and the Distributions, or (ii)
additional shares are issued under certain contracts for acquisitions completed
by U.S. Office Products.
Assuming (i) exercise of all currently exercisable outstanding options, and
(ii) no 2003 Notes were purchased under the 2003 Tender and all such 2003 Notes
were converted in accordance with their existing terms, in each case without any
adjustment for the Strategic Restructuring Plan, and (a) exercise of the Special
Warrants in full, and (b) exercise of the Common Stock Warrants in full, CD&R
could own approximately 34.7% of outstanding U.S. Office Products Common Stock
on a fully-diluted basis. U.S. Office Products expects to make adjustments to
the number and exercise price of outstanding options, and to the conversion
price of any 2001 Notes and 2003 Notes remaining after the 2001 Note Offer and
the 2003 Tender Offer, on account of the restructuring transactions, and these
adjustments will result in a greater number of shares that may be issued upon
exercise of the options and conversion of such notes. Although the amount of
these adjustments will not be known until after the completion of the Strategic
Restructuring Plan, the effect of these adjustments will be to reduce CD&R's
fully-diluted ownership interest in U.S. Office Products from the amounts set
forth above. If no currently exercisable outstanding options are exercised,
exercise of the Special Warrants and Common Stock Warrants could give CD&R
approximately 39.9% of outstanding U.S. Office Products Common Stock after
implementation of the Strategic Restructuring Plan (assuming that all of the
2001 Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender).
Because the Record Date for the Distributions will be immediately before the
closing of the Equity Investment, CD&R will not receive any shares of the
Spin-Off Companies in the Distributions.
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Prior to the closing of the Initial CD&R Acquisition, the Board of Directors
of U.S. Office Products will consist of nine persons, including the chief
executive officer, three designees of CD&R, three designees of the U.S. Office
Products' Board and two persons who are satisfactory to both CD&R and the U.S.
Office Products' Board. After the closing of the Initial CD&R Acquisition, the
existing members of the U.S. Office Products Board will have the right to
nominate six directors, which will include the chief executive officer. CD&R
will have the right to nominate three directors. So long as CD&R has the right
to nominate two or more directors, one of CD&R's nominees will serve as Chairman
of the Board. CD&R can nominate one additional person to the U.S. Office
Products' Board, if the directors of U.S. Office Products do not nominate its
chief executive officer to the Board.
In addition, three-fourths of the directors of U.S. Office Products must
approve the following transactions: (i) the sale by U.S. Office Products of
equity securities, other than (A) a specified amount made available under
employee benefit plans, such as option plans, or (B) a specified amount issued
to acquire companies or issued in public offerings; (ii) any merger, tender
offer involving U.S. Office Products equity securities or sale, lease or
disposition of all or substantially all of U.S. Office Products assets or other
business combination involving U.S. Office Products, unless the consideration
for such sale is all cash or is freely tradeable common stock of a public
company with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to stockholder rights plans; (v) any
dissolution or partial liquidation of U.S. Office Products; or (vi) any
modification to U.S. Office Products' organization documents or by-laws that is
inconsistent with CD&R's rights under the Investment Agreement or any other
agreements between U.S. Office Products and CD&R. The effect of this provision
is so long as CD&R can nominate three directors, at least one of them must vote
in favor of any of the above actions for it to be approved.
The following Table summarizes the right of CD&R to nominate directors of
U.S. Office Products and shows when the 75% super-majority voting requirement
will apply:
<TABLE>
<CAPTION>
PORTION OF SHARES OF U.S. NUMBER OF DIRECTORS RIGHT TO 75% BOARD
OFFICE PRODUCTS COMMON CD&R IS ENTITLED TO DESIGNATE APPROVAL
STOCK RETAINED BY CD&R(1)(2) NOMINATE (OUT OF NINE)(3)(4) CHAIRMAN REQUIREMENT(2)
- -------------------------------------------------------- ----------------------------- ------------- -----------------
<S> <C> <C> <C>
66 2/3% to 100%......................................... Three Yes Yes
33 1/2% to 66 2/3%...................................... Two Yes Yes
Less than 33 2/3% (but CD&R holds at least 5% of the
then outstanding U.S. Office Products voting stock.... One No No
Less than 5% of the then outstanding U.S. Office
Products voting stock................................. None No No
</TABLE>
- ----------------------
(1) Includes shares CD&R can acquire by exercising the Special Warrants.
(2) All of CD&R's corporate governance rights will expire on the earlier of the
fifth anniversary of the closing of the Initial CD&R Acquisition or if CD&R
ever acquires more than 50% of the voting power represented by U.S. Office
Products' then outstanding voting securities.
(3) CD&R can approve one additional nominee if the Chief Executive Officer of
U.S. Office Products is not a member of the Board or is not a Board nominee.
(4) The size of the Board can be increased up to a total of 12 members, in which
case the number of directors that CD&R has the right to nominate will
increase proportionately.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of U.S. Office Products' representations and warrants and compliance by
U.S. Office Products with its obligations under the Investment Agreement; (ii)
receipt of necessary antitrust and other regulatory clearance; (iii) absence of
material litigation; (iv) U.S. Office Products stockholder approval of issuance
of shares in the Equity Investment; (v) completion of the Distributions in
accordance with Distribution Agreements containing certain terms
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specified in the Investment Agreement and otherwise as reasonably approved by
CD&R; (vi) execution and delivery of the Tax Allocation Agreement containing
certain terms specified in the Investment Agreement and otherwise as reasonably
approved by CD&R; (vii) execution of documents relating to financing for the
Tender Offer satisfactory in form and substance to CD&R; (viii) completion of
the Tender Offer; (ix) execution of a consulting agreement with CD&R Inc.
providing for payment of an annual fee of $500,000, and a registration rights
agreement with CD&R; (x) absence of any development since October 25, 1997 that
would have a material adverse effect on U.S. Office Products after giving effect
to the Distributions; (xi) no person or group (other than CD&R or its
affiliates) having entered into an agreement with U.S. Office Products with
respect to a tender or exchange offer for any shares of U.S. Office Products
Common Stock, or a merger, consolidation, or other business combination with or
involving the Company; and (xii) U.S. Office Products' debt immediately
following completion of the transactions contemplated by the Strategic
Restructuring Plan shall not exceed $1.4 billion (assuming conversion of certain
convertible debt) and the outstanding debt of the Spin-Off Companies shall be at
least $130.0 million plus expenditures by such entities for acquisitions after
the date of the Investment Agreement. See "The Spin-Offs from U.S. Office
Products--Distribution Agreement"; and "--Tax Allocation Agreement." If U.S.
Office Products does not proceed with the Distributions, or if the Equity
Investment does not occur for certain other reasons, CD&R can terminate the
Investment Agreement and CD&R would receive a termination fee of $25.0 million
plus CD&R's reasonable fees and expenses. If the Equity Investment is completed,
CD&R Inc. will receive a transaction fee of $15.0 million and reimbursement for
expenses it incurs in connection with the transaction. For additional
information concerning the Equity Investment, investors should refer to U.S.
Office Products' proxy statement for its special meeting of stockholders to be
held to consider the issuance of shares in Equity Investment. See "Additional
Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will resign as
Chairman of the U.S. Office Products Board upon completion of the Distributions.
In connection with the adoption of the Strategic Restructuring Plan, U.S. Office
Products' Board of Directors and Mr. Ledecky concluded that it was important to
the achievement of the objectives of the Strategic Restructuring Plan that the
Spin-Off Companies obtain the benefit of Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into the Ledecky Services Agreement.
It is expected that Aztec will enter into an employment agreement with Mr.
Ledecky which will implement assigned portions of the Ledecky Services
Agreement. The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that will continue for four years after the
Technology Distribution has been completed. U.S. Office Products is permitted to
(and will) assign to Aztec the ability to enforce the non-competition provisions
described above as to its own business, which will then constitute part of Mr.
Ledecky's employment agreement with Aztec. Mr. Ledecky will receive options to
purchase up to 7.5% of the outstanding shares of common stock of each Spin-Off
Company as of the Distribution Date, without regard to the Offering. For
additional information on the terms of the Ledecky Services Agreement and the
options to be granted by Aztec to Mr. Ledecky, see "Management-- Ledecky
Services Agreement" and "--1998 Stock Incentive Plan."
Aztec has filed a Registration Statement with the Commission for the
issuance of shares of Aztec Common Stock in the Offering that is expected to
close prior to or concurrent with the Technology Distribution. As a result of
certain U.S. federal income tax limitations under Section 355 of the Code on the
number of shares that Aztec can issue in connection with the Technology
Distribution without jeopardizing the tax-free treatment of the Technology
Distribution, the amount of Aztec capital stock that will be issued in such a
public offering will be limited by the factors discussed in "Risk Factors--Tax
Matters," "Possible Limitations on Issuances of Common Stock," and "The
Technology Distribution--U.S. Federal Income Tax Consequences of the Technology
Distribution."
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TECHNOLOGY DISTRIBUTION
Wilmer, Cutler & Pickering expects to deliver the Tax Opinion at the time of
the Distributions on the material U.S. federal income tax consequences of the
Technology Distribution to U.S. Office Products and holders of U.S. Office
Products Common Stock on the Record Date. The Tax Opinion will be based on the
Code, and regulations, rulings, and judicial decisions as of the date thereof,
all of which may be repealed, revoked, or modified so as to result in U.S.
federal income tax consequences different from those described below. Such
changes could be applied retroactively in a manner that could adversely affect a
holder of U.S. Office Products Common Stock. In addition, the authorities on
which the Tax Opinion will be based are subject to various interpretations. It
is therefore possible that the U.S. federal income tax treatment of the
Technology Distribution and of the holding, and disposition of Aztec Common
Stock may differ from the treatment described below.
The Tax Opinion will apply only to holders of U.S. Office Products Common
Stock who are U.S. persons and who hold U.S. Office Products Common Stock as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. A U.S. person is the beneficial owner of U.S. Office
Products Common Stock that is (i) for U.S. federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust with respect to
the administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. The Tax Opinion will not address tax
considerations applicable to a holder of U.S. Office Products Common Stock's
particular circumstances or to a holder that may be subject to special tax rules
(such as holders subject to the alternative minimum tax) or other special
situations, such as those of dealers in securities or currencies, financial
institutions, insurance companies, persons holding U.S. Office Products Common
Stock as part of a hedging or conversion transaction or a straddle, persons
whose "functional currency" is not the U.S. dollar, and certain U.S.
expatriates.
The Tax Opinion will not address all aspects of U.S. federal income taxation
that may be relevant to holders of U.S. Office Products Common Stock in light of
their particular circumstances, nor will it address any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction. Holders of
U.S. Office Products Common Stock should consult their tax advisors about the
particular U.S. federal income tax consequences to them of the Technology
Distribution, or the holding and disposition of Aztec Common Stock, as well as
any tax consequences arising under the laws of any state, local, or foreign
taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. Subject to the foregoing, the Tax Opinion will state Wilmer, Cutler &
Pickering's opinion that for U.S. federal income tax purposes the Distributions
(including the Technology Distribution) will qualify as tax-free spin-offs under
Section 355 of the Code and will not be taxable under Section 355(e) of the
Code. U.S. Office Products will not complete the Technology Distribution unless
it receives the Tax Opinion. The Tax Opinion will be based on the accuracy as of
the time of the Distributions of factual representations made by U.S. Office
Products, the Spin-Off Companies and CD&R and certain other information, data,
documentation and other materials that Wilmer, Cutler & Pickering has deemed
necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the Technology
Distribution.
Assuming the Technology Distribution qualifies as a tax-free spin-off under
Section 355 and is not taxable under Section 355(e):
23
<PAGE>
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of Aztec Common Stock in
the Technology Distribution. Holders of U.S. Office Products Common Stock
will recognize gain or loss on the receipt of cash in lieu of fractional
shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the Technology Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the Technology Distribution will be
allocated among U.S. Office Products Common Stock and Spin-Off Companies'
common stock (including any fractional shares) received with respect to such
U.S. Office Products Common Stock in proportion to their relative fair
market values on the Distribution Date. Such allocation must be calculated
separately for each block of U.S. Office Products Common Stock (shares
purchased at the same time and at the same cost) with respect to which the
Spin-Off Companies' common stock is received.
4. The holding period of the Aztec Common Stock (including any
fractional shares) received in the Technology Distribution will include the
holding period of the U.S. Office Products Common Stock with respect to
which it was distributed.
Treasury regulations governing Section 355 require that each holder of U.S.
Office Products Common Stock who receives shares of Aztec Common Stock pursuant
to the Technology Distribution attach a statement to the U.S. federal income tax
return that will be filed by such stockholder for the taxable year in which the
stockholder receives Aztec Common Stock in the Technology Distribution. The
regulations require that the statement show the applicability of Section 355 to
the Technology Distribution. U.S. Office Products will provide each U.S. Office
Products stockholder of record on the Record Date with information necessary to
comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Tax Opinion is not binding on the IRS or the courts. Holders of U.S.
Office Products Common Stock should be aware that the requirements of Section
355 pertaining to business purpose, active trade or business, and absence of a
device for distribution of earnings and profits, as well as the requirements of
Section 355(e) pertaining to a plan or series of related transactions to acquire
50% or more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Technology Distribution. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Tax
Opinion.
BUSINESS PURPOSE. In order for the Technology Distribution to qualify as a
tax-free spin-off under Section 355, it must be motivated, in whole or
substantial part, by one or more corporate business purposes. U.S. Office
Products will represent that the Technology Distribution was motivated, in whole
or substantial part, to allow U.S. Office Products and Aztec to adopt strategies
and pursue objectives that are more appropriate to their respective industries
and stages of growth; to allow Aztec to pursue an independent acquisition
program with a more focused use of resources and, where stock is used as
consideration, to allow Aztec to provide stock of a public company that is in
the same industry as the business being acquired; to allow U.S. Office Products
and Aztec to offer their respective employees more focused compensation
packages; and to make possible the Equity Investment, which the Board of
Directors of U.S. Office Products concluded would contribute to U.S. Office
Products' development, based on the skills and experience of CD&R, Inc. Based on
these representations and certain other information, data, documentation and
other materials, Wilmer, Cutler & Pickering expects to deliver an opinion at the
time of the Distributions that the Technology Distribution satisfies the
business purpose requirement of Section 355 of the Code. However, although
similar rationales have been accepted by the IRS in other circumstances as
sufficient to meet the business purpose requirement of Code Section 355, there
can be no assurances that the IRS will not assert that the business purpose
requirement is not satisfied.
24
<PAGE>
ACTIVE TRADE OR BUSINESS. In order for the Technology Distribution to
qualify as a tax-free spin-off under Section 355, both Aztec and U.S. Office
Products must be engaged in an active trade or business that has been actively
conducted for the five-year period preceding the Technology Distribution, taking
into account only businesses that have been acquired in transactions in which no
gain or loss was recognized. Whether current and historical business activity
constitutes an active trade or business, and whether any gain or loss should
have been recognized in an acquisition structured and reported as a nontaxable
transaction, turn in some instances on the application of subjective legal
standards and on factual determinations, such as intentions of the parties
involved. Based on the representations of U.S. Office Products and Aztec,
Wilmer, Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that the Technology Distribution will satisfy the active trade or
business requirement. However, because of the inherently subjective nature of
important elements of the active trade or business requirement, and because the
IRS may challenge the representations upon which Wilmer, Cutler & Pickering
relies, there can be no assurance that the IRS will not assert that the active
trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. The
Technology Distribution will not qualify as a tax-free spin-off under Section
355 if the Technology Distribution was used principally as a device for the
distribution of the earnings and profits of U.S. Office Products or Aztec.
Treasury regulations provide that this test is applied based on all the facts
and circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and Aztec, Wilmer, Cutler & Pickering
expects to deliver an opinion at the time of the Distributions that the
Technology Distribution is not a transaction used principally as a device for
the distribution of earnings and profits of either U.S. Office Products or
Aztec. However, because of the inherently subjective nature of the device test
(including the subjectivity involved in assigning weight to various factors),
and because the IRS may challenge the representations upon which Wilmer, Cutler
& Pickering relies, there can be no assurance that the IRS will not assert that
the Technology Distribution is a transaction used principally as a device for
the distribution of earnings and profits of U.S. Office Products or Aztec.
If the Technology Distribution fails to qualify as a tax-free spin-off under
Section 355:
1. U.S. Office Products will recognize gain equal to the difference
between the fair market value of the Aztec Common Stock on the Distribution
Date and U.S. Office Products adjusted tax basis in the Aztec Common Stock
on the Distribution Date. If U.S. Office Products were to recognize gain on
the Technology Distribution, such gain would likely be substantial.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the Aztec Common Stock
distributed to such stockholder, including fractional shares. The
distribution would generally be treated as ordinary dividend income to a
U.S. Office Products stockholder to the extent of such U.S. Office Products
stockholder's pro rata share of U.S. Office Products' accumulated and
current earnings and profits. To the extent the amount of the distribution
exceeds such U.S. Office Products stockholder's pro rata share of U.S.
Office Products' accumulated and current earnings and profits, such excess
would be treated first as a basis-reducing, tax-free return of capital to
the extent of the stockholder's tax basis in his or her U.S. Office Products
Common Stock and then as capital gain. For corporate stockholders, the
portion of the taxable distribution that constitutes a dividend would be
eligible for the dividends-received deduction (subject to certain
limitations in the Code) and could be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in a
corporate stockholder's basis in its U.S. Office Products Common Stock to
the extent of such deduction and the recognition of gain to the extent the
deduction exceeds the corporate stockholder's tax basis in its U.S. Office
Products Common Stock.
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<PAGE>
3. Each U.S. Office Products stockholder's tax basis in the Aztec
Common Stock would equal the fair market value on Distribution Date of the
Aztec Common Stock (including fractional shares) distributed to such
stockholder.
4. The holding period of the Aztec Common Stock (including fractional
shares) received in the Technology Distribution would begin with, and
include, the day after the Distribution Date.
Whether or not the Technology Distribution is taxable, cash received by a
holder of U.S. Office Products Common Stock in lieu of a fractional share of
Aztec Common Stock will be treated as received in exchange for such fractional
share and the stockholder will recognize gain or loss for U.S. federal income
tax purposes measured by the difference between the amount of cash received and
the stockholder's tax basis in the fractional share. Such gain or loss will be
capital gain or loss to the stockholder.
EFFECT OF POST DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability of 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether this 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary occurring two years before or after the spin-off
pursuant to a plan that includes the spin-off. However, the presumption may be
rebutted by establishing that the spin-off and the acquisition are not part of a
plan or series of related transactions. Based on the representations of U.S.
Office Products, Aztec and CD&R, and the assumption that the Technology
Distribution is not part of a plan that is outside the knowledge of U.S. Office
Products and Aztec pursuant to which one or more persons will acquire directly
or indirectly 50% or more by vote or value of the capital stock of U.S. Office
Products or Aztec, Wilmer, Cutler & Pickering expects to deliver an opinion at
the time of the Distributions that the Technology Distribution will not be
taxable under Section 355(e). However, there can be no assurance that the IRS
will not assert that the Technology Distribution is taxable under Section
355(e).
If the Technology Distribution is taxable under Section 355(e), U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Aztec Common Stock on the Distribution Date and U.S. Office
Products' tax basis in the Aztec Common Stock on the Distribution Date. If U.S.
Office Products were to recognize gain on the Technology Distribution, such gain
would likely be substantial. However, no gain or loss will be recognized by
holders of Aztec Common Stock (except with respect to cash received in lieu of
fractional shares).
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement, Aztec
and the other Spin-Off Companies will jointly and severally indemnify U.S.
Office Products for any Distribution Taxes assessed against U.S. Office Products
if an Adverse Tax Act of any of the Spin-Off Companies materially contributes to
a final determination that any of the Distributions is taxable. Aztec will also
enter into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible for the Adverse Tax Act
will indemnify the other Spin-Off Companies for any liability to U.S. Office
Products under the Tax Allocation Agreement. As a consequence, Aztec will be
primarily liable for any Distribution Taxes resulting from an Adverse Tax Act by
Aztec and liable (subject to indemnification by the other Spin-Off Companies)
for any Distribution Taxes resulting from an Adverse Tax Act by the other
Spin-Off Companies. Additionally, U.S. Office Products and each of the Spin-Off
Companies will be liable for its pro rata portion of any Distribution Taxes,
based on the value of each company's common stock after the Distributions, if it
is determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies. As a result, Aztec could become
liable for a pro rata portion of any Distribution Taxes with respect not only to
the Technology Distribution, but also to any of the other Distributions. See
"The Spin Offs from U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement" for a detailed discussion of the Tax Allocation
Agreement.
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WILMER, CUTLER & PICKERING'S OPINION OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK DOES NOT PURPORT TO
COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER
OF U.S. OFFICE PRODUCTS COMMON STOCK. ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE TECHNOLOGY
DISTRIBUTION TO THEM.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS
Aztec expects that all or substantially all vested and unvested options to
acquire the U.S. Office Products common stock that are held by Aztec employees
("U.S. Office Products Options") on the Distribution Date will be replaced with
options to acquire shares of Aztec Common Stock ("Aztec Options"). As of the
Distribution Date, approximately 803,688 U.S. Office Products Options will be
held by employees of Aztec. The number of Aztec Options that will be outstanding
after the Distributions will depend on the trading price of U.S. Office Products
common stock around the time of the Distributions and the public offering price
of the Aztec Common Stock in the Offering. For those reasons, the number of
Aztec Options into which the U.S. Office Products options will convert is not
yet determinable. The formulas will not affect when the options vest or when
employees can exercise the options. The following formulas will be used to
adjust the number and exercise price of U.S. Office Products Options. Such
formulas will adjust solely for the Distributions and not for other events, such
as the Tender Offer. The exercise price of U.S. Office Products Options will be
adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price of
Common Stock in the Offering
Trading Price of U.S. Office
Products Common Stock
Pre-Technology Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products
Common Stock Pre-Technology
Distribution
Initial Public Offering Price of
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Technology Distribution" will be the average closing price of U.S. Office
Products common stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the expiration
of the Tender Offer and the completion of the Distributions. The foregoing
formula adjustments are intended to preserve for the holder of U.S. Office
Products Options the intrinsic value perception, measured as the difference
between the market value of one share of U.S. Office Products Common Stock at
the time of the Technology Distribution and the exercise price of such option.
The intrinsic value of the Aztec Options will be no greater than the intrinsic
value of the U.S. Office Products Options immediately before the Distribution,
and the ratio of exercise price to market price will be not less than the ratio
immediately before the Distributions.
It is anticipated that all other terms of the Aztec Options will be the same
as the terms of the U.S. Office Products Options they replace. As a result of
the adjustments described above, options held by Aztec employees after the
Technology Distribution would represent a greater percentage interest in Aztec
than the percentage interest in U.S. Office Products represented by such options
before the Distributions.
RESTRICTIONS ON TRANSFER
Shares of Aztec Common Stock distributed to U.S. Office Products
stockholders pursuant to the Technology Distribution will be freely transferable
under the Securities Act, except for shares received by any persons who may be
deemed to be "affiliates" of Aztec as that term is defined in Rule 144
promulgated under the Securities Act. Persons who may be deemed to be affiliates
of Aztec after the Technology Distribution generally include individuals or
entities that control, are controlled by, or are under common control with,
Aztec and may include certain officers and directors of Aztec as well as
principal stockholders of Aztec. Persons who are affiliates of Aztec will be
permitted to sell their shares of
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Aztec Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemptions provided for private transactions or Rule
144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that legal, financial advisory, investment
banking, financing, accounting, printing, mailing, and other expenses (including
the fees of U.S. Office Products' and the Spin-Off Companies' transfer agents)
of the Strategic Restructuring Plan (including CD&R's fees and expenses),
including the Distributions, will total approximately $75.0 million. Upon
request, U.S. Office Products will pay the reasonable expenses of brokerage
firms, custodians, nominees, and fiduciaries who are record holders of U.S.
Office Products shares for forwarding this Information Statement/Prospectus to
the beneficial owners of such shares. The foregoing expenses will be allocated
among U.S. Office Products and the Spin-Off Companies pursuant to a formula to
be determined. See "The Spin-Offs from U.S. Office Products--Distribution
Agreement."
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THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
Following the Technology Distribution, U.S. Office Products and Aztec will
operate independently (except for interests U.S. Office Products may retain
pursuant to certain pledge agreements), and neither will have any stock
ownership, beneficial or otherwise, in the other. For the purposes of governing
certain of the ongoing relationships between and among U.S. Office Products,
Aztec and the other Spin-Off Companies after the Distributions, and to provide
mechanisms for an orderly transition, on or before the Distribution Date, U.S.
Office Products, Aztec and the other Spin-Off Companies will enter into the
Distribution Agreement, the Tax Allocation Agreement, and the Employee Benefits
Agreement, and the Spin-Off Companies will enter into the Tax Indemnification
Agreement. The terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement, and Employee Benefits Agreement have not yet been
finally determined. Those terms will be agreed to while Aztec is a wholly-owned
subsidiary of U.S. Office Products. In addition, the Investment Agreement
specifies certain terms of these agreements and provides that they are subject
to CD&R's reasonable approval. Therefore, they will not be the result of
arm's-length negotiations between independent parties.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not been
finally determined, Aztec currently expects that the terms will include those
described below. There can be no assurance that the terms of the Distribution
Agreement, Tax Allocation Agreement, Tax Indemnification Agreement, and Employee
Benefits Agreement will not be less favorable to the stockholders of Aztec than
the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement provides
for the transfer from U.S. Office Products to Aztec of substantially all of the
equity interests in the U.S. Office Products subsidiaries that are engaged in
Aztec's business as well as the transfer in certain instances of other assets
related to the business of Aztec. It also provides that the recovery on any
claims that U.S. Office Products may have against the persons who sold
businesses to U.S. Office Products that will become part of Aztec in connection
with the Technology Distribution (the "Aztec Acquisition Indemnity Claims") will
be allocated 100% to Aztec. In addition, to the extent that Aztec Acquisition
Indemnity Claims are secured by the pledge of stock of U.S. Office Products and
the Spin-Off Companies that are owned by persons who sold businesses to U.S.
Office Products that will become part of Aztec (and no previous claims have been
made against such shares), the pledged shares will be used, subject to final
resolution of the claim, to reimburse U.S. Office Products and the applicable
Spin-Off Company for their respective damages, expenses in accordance with the
agreed upon allocation of recovery rights, which will be determined prior to the
Technology Distribution.
DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires each Spin-Off Company, on or prior to the Distributions, to
obtain credit facilities to borrow funds under such facilities and to use the
proceeds of such borrowings to pay off the U.S. Office Products after January
12, 1998 (the date of the Investment Agreement) in connection with the
acquisition of any entity that has become or will become a subsidiary of such
Spin-Off Company. Under the Distribution Agreement, U.S. Office Products has
allocated $5.0 million of debt to Aztec. Aztec will borrow $4.3 million under an
existing working capital credit facility to pay off debt to U.S. Office
Products.
LIABILITIES. Under the Distribution Agreement, Aztec will be responsible
for (i) any liabilities arising out of or in connection with the businesses
conducted by Aztec and/or its subsidiaries, (ii) its liabilities under the
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement
and related agreements, (iii) the U.S. Office Products' debt that has been
allocated to Aztec as described above, (iv) liabilities under the securities
laws relating to the Prospectus related to the Offering and portions of this
Information Statement/Prospectus, as well as other securities law liabilities
related to the Aztec
29
<PAGE>
business that arise from information supplied to U.S. Office Products (or that
should have been supplied but was not) by Aztec, (v) liabilities of U.S. Office
Products for earn-outs from acquisitions in respect of Aztec or its
subsidiaries, (vi) Aztec's costs and expenses related to the Offering and its
bank credit facility, and (vii) $1.0 million of the transaction costs (including
legal, accounting, investment banking and financial advisory) and other fees
incurred by U.S. Office Products in connection with the Strategic Restructuring
Plan. Each of the Spin-Off Companies will be similarly obligated to U.S. Office
Products. Aztec and the other Spin-Off Companies have also agreed to bear a pro
rata share of (i) any liabilities of U.S. Office Products under the securities
laws (other than claims relating solely to a specific Spin-Off Company or
relating specifically to the continuing businesses of U.S. Office Products), and
(ii) U.S. Office Products' general corporate liabilities (other than debt,
except for that specifically allocated to the Spin-Off Companies) incurred prior
to the Distributions (I.E., liabilities not related to the conduct of a
particular distributed or retained subsidiary's business). If one of the
Spin-Off Companies defaults on an obligation owed to U.S. Office Products, the
other non-defaulting Spin-Off Companies will be obligated on a pro rata basis to
pay such obligation.
The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and (b) their operating income
relative to that of U.S. Office Products. The residual will be U.S. Office
Products' pro rata share. Based upon financial data for the nine-month period
ended January 24, 1998, the Company's pro rata share of Shared Liabilities would
have been 8.2%, the other Spin-Off Companies' pro rata share would have
aggregated 26.2% and U.S. Office Products' pro rata share would have been 65.6%.
As to any Default Liability, each non-defaulting company's pro rata share will
be increased to include a portion of the defaulting company's pro rata share.
The aggregate of the Shared Liabilities and Default Liability for which any
Spin-Off Company may be liable is, however, limited to $1.75 million.
The Distribution Agreement provides that each party will indemnify and hold
all of the other parties harmless from any and all liabilities for which the
former assumed liability under the Distribution Agreement. All indemnity
payments will be subject to adjustment upward or downward to take account of tax
costs or tax benefits as well as insurance proceeds. If there are any claims
made under U.S. Office Products' existing insurance policies, the amount of any
deductible or retention will be allocated by U.S. Office Products among the
claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement will have other customary
provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. Aztec will also enter into the
Tax Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, Aztec will be liable for any
Distribution Taxes resulting from any Adverse Tax Act by Aztec and liable
(subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. If there is a final
30
<PAGE>
determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, each of U.S. Office Products and the
Spin-Off Companies will be liable for its pro rata portion of such Distribution
Taxes based on the value of each company's common stock after the Distributions.
As a result, Aztec could become liable for a pro rata portion of any
Distribution Taxes with respect to not only the Technology Distribution but also
any other Distribution.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with Aztec and the other Spin-Off Companies
to provide for an orderly transition of benefits coverage between U.S. Office
Products and the Spin-Off Companies. Pursuant to this agreement, the respective
Spin-Off Companies will retain or assume liability for employment-related claims
and severance for persons currently or previously employed by the respective
Spin-Off Companies and their subsidiaries, while U.S. Office Products and its
post-Distribution subsidiaries will retain or assume responsibility for their
current and previous employees. The proposed Employee Benefits Agreement
reflects U.S. Office Products' expectation that each of the Spin-Off Companies
will establish 401(k) plans for their respective employees effective as of, or
shortly after, the Distribution Date, and that U.S. Office Products will
transfer 401(k) accounts to those plans as soon as practicable. The proposed
agreement also provides for spinning off of portions of the U.S. Office
Products' cafeteria plan that relate to employees of the Spin-Off Companies (and
their subsidiaries) and having those spun-off plans assume responsibilities for
claims submitted on or after the Distribution Date.
DIVIDEND POLICY
Aztec does not anticipate declaring and paying cash dividends on Aztec
Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of dividends on Aztec Common Stock will
be made by the Aztec Board of Directors from time to time in the exercise of its
business judgment, taking into account Aztec's financial condition, results of
operations, existing and proposed commitments for use of Aztec's funds and other
relevant factors. Aztec's ability to pay dividends may be restricted from time
to time by financial covenants in its credit agreements.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Aztec as of January 24,
1998 (i) on an actual basis, (ii) on a pro forma basis to reflect the Technology
Distribution and the allocation of $5.0 million of debt by U.S. Office Products
as described in "The Spin-Offs From U.S. Office Products," and (iii) on a pro
forma, as adjusted basis to give effect to the Offering at an assumed initial
public offering price of $13.00 per share after deduction of estimated offering
expenses and underwriting discounts and commissions and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Position and Results of
Operations," the historical consolidated financial statements and the pro forma
combined financial statements of Aztec, and the related notes to each thereof,
included elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED(2)
---------- ----------- --------------
<S> <C> <C> <C>
(In thousands)
Short-term debt........................................................... $ 304 $ 304 $ 304
---------- ----------- --------------
---------- ----------- --------------
Long-term debt............................................................ $ 386 $ 4,696 $ 386
Long-term payable to U.S. Office Products................................. 9,957
Stockholder's equity:
Preferred Stock, $0.001 par value.....................................
1,000,000 shares authorized, no shares outstanding..................
Common Stock, $0.001 par value, 150,000,000 shares authorized, no
shares actual, 22,140,000 shares pro forma, 26,340,000 shares pro
forma, as adjusted (1).............................................. 22 26
Additional paid-in capital............................................ 80,796 130,070
Divisional equity..................................................... 80,818
Retained earnings..................................................... 9,301 6,969 6,969
---------- ----------- --------------
Total stockholder's equity.......................................... 90,119 87,787 137,065
---------- ----------- --------------
Total capitalization.............................................. $ 100,462 $ 92,483 $ 137,451
---------- ----------- --------------
---------- ----------- --------------
</TABLE>
- ------------------
(1) Excludes shares of Common Stock reserved for issuance upon exercise
of options. See "Management--Replacement of Outstanding U.S. Office Products
Options" and "1998 Stock Incentive Plan."
(2) The net proceeds of the Offering are estimated to be $49.3 million ($56.9
million if the underwriters' overallotment option is exercised in full). The
net proceeds will be used to repay $4.3 million of indebtedness to
BankBoston, N.A., and for working capital and general corporate purposes,
including future acquisitions.
32
<PAGE>
SELECTED FINANCIAL DATA
The historical Selected Financial Data for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 (except pro forma amounts) have been derived
from Aztec's consolidated financial statements that have been audited and are
included elsewhere in this Information Statement/Prospectus. The historical
Selected Financial Data for the fiscal years ended March 31, 1993 and 1994 have
been derived from unaudited consolidated financial statements are not included
elsewhere in this Information Statement/Prospectus or incorporated herein by
reference. The Selected Financial Data for the nine months ended January 25,
1997 and January 24, 1998 (except pro forma amounts) have been derived from
unaudited consolidated financial statements that appear elsewhere in this
Information Statement/Prospectus. These unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the Technology
Distribution and the purchase acquisitions completed by Aztec between May 1,
1996 and May 1, 1998 as if all such transactions had been consummated on May 1,
1996. In addition, the pro forma information is based on available information
and certain assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Information Statement/Prospectus.
33
<PAGE>
SELECTED FINANCIAL DATA (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED
APRIL 26, ------------------------
--------------------
FISCAL YEAR ENDED MARCH 31, PRO
------------------------------------------ FORMA JANUARY 25, JANUARY 24,
1993 1994 1995 1996 1997 1997 (2) 1997 1998
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues......................... $ 46,152 $ 58,979 $ 88,999 $ 114,055 $ 136,278 $ 228,912 $ 101,295 $ 142,512
Cost of revenues................. 34,121 43,630 65,858 84,113 102,129 169,150 76,049 107,895
--------- --------- --------- --------- --------- --------- ----------- -----------
Gross profit..................... 12,031 15,349 23,141 29,942 34,149 59,762 25,246 34,617
Selling, general and
administrative expenses........ 10,139 11,218 14,942 20,510 21,525 39,134 15,637 22,951
Goodwill amortization expense.... 1,651 414
Non-recurring acquisition
costs.......................... 2,274 2,274 1,906
--------- --------- --------- --------- --------- --------- ----------- -----------
Operating income................. 1,892 4,131 8,199 9,432 10,350 16,703 7,703 11,252
Interest expense................. 412 297 331 420 324 400 310 169
Interest income.................. (75) (54) (118) (416) (168) (169) (167)
Other (income) expense........... (77) (75) (111) (964) (53) (579) 234 (14)
--------- --------- --------- --------- --------- --------- ----------- -----------
Income before provision for
income taxes................... 1,632 3,963 8,097 10,392 10,247 16,882 7,328 11,264
Provision for income taxes (4)... 210 232 401 750 3,524 7,428 1,771 4,692
--------- --------- --------- --------- --------- --------- ----------- -----------
Net income....................... $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,572 $ 9,454 $ 5,557 $ 6,572
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Per share amounts:
Basic.......................... $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.37 $ 0.43 $ 0.32 $ 0.29
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Diluted........................ $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.36 $ 0.43 $ 0.32 $ 0.28
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic.......................... 8,852 8,852 9,112 13,509 18,005 22,140(5) 17,196 22,952
Diluted........................ 8,852 8,852 9,141 13,675 18,352 22,140(5) 17,565 23,437
<CAPTION>
JANUARY 24, 1998
-----------------------------------
MARCH 31, PRO FORMA
------------------------------- APRIL 30, APRIL 26, PRO FORMA AS ADJUSTED
1993 1994 1995 1996 1997 ACTUAL (7) (3)
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 31,848
Total assets................................................ 14,890 16,423 28,106 33,945 37,311 142,347
Long-term debt, less current portion........................ 461 461 1,524 799 167 386
Long-term payable to U.S. Office Products................... 4,786 9,957
Stockholder's equity........................................ 5,382 6,745 11,062 10,497 11,626 90,119
<CAPTION>
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 24,
1997 (2) 1998 (2) 1998(3)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues......................... $ 172,518 $ 191,074 $ 191,074
Cost of revenues................. 127,875 141,631 141,631
----------- ----------- -----------
Gross profit..................... 44,643 49,443 49,443
Selling, general and
administrative expenses........ 28,876 31,235 31,235
Goodwill amortization expense.... 1,239 1,239 1,239
Non-recurring acquisition
costs.......................... 1,906
----------- ----------- -----------
Operating income................. 12,622 16,969 16,969
Interest expense................. 300 300 41
Interest income..................
Other (income) expense........... (232) (252) (252)
----------- ----------- -----------
Income before provision for
income taxes................... 12,554 16,921 17,180
Provision for income taxes (4)... 5,524 7,445 7,559
----------- ----------- -----------
Net income....................... $ 7,030 $ 9,476 $ 9,621
----------- ----------- -----------
----------- ----------- -----------
Per share amounts:
Basic.......................... $ 0.32 $ 0.43 $ 0.43
----------- ----------- -----------
----------- ----------- -----------
Diluted........................ $ 0.32 $ 0.43 $ 0.43
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares
outstanding:
Basic.......................... 22,140(5) 22,140(5) 22,507(6)
Diluted........................ 22,140(4) 22,140(4) 22,507(6)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 23,869 $ 68,837
Total assets................................................ 134,368 179,336
Long-term debt, less current portion........................ 4,696 386
Long-term payable to U.S. Office Products...................
Stockholder's equity........................................ 87,787 137,065
<CAPTION>
BALANCE SHEET DATA:
Working capital.............................................
Total assets................................................
Long-term debt, less current portion........................
Long-term payable to U.S. Office Products...................
Stockholder's equity........................................
</TABLE>
- ------------------
(1) The historical financial information of the Pooled Companies has been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions. The pro forma
financial data reflect acquisitions completed by Aztec through May 1, 1998.
See Note 4 of the Company's Notes to Consolidated Financial Statements for a
description of the number and accounting treatment of the acquisitions by
the Company.
(2) Gives effect to the Technology Distribution and the purchase acquisitions
completed by Aztec since May1, 1996 as if all such transactions had been
consummated on May 1, 1996. The pro forma statement of income data are not
necessarily indicative of the operating results that would have been
achieved had these events actually then occurred and should not be construed
as representative of future operating results.
(3) Adjusted to give effect to the sale by the Company of 4,200,000 shares of
Common Stock in the Offering at the assumed initial public offering price
and the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(4) Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(i) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma balance sheet data are
not necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
(6) For calculation of the pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(k) of
Notes to Pro Forma Combined Financial Statements included herein.
(7) Gives effect to the Technology Distribution as if it had been made on
January 24, 1998. The pro forma balance sheet data are not necessarily
indicative of the financial position that would have been achieved had the
Technology Distribution actually then occurred and should not be construed
as representative of future financial position.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "expect," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," and "Business," as well as those discussed elsewhere
in this Prospectus.
OVERVIEW
Aztec was initially formed in October 1996 with the acquisition of Bay State
by U.S. Office Products. Since that time, under the leadership of Aztec's
current Chairman and Chief Executive Officer, James E. Claypoole, nine
complementary regional IT solutions companies were acquired. These companies
are: (i) Aztec International; (ii) Compel; (iii) Digital Network Associates;
(iv) Entra; (v) Fortran; (vi) Mahon; (vii) Office Equipment Service; (viii)
Professional Computer Solutions; and (ix) Professional Network Services.
Aztec generates revenues principally from (i) fees for services rendered to
customers (including consulting and engineering services, systems and network
implementation services, software development and implementation services, IT
support and operational services, and telephony design and integration services)
and (ii) sales of products to customers within these business sectors (including
telephony systems and network and systems hardware and software).
Aztec's consolidated financial statements give retroactive effect to the
five business combinations accounted for under the pooling-of-interests method
during the period from October 1996 through April 1997 (the "Pooled Companies")
and include the results of five companies acquired during the nine months ended
January 24, 1998 in business combinations accounted for under the purchase
method (the "Purchased Companies") from their respective acquisition dates.
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results for years ending on March 31 and December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from March 31 and December 31 to conform to U.S. Office Products' fiscal year,
which ends on the last Saturday in April. In the following discussion, "fiscal
1995" and "fiscal 1996" refer to the Company's fiscal years ended March 31, 1995
and 1996, respectively.
The following discussion should be read in conjunction with Aztec's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended March 31, 1995, 1996 and April 26, 1997 and for the nine
months ended January 25, 1997 and January 24, 1998, as well as for the fiscal
year ended April 26, 1997 and for the nine months ended January 25, 1997
35
<PAGE>
and January 24, 1998 on a pro forma basis reflecting the Technology Distribution
and the results of the Purchased Companies as if such transactions had occurred
on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE NINE MONTHS ENDED
-------------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
MARCH 31, MARCH 31, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
------------- ------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 74.0 73.7 74.9 73.9 75.1 75.7 74.1
----- ----- ----- ----- ----- ----- -----
Gross profit........... 26.0 26.3 25.1 26.1 24.9 24.3 25.9
Selling, general and
administrative
expenses................. 16.8 18.0 15.8 17.8 15.4 16.4 17.5
Non-recurring acquisition
costs.................... 1.7 1.0 1.9 1.1
----- ----- ----- ----- ----- ----- -----
Operating income....... 9.2 8.3 7.6 7.3 7.6 7.9 7.3
Interest (income) expense,
net...................... 0.2 0.1 0.2 0.1 0.2
Other income............... (0.1) (0.8) (0.3) 0.3 (0.2)
----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes............. 9.1 9.1 7.5 7.4 7.2 7.9 7.3
Provision for income
taxes.................... 0.5 0.6 2.6 3.3 1.7 3.3 3.2
----- ----- ----- ----- ----- ----- -----
Net income................. 8.6% 8.5% 4.9% 4.1% 5.5% 4.6% 4.1%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues................... 100.0%
Cost of revenues........... 74.1
-----
Gross profit........... 25.9
Selling, general and
administrative
expenses................. 17.0
Non-recurring acquisition
costs....................
-----
Operating income....... 8.9
Interest (income) expense,
net...................... 0.2
Other income............... (0.2)
-----
Income before provision for
income taxes............. 8.9
Provision for income
taxes.................... 3.9
-----
Net income................. 5.0%
-----
-----
</TABLE>
COMPARISON OF THE NINE MONTHS ENDED JANUARY 24, 1998 TO THE NINE MONTHS ENDED
JANUARY 25, 1997
REVENUES. Consolidated revenues increased 40.7%, from $101.3 million for
the nine months ended January 25, 1997, to $142.5 million for the nine months
ended January 24, 1998. This increase was primarily due to sales to new accounts
and increased sales to existing customers in the consulting and engineering
services sector, the systems and network integration sector, and the telephony
integration services sector of the business resulting from the expansion of
Aztec's customer base. Revenues in these sectors have a higher concentration of
service related revenue. In addition, revenues of Purchased Companies acquired
at the end of the nine months ended January 24, 1998 contributed to the increase
in revenues. The majority of the purchased Companies' revenues are
service-related.
GROSS PROFIT. Gross profit increased 37.1%, from $25.2 million, or 24.9% of
revenues, for the nine months ended January 25, 1997 to $34.6 million, or 24.3%
of revenues, for the nine months ended January 24, 1998. This decrease in gross
profit as a percentage of revenues was due to a higher concentration of business
in the systems and network design and implementation services sector which has
inherently lower gross margin percentages than the other sectors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 49.4%, from $15.6 million, or 15.4% of revenues, for the nine
months ended January 25, 1997 to $23.4 million, or 16.4% of revenues, for the
nine months ended January 24, 1998. The increase in selling, general and
administrative expenses as a percentage of revenues was primarily due to
increases in corporate overhead at one of the operating companies of Aztec.
NON-RECURRING ACQUISITION COSTS. Aztec incurred non-recurring acquisition
costs of $1.9 million for the nine months ended January 25, 1997 in conjunction
with three business combinations accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals and various regulatory fees. Generally accepted accounting principles
("GAAP") require Aztec to expense all acquisition costs (both those paid by
Aztec and those paid by the sellers of the acquired companies) related to
business combinations accounted for under the pooling-of-interests method. In
accordance with generally accepted accounting principles, the Company will be
unable to utilize the pooling-of-interests method to account for acquisitions
for a period of two years following the completion of the Strategic
Restructuring Plan. During this period, the Company will not reflect any
non-recurring acquisition costs in its results of
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operations, as all costs incurred of this nature would be related to
acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration.
INTEREST EXPENSE. Interest expense, net of interest income, decreased
$139,000, from net interest expense of $141,000 for the nine months ended
January 25, 1997, to $2,000 for the nine months ended January 24, 1998. The
decrease was due primarily to the Company's pay down of debt due to an increase
in cash flows from operations during the nine months ended January 24, 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes increased from $1.8
million for the nine months ended January 25, 1997 to $4.7 million for the nine
months ended January 24, 1998, reflecting effective income tax rates of 24.2%
and 41.7%, respectively. The low effective income tax rate for the nine months
ended January 25, 1997, compared to the federal statutory rate of 35.0% plus
state taxes, is the result of certain companies included in the results, which
were acquired in business combinations accounted for under the
pooling-of-interests method, not being subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by Aztec.
COMPARISON OF FISCAL YEAR ENDED APRIL 26, 1997 TO FISCAL YEAR ENDED MARCH 31,
1996
REVENUES. Consolidated revenues increased 19.5%, from $114.1 million in
fiscal 1996 to $136.3 million in fiscal 1997. This increase was primarily due to
increased sales to existing customers and sales to new customers in the
consulting and engineering services sector, the systems and network integration
sector, and the software development and integration services sector of the
business. Revenues in these sectors have a higher concentration of service
related revenues.
GROSS PROFIT. Gross profit increased 14.1%, from $29.9 million, or 26.3% of
revenues, in fiscal 1996 to $34.1 million, or 25.1% of revenues, in fiscal 1997.
The decrease in gross profit as a percentage of revenues was due primarily to a
higher concentration of business in the systems and network design and
implementation services sector which has inherently lower gross margin
percentages than the other sectors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 4.9%, from $20.5 million, or 18.0% of revenues, in fiscal
1996 to $21.5 million, or 15.8% of revenues, in fiscal 1997. The decrease in
selling, general and administrative expenses as a percentage of revenues was due
primarily to operating efficiencies employed at Aztec and Aztec's ability to
increase its revenue base without a corresponding increase in fixed operating
costs.
NON-RECURRING ACQUISITION COSTS. Aztec incurred non-recurring acquisition
costs of $2.3 million in fiscal 1997 in conjunction with five business
combinations accounted for under the pooling-of-interests method.
INTEREST EXPENSE. Interest expense, net of interest income, increased
$152,000, from $4,000 in fiscal 1996 to $156,000 in fiscal 1997. The net
increase was due primarily to the reduction in interest income related to
short-term investments at one of the Pooled Companies. The proceeds from the
short-term investments were used to fund other working capital needs.
OTHER INCOME. Other income decreased $911,000, from $964,000 in fiscal 1996
to $53,000 in fiscal 1997. In fiscal 1996, other income consisted primarily of a
gain on the sale of a non-core line of business at one of the Pooled Companies
prior to its acquisition by Aztec.
PROVISION FOR INCOME TAXES. Provision for income taxes increased from
$750,000 in fiscal 1996 to $3.5 million in fiscal 1997, reflecting effective
income tax rates of 7.2% and 34.4%, respectively. The low effective income tax
rate for fiscal 1996, compared to the federal statutory rate of 35.0% plus state
taxes, is the result of certain companies included in the results, which were
acquired in business combinations accounted for under the pooling-of-interests
method, not being subject to federal income taxes on a
37
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corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by Aztec.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1996 TO FISCAL YEAR ENDED MARCH 31,
1995
REVENUES. Consolidated revenues increased 28.2%, from $89.0 million in
fiscal 1995, to $114.1 million in fiscal 1996. This increase was primarily due
to increased sales to existing customers and sales to new customers in the
consulting and engineering services sector, the systems and network integration
sector, and the software development, and integration services sector of the
business resulting from the expansion of Aztec's customer base. Revenues in
these sectors have a higher concentration of service related revenue.
GROSS PROFIT. Gross profit increased 29.4%, from $23.1 million, or 26.0% of
revenues, in fiscal 1995 to $29.9 million, or 26.3% of revenues, in fiscal 1996.
The increase in gross profit as a percentage of revenues was due primarily to
increased sales in the consulting and engineering services sector and the
telephony integration services sector of Aztec's business.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 37.3%, from $14.9 million, or 16.8% of revenues, in fiscal
1995 to $20.5 million, or 18.0% of revenues, in fiscal 1996. The increase in
selling, general and administrative expenses as a percentage of revenues was due
primarily to bonuses that were paid to the shareholders of one of the Pooled
Companies after the completion of the sale of a non-core line of business and
bonuses paid to the shareholders of other Pooled Companies for subchapter S
corporation tax payments.
INTEREST EXPENSE. Interest expense, net of interest income, decreased
$209,000, from $213,000 in fiscal 1995 to $4,000 in fiscal 1996. The net
decrease was due primarily to an increase in interest income at one of the
Pooled Companies which invested excess cash from operations in short-term
investments.
OTHER INCOME. Other income increased $853,000, from $111,000 in fiscal
1995, to $964,000 in fiscal 1996. In fiscal 1996, other income consisted
primarily of a gain on the sale of a non-core line of business at one of the
Pooled Companies prior to its acquisition by Aztec.
PROVISION FOR INCOME TAXES. Provision for income taxes increased from
$401,000 in fiscal 1995 to $750,000 in fiscal 1996, reflecting effective income
tax rates of 5.0% and 7.2%, respectively. The low effective income tax rates for
fiscal 1995 and fiscal 1996, compared to the federal statutory rate of 35.0%
plus state taxes, are the result of certain companies included in the results,
which were acquired in business combinations accounted for under the
pooling-of-interests method, not being subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by Aztec.
COMPARISON OF PRO FORMA NINE MONTHS ENDED JANUARY 24, 1998 TO NINE MONTHS ENDED
JANUARY 25, 1997
The pro forma combined financial data discussed herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company.
REVENUES. Pro forma revenues increased 10.8%, from $172.5 million for the
nine months ended January 25, 1997 to $191.1 million for the nine months ended
January 24, 1998. This increase was primarily due to increased sales to existing
customers and sales to new customers in the consulting and engineering services
sector, the systems and network integration sector, and the telephony
integration services sector of the business. Revenues in these sectors have a
higher concentration of service related revenue.
GROSS PROFIT. Pro forma gross profit increased 10.8%, from $44.6 million,
or 25.9% of pro forma revenues, for the nine months ended January 25, 1997, to
$49.4 million, or 25.9% of pro forma revenues for the nine months ended January
24, 1998.
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SELLING, GENERAL AND ADMINISTRATIVE. Pro forma selling, general and
administrative expenses increased 7.8%, from $30.1 million, or 17.5% of pro
forma revenues, for the nine months ended January 25, 1997, to $32.5 million, or
17.0% of pro forma revenues for the nine months ended January 24, 1998. This
decrease in selling, general and administrative expenses as a percentage of
revenues was primarily due to the Company's revenues increasing at a faster rate
than the selling, general and administrative expenses which were predominantly
fixed in nature during the nine months ended January 24, 1998.
PROVISION FOR INCOME TAXES. Provision for income taxes has been estimated
using an effective income tax rate of 44.0%. The high effective tax rate,
compared to the federal statutory rate of 35.0%, was primarily due to
nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At January 24, 1998, Aztec had cash of $117,000 and working capital of $31.8
million. Aztec's capitalization, defined as the sum of long-term debt, long-term
payables to U.S. Office Products and stockholder's equity, at January 24, 1998
was approximately $100.5 million. On a pro forma basis at January 24, 1998,
Aztec had working capital of $23.9 million and capitalization of $92.5 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $7.3 million. Net cash used in investing activities was
$1.4 million, which consisted primarily of $1.3 used for additions of property,
plant, and equipment. Net cash used in financing activities was $6.9 million,
including $1.5 million that was paid to U.S. Office Products as part of U.S.
Office Products' centralized cash management process, $1.3 million in dividends
paid by one of the Pooled Companies and the repayment of $2.1 million in
short-term debt. After the Technology Distribution such cash paid to U.S. Office
Products would be retained but Aztec will need to use its own cash resources for
acquisitions and other cash requirements.
During the nine months ended January 25, 1997, net cash provided by
operating activities was $5.3 million. Net cash used in investing activities was
$3.3 million, which consisted primarily of a tax deposit at one of the Pooled
Companies of $1.3 million and $1.2 used to pay non-recurring acquisition costs.
Net cash used in financing activities was $5.3 million, which resulted primarily
from $4.1 million in dividends paid by certain Pooled Companies.
During fiscal 1997, net cash provided by operating activities was $6.3
million. Net cash used in investing activities was $3.9 million, which consisted
primarily of $1.8 million in payments of non-recurring acquisition costs in
conjunction with the acquisitions of certain Pooled Companies and a tax deposit
at one of the Pooled Companies of $1.3 million. Net cash used in financing
activities of $6.8 million resulted from the repayment of $5.5 million in
short-term debt and $4.3 million in dividends paid by certain of the Pooled
Companies. These cash outflows were partially offset by $3.6 million in advances
from U.S. Office Products.
During fiscal 1996, net cash provided by operating activities was $4.3
million. Net cash provided by investing activities was $306,000 consisting of
$1.3 million in proceeds from the sale of a non-core line of business at one of
the Pooled Companies which was partially offset by $552,000 used for additions
to property and equipment and $421,000 paid in deposits. Net cash used in
financing activities was $3.0 million which resulted from $7.4 million in
dividends paid by certain of the Pooled Companies, partially offset by
borrowings of $3.7 million and $1.2 million in short-term and long-term debt,
respectively.
During fiscal 1995, net cash provided by operating activities was $6.1
million. Net cash used in investing activities was $959,000, which primarily
resulted from $888,000 used in additions to property and equipment. Net cash
used in financing activities was $1.7 million, which primarily consisted of $3.1
million in dividends paid by certain of the Pooled Companies partially offset by
$2.1 million in additional long-term borrowings.
39
<PAGE>
Aztec's anticipated capital expenditures budget for the next twelve months
is approximately $4.0 million. The largest items include $1.5 million for Year
2000 compliance, and other amounts for infrastructure improvements (including
computer equipment and service vehicles).
Aztec expects that the Distribution Agreement with U.S. Office Products will
call for the allocation of $5.0 million of debt by U.S. Office Products
resulting in incremental debt of $2.3 million at January 24, 1998, which will be
reflected in the financial statements as a reduction in stockholder's equity.
Aztec has entered into a commitment letter with BankBoston, N.A. for the $200
million Proposed Credit Facility. On closing of the Proposed Credit Facility,
which will occur on the earlier of 75 days following the Spin-Off or August 15,
1998, Aztec will have access to the full $200 million amount; between the
Spin-Off and the closing, Aztec will have access to an interim unsecured $15
million working capital line of credit. The Proposed Credit Facility will mature
five years from the closing date of the Proposed Credit Facility; will be
secured by all material assets of Aztec; and will be subject to terms and
conditions customary for facilities of this kind, including certain financial
covenants. Interest rate options will be available to Aztec depending on the
satisfaction of certain specified financial ratios.
As a result of the provisions of Section 355 of the Internal Revenue Code,
the Company may be subject to constraints in its ability to issue additional
shares of Common Stock in certain transactions for two years following the date
of the Technology Distribution. In particular, if 50% or more, by vote or value,
of the capital stock of Aztec is acquired by one or more persons acting pursuant
to a plan or series of transactions that includes the Technology Distribution,
Aztec will suffer significant tax liability. Aztec will evaluate any significant
future issuance of capital stock to avoid the imposition of such tax liability.
See "Risk Factors--Possible Limitations on Issuance of Common Stock."
On March 6, 1998, the Company filed a Registration Statement with the SEC
for the issuance of Common Stock in an underwritten public offering that is
expected to close prior to or concurrent with the Aztec Distribution. The public
offering is expected to be for 4,200,000 shares (plus 630,000 shares subject to
the underwriters' option to purchase shares to cover over-allotments). A
preliminary prospectus dated May 15, 1998 estimated that the initial public
offering price will be between $12.00 and $14.00 per share. The Company
anticipates that its current cash on hand, cash flow from operations, the net
proceeds from the Offering and additional financing available under the Credit
Facility will be sufficient to meet the Company's liquidity requirements for its
operations through the end of fiscal 1999. However, the Company intends to
pursue acquisitions which are expected to be funded through a combination of
cash and shares of Common Stock. There can be no assurances that additional
sources of financing will not be required during the next 12 months or
thereafter.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of major
client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel cost increases. Certain of these
factors may also affect the Company's personnel utilization rates which may
cause further variation in quarterly operating results. The timing of revenues
is difficult to forecast because the Company's sales cycle is relatively long
and the Company's services are impacted by both the financial condition and
management decisions of its clients and general economic conditions. Because a
high percentage of the Company's expenses are relatively fixed at the beginning
of any period and the Company's general policy is to not adjust its staffing
levels based upon what it views as short-term circumstances, a variation in the
timing of the initiation or the completion of client assignments, particularly
at or near the end of any quarter, can cause significant variations in operating
results from quarter to quarter and could result in losses for any particular
period. In addition, many of the Company's engagements are, and may be in the
future, terminable by its clients without penalty. A termination of a major
project could require the Company to maintain under-utilized employees,
resulting in a higher than expected percentage of unassigned professionals, or
to terminate the employment of excess personnel. Due
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<PAGE>
to all of the foregoing factors, there can be no assurance that the Company's
results of operations will not be below the expectations of investors for any
given fiscal period.
The following table sets forth certain unaudited quarterly financial data
for fiscal 1996, fiscal 1997 and the three fiscal quarters ended January 24,
1998 (in thousands). The information has been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
adjustments consisting only of normal recurring accruals necessary for a fair
presentation of such quarterly information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 30,536 $ 27,653 $ 27,173 $ 28,693
Gross profit.......................................................... 9,490 7,462 6,249 6,741
Operating income (loss)............................................... 5,296 3,036 1,222 (122)
Net income............................................................ 5,315 2,936 1,103 288
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 34,263 $ 31,898 $ 35,134 $ 34,983
Gross profit.......................................................... 7,982 7,608 9,656 8,903
Operating income (1).................................................. 2,695 1,779 3,229 2,647
Net income............................................................ 2,617 1,315 1,625 1,166
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 25,
1998
-------------------------------
FIRST SECOND THIRD
--------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 42,730 $ 36,875 $ 62,907
Gross profit.......................................................... 9,047 9,718 15,852
Operating income...................................................... 2,749 3,687 4,816
Net income............................................................ 1,636 2,233 2,703
</TABLE>
- ------------------
(1) Reflects a one-time charge of $1,105, $801, and $368 for the second, third,
and fourth quarters, respectively, for non-recurring acquisition costs.
INFLATION
Aztec does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, fiscal 1996 or fiscal 1997.
NEW ACCOUNTING PRONOUNCEMENT
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Aztec intends to adopt SFAS No.
130 in the fiscal year ended April 24, 1999.
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century and consequently
use only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000 (the "Year 2000 Issue"). The Company has reviewed the potential impact of
the Year 2000 Issue on its business, operations and financial condition and has
concluded that it will not be material.
41
<PAGE>
BUSINESS
The following discussion of the Company's business contains forward-looking
statements that involve risks and uncertainties. When used herein, the words
"anticipate," "believe," "estimate," "expect," and similar expressions are
intended to identify such forward-looking statements. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," and "Business," as well as those
discussed elsewhere in this Information Statement/Prospectus.
OVERVIEW
Aztec is a single-source provider of a broad range of IT business solutions.
Aztec currently consists of ten companies who have been in business for an
average of over 15 years, with a history of superior client service. These
companies offer complementary IT solutions, which allow Aztec to be a "one-stop"
IT solutions provider in the Northeast region of the United States while
providing personalized services to its clients on a regional and local basis.
Aztec's clients include middle market and Fortune 1000 companies in a wide range
of industries (including communications, health care, financial services,
government, manufacturing, pharmaceuticals, professional services, and
technology). In 1997, Aztec, which employs over 1,000 people (approximately 65%
of whom are technical professionals), provided services to over 2,000 customers.
For the fiscal year ended April 26, 1997, Aztec had revenues of $136.3 million
and net income of $6.7 million. Over the same period of time and taking into
account all purchase acquisitions since May 1, 1996, pro forma revenues would
have been $228.9 million and pro forma net income would have been $9.5 million.
Aztec's broad range of complementary IT business solutions includes: (i)
consulting and engineering services; (ii) systems and network design and
implementation services; (iii) software development and implementation services;
(iv) IT support and operational services; and (v) telephony design and
integration services. Aztec is currently providing this broad range of services
in the Northeast region of the United States, and certain of these services in
other regions of the United States. Aztec intends to extend its comprehensive
services offerings to the other regions of the United States. Aztec is dedicated
to delivering IT services and support for all the major technology needs of its
clients, which include a variety of operating systems (NT, Unix, VMS, Netware,
SunOS, Digital Open VMS, and OS/2) on a variety of hardware platforms (Intel,
Sun, HP, and Digital). In addition, Aztec supports its clients' hardware and
software needs related to the World Wide Web and high-end telephony systems.
Aztec's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. Aztec intends to grow through a
combination of targeted strategic acquisitions and internal growth. Aztec's
acquisition strategy is to extend its range of services to the regions outside
of the Northeast by acquiring existing, profitable businesses, rather than
start-up operations. Aztec's internal growth strategies include (i) capitalizing
on existing cross-selling opportunities and (ii) expanding its IT solutions
offerings. Aztec plans to encourage and manage cross-selling through a
company-developed proprietary software communication tool that will permit it to
review and manage sales leads generated at any level of Aztec's operations,
reinforced by compensation incentives.
Aztec was initially formed in October 1996 with the acquisition of Bay State
by U.S. Office Products. Since that time, under the leadership of Aztec's
current Chairman and Chief Executive Officer, James E. Claypoole, nine
complementary regional IT solutions companies have been acquired. A brief
description of Aztec's constituent operating companies follows.
AZTEC INTERNATIONAL
Founded in 1983, Aztec International is a leading provider of cost-effective
service for telecommunications equipment. With facilities strategically
positioned across the United States, Aztec International is
42
<PAGE>
able to provide OEM rework, secondary telecommunications equipment sales, and
repair for key systems, telephone PBX, telephones and printed circuit boards.
Aztec International holds the distinction of being among the few organizations
in the tele-service industry that is trained for and has been awarded ISO-9002
Certification. Aztec International is headquartered in South Norwalk,
Connecticut, and as of December 31, 1997, had 91 employees.
BAY STATE COMPUTER GROUP
Founded in 1984, Bay State is a leading enterprise service provider,
offering solutions to both mid-size and large corporate entities. As a
full-service, multi-platform design and implementation company, Bay State
provides the engineering expertise to design, configure, implement, manage and
support a wide variety of enterprise IT environments. Bay State's areas of
expertise include strategic design and process re-engineering, Internet/intranet
development, IT infrastructure, connectivity and security services, performance
management, and engineering outsourcing for both short- and long-term technology
projects. Bay State is headquartered in Boston, Massachusetts and as of December
31, 1997, had 175 employees.
COMPEL CORPORATION
Founded in 1979, Compel designs and installs full-service communication
networks, providing a broad spectrum of solutions to handle data, voice, and
video. Using a staff of Registered Communications Distribution Designers, Compel
integrates fiber optics into customer networks. Compel's expertise ranges from
developing enterprise criteria, documenting topology, and providing
implementation to evaluating performance. Compel is headquartered in Silver
Springs, California, and as of December 31, 1997, had 321 employees.
DIGITAL NETWORK ASSOCIATES
Founded in 1986, Digital Network Associates designs, installs, and supports
complex enterprise IT solutions. Digital Network Associates' solutions encompass
strategic planning, network design, project management, training, customer
support, and engineering services. Digital Network Associates also provides
application development in client/server, wireless client/server, groupware
collaboration, and multimedia applications. Digital Network Associates is
headquartered in New York City, and as of December 31, 1997, had 45 employees.
ENTRA COMPUTER CORP.
Founded in 1984, Entra's professional programmers develop specialized,
integrated applications for a variety of vertical industries, integrating
software for customers using popular programming languages and database
software. Entra also has a large engineering staff who design and integrate
enterprises as well as a dedicated division of Computer Aided Design engineers,
and a team that provides training for operating systems and applications. Entra
is headquartered in Youngstown, Ohio, and as of December 31, 1997, had 49
employees.
FORTRAN
Founded in 1983 by telecommunications engineers, Fortran has experience with
the attributes of a wide variety of telecommunications systems, and uses this
experience to develop failsafe systems for specific client environments ranging
from simple turnkey systems to complex voice data communications systems.
Fortran designs and integrates telecommunications systems and solutions to meet
the individual needs and requirements of its clients. Fortran engineers have
expertise in Integrated Services Digital Networks ("ISDN"), and in integrating
LAN, data and voice communications, video conferencing, voicemail and voice
processing into the ISDN of the future. Fortran is headquartered in Newington,
Virginia, and as of December 31, 1997, had 58 employees.
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<PAGE>
MAHON
Founded in 1979, Mahon develops turnkey data, voice and video integrated
solutions. Mahon designs, installs, and maintains enterprise, telephone/voice
processing systems, and video conferencing systems. Mahon maintains a large
staff of Registered Communications Distribution Designers who provide custom
solutions for complete voice, data and video infrastructures that scale to
individual customer requirements. Mahon also has expertise in telephony
applications, including automatic call distribution, unified messaging, and
interactive voice response. Mahon is headquartered in Boston, Massachusetts, and
as of December 31, 1997, had 97 employees.
OFFICE EQUIPMENT SERVICE
Founded in 1972, Office Equipment Service provides enterprise services,
including document management solutions and technical support. Office Equipment
Service provides consultations to evaluate customer needs using a variety of
diagnostic methods and tools, ranging from user surveys to sophisticated
enterprise-monitoring devices that pinpoint areas for improvement. Office
Equipment Service is headquartered in Memphis, Tennessee, and as of December 31,
1997, had 89 employees.
PROFESSIONAL COMPUTER SOLUTIONS
Founded in 1985, Professional Computer Solutions is a leading software
development and consulting firm specializing in groupware and messaging systems,
data warehousing, Web-based development, n-tier client/server, and application
rightsizing. Professional Computer Solutions provides failsafe solutions to
clients' business needs, delivering complete enterprise designs with application
development and post-implementation support to ensure that clients realize all
of the system's benefits. Professional Computer Solutions is headquartered in
Englewood, New Jersey, and as of December 31, 1997, had 80 employees.
PROFESSIONAL NETWORK SERVICES
Founded in 1989, Professional Network Services provides comprehensive
enterprise solutions and helps organizations evaluate constantly-changing
technologies. Professional Network Services designs infrastructure, defines
service level objectives, and develops appropriate enterprise management
practices to support service levels. Professional Network Services also provides
video-conferencing and technical support to customers. Professional Network
Services is headquartered in Trumbull, Connecticut, and as of December 31, 1997,
had 62 employees.
MARKET AND INDUSTRY OVERVIEW
Since the mid-1980's, dramatic changes have occurred in the delivery of IT
solutions to end users. With the development of the personal computer, computing
power has migrated from centralized mainframes using proprietary software
applications to decentralized, scalable architectures and Web-enabled systems
integrating personal computers, client/server networking technology, and
fourth-generation object-oriented programs. Attendant to this major expansion of
distributive data processing are corresponding cultural changes in the corporate
delivery of IT services. No longer is information processed, controlled, and
disseminated by a single central corporate data processing function. The arrival
of distributive data processing has reduced the extent to which IT manufacturers
directly relate to end users. The IT fulfillment process has shifted from
manufacturers to third-party IT providers such as Aztec.
Businesses increasingly turn to outside organizations such as Aztec for
efficient design, development, and implementation of IT systems. Based on
industry sources that Aztec believes are reliable, Aztec believes that the
United States market for outsourced IT services is expected to grow from
approximately $13 billion in 1996 to approximately $24 billion in 2001. Due in
part to the rapid pace of technological change coupled with the scarcity of
skilled IT professionals, business solutions frequently are too sophisticated
and complex for a company to undertake itself. Moreover, Aztec believes the cost
of
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<PAGE>
developing complex business solutions in-house has generally exceeded the
internal resources of the business. In addition, the increased use of outside IT
solutions firms is being driven by competitive pressures requiring rapid
implementation of new systems and the adverse effects of selecting inappropriate
or outdated technology. Additionally, many companies have made a strategic
decision to focus on their core competencies, minimize their fixed costs, and
reduce their workforce, thereby preventing them from investing in large IT
staffs.
The business community increasingly demands multifunctional networks that
can simultaneously support any combination of voice, data, and video services
accessible from wireline and wireless terminal devices. For example,
telecommunications service providers are beginning to offer multifunctional
services, such as ISDN, which allows for the dynamic allocation of bandwidth
between any combination of voice, data, and video, and individual call routing.
Aztec believes that traditionally distinct telecommunications networks and data
networks increasingly will be built on the same technical platforms.
Data communication solutions have also become standard commodity solutions
where hubs and routers are now available to solve the complex problems of
enterprise-wide information flow. These products were developed by a multitude
of new small IT manufacturers. No longer do a few large computer manufacturers
have a stranglehold on data communication system configuration and deployment.
Today, an optimal IT business solution can be designed and implemented by small,
agile business solution providers who have the professional expertise to bring
together products and services from a multitude of vendors.
More recent technological developments have introduced applications that
capitalize on "cyberspace" and create additional opportunities for business
solution companies to provide: (i) programming and consulting services for
Web-enabled applications that allow them to be accessed by customers, employees,
and trading partners using low-cost Internet/intranet technology; (ii)
consulting and design services for Internet-specific products, such as
firewalls, Internet security systems, and network management; and (iii)
integrated voice and data systems that provide networks replacing existing
separate telephone systems and cable plants.
Demand for IT services has grown significantly and the nature of the IT
services industry has changed. According to Dataquest, the domestic market for
IT professional services (consulting, systems integration, applications
development, and outsourcing services) was approximately $73 billion in 1996 and
is estimated to grow to approximately $148 billion by the year 2001. Consulting,
development, and integration markets are experiencing record growth, with
revenue growth for the top 20 consulting, development and integration companies
averaging 25% between 1995 and 1996, according to Dataquest. Furthermore, the IT
service industry is highly-fragmented, with a small number of large national
service providers and a large number of small- and medium-sized providers,
typically regional in scope. Recently, the industry has experienced an increase
in consolidation activity that Aztec believes is driven in part by corporate
demands for single-source IT providers.
Aztec believes it is well positioned to capitalize on these developments by
providing focused IT expertise in a cost-effective manner to existing and
potential clients, and by identifying and acquiring complementary businesses in
this industry.
BUSINESS STRATEGY
Aztec's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. By fostering a long-term relationship
with the customer and providing a superior level of service, Aztec will seek to
expand its current market presence and reputation. Aztec intends to grow through
a combination of targeted strategic acquisitions and internal growth.
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<PAGE>
GROWTH BY ACQUISITION.
Aztec's acquisition strategy is to identify profitable, well-managed
companies that provide services that complement the services already provided by
Aztec, and facilitate Aztec's expansion throughout the United States. Aztec's
acquisition program will have as its goals the extension of the IT business
solutions offerings that it already has in place in the Northeast region of the
United States and the expansion of its cross-selling opportunities. Aztec will
seek to expand its geographic scope by acquiring existing, profitable
businesses, rather than through start-up operations. Given the highly fragmented
nature of the IT services and solutions industry, Aztec believes significant
acquisition opportunities exist. Aztec intends to retain the distinctive skills
of the companies it acquires so as to avoid diluting the focus and market
identity of such acquired companies.
In furtherance of its acquisition strategy, Aztec routinely reviews, and
conducts investigations of, potential acquisitions of technology solutions
businesses. When Aztec believes a favorable opportunity exists, it enters into
discussions with the owners of such businesses regarding the possibility of an
acquisition by Aztec. As of the date of this Prospectus, Aztec currently does
not have any agreements for pending acquisitions and no acquisitions are
probable.
INTERNAL GROWTH.
CAPITALIZING ON EXISTING CROSS-SELLING OPPORTUNITIES. Aztec's operating
companies are each regional IT solutions providers that provide complementary IT
solutions. Because each of these companies has extensive project management
experience and client relationships, each has familiarity with the needs of
their particular clients that can be shared with other operating companies.
Similarly, clients value having a "one-stop shopping" relationship with a
technology solutions provider who is familiar with their technical environment.
Accordingly, Aztec believes that its existing long-term client relationships
provide substantial cross-selling opportunities. Aztec plans to encourage and
manage cross-selling through a Company-developed proprietary software
communication tool that will permit it to review and manage sales leads
generated at any level of Aztec's operations, reinforced by compensation
incentives.
EXPANDING IT SOLUTIONS OFFERINGS. Aztec has historically derived a greater
portion of its revenues from IT projects involving consulting and engineering
services. Aztec plans to continue to focus on these services, which are
described below under "--The Aztec Solution, Consulting and Engineering
Services." Aztec has contractual strategic alliances with IBM, Sun Microsystems,
Hewlett Packard, Compaq, Digital, and over fifty other manufacturers of IT
equipment. As a result, Aztec can recommend the best IT business solutions for
its clients without being restricted by narrow product offerings, providing
Aztec the opportunity to grow its consulting and engineering business.
Aztec also believes that it has significant opportunities to expand its
software development and implementation services, which are described below
under "The Aztec Solution--Software Development and Implementation Services."
This business has historically accounted for a smaller portion of Aztec's
revenues, and Aztec believes that it has the expertise to extend these services
to other regions in the United States where the Company does not currently offer
them.
46
<PAGE>
THE AZTEC SOLUTION
Aztec offers its clients a single source for IT business solutions and
services. Aztec seeks to foster a relationship with the client that will allow
Aztec to become its clients' "one-stop shop" for total IT business solutions.
The five sectors of Aztec's business and the services provided within each
sector are:
CONSULTING AND ENGINEERING SERVICES
- Business process reengineering
- IT needs analysis
- Technology infrastructure planning and design
- Systems architecture development
- Decision support planning and analysis
- Year 2000 planning and consulting
- Solution design and development
Aztec's technical and sales professionals deliver these IT business
solutions through the client's chief information officer or chief financial
officer. In providing these consulting and engineering services, Aztec
establishes long-term relationships with its clients that it believes will offer
future opportunities to expand the level of service and support required to meet
clients' needs.
SYSTEMS AND NETWORK DESIGN AND IMPLEMENTATION SERVICES
- LAN and WAN client/server design and
integration
- Internet/intranet infrastructure design and integration
- Voice and data communication infrastructure
- Communication network solutions involving hubs, routers, and switches
- Capacity planning
- Network performance management
- Connectivity and security services
Aztec delivers enterprise-wide turnkey IT business solutions by combining
its business knowledge with technical expertise concerning hardware, software,
and support capabilities to achieve the client's goals. These solutions address
client needs for high bandwidth applications, from transaction processing to
Internet commerce.
Aztec designs, develops, and installs full application-ready, distributed
client/server computing platforms and integrates them into existing IT
infrastructures. Capabilities include project planning, technology integration
and installation that maximizes system performance and delivery of computing
solutions in the most cost-effective way, assuring flexible, open systems
capable of integrating into tomorrow's new technologies.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
- Custom client/server software design and development
- Internet/intranet software solutions design
and development
- Customization of business software
- Data warehousing design and development
- Object-oriented design and development
- Reseller of leading fourth-generation
database tools and applications
- Reseller of document management and
imaging software
Aztec designs systems that allow groups of various sizes in multiple
locations to collaborate across business lines and functions. It uses data
warehousing tools and technology processes to give clients decision support
information, sales and marketing intelligence systems, and other strategic
knowledge tools. Aztec's Internet services help clients exploit the full
potential of information processing on both the global Internet and on corporate
intranets. Aztec is a certified reseller and supporter of products of the
leading software manufacturers, including Microsoft, Oracle, Sybase, and
Borland, incorporating the latest technology and techniques. Aztec emphasizes
keeping up with the rapid change of technology by
47
<PAGE>
employing highly-qualified strategists and technologists, forming alliances with
key tool and database vendors, participating in beta programs for new products,
and by participating in and attending major technical conferences.
IT SUPPORT AND OPERATIONAL SERVICES
- Outsourcing of IT professional services
- Outsourcing of IT product procurement
- Engineering and network management
services
- Facility infrastructure cabling and installation
- Warranty support
- Help desk support
- Hardware and software maintenance and
support
Aztec provides both short- and long-term temporary technical expertise to
address a wide range of network operation and project needs, including LAN and
WAN management, systems management, and system administration.
TELEPHONY DESIGN AND INTEGRATION SERVICES
- Design and integrate telecommunications systems
- Design and integrate ISDN networks
- Telephone PBX and key-system procurement and installation
- Voicemail systems installation
- Voice response units installation
- Warranty support
Aztec seeks to maintain current knowledge of the attributes of all
telecommunications systems, and to use this knowledge to develop systems for
specific client environments--from simple key systems to complex voice/data
communications systems.
Aztec recognizes the importance of global ISDN communication, and has the
ability to integrate LAN, data and voice communications, video conferencing,
voicemail and voice processing into the ISDN of the future.
48
<PAGE>
The following graphic shows the IT business solutions offered by each of
Aztec's ten operating companies: Aztec International, Bay State, Compel, Digital
Network Associates ("DNA"), Entra, Fortran, Mahon, Office Equipment Service
("OES"), Professional Computer Solutions ("PCSI") and Professional Network
Services, Inc. ("PNS"):
[LOGO]
OPERATIONS
DECENTRALIZED MANAGEMENT. Each of Aztec's operating companies currently
manages its own business on a decentralized basis, with management direction and
oversight provided by the Chairman and Chief Executive Officer of Aztec, the
Chief Operating Officer, the Executive Vice President and Chief Financial
Officer and with functional support from U.S. Office Products. Aztec intends to
continue to operate with a decentralized management structure that it believes
will enable it to deliver superior client service and a motivating environment
for its operating companies, and that will minimize corporate-level overhead.
Aztec anticipates that finance, accounting, legal, management information
systems, treasury, employee benefits, and certain purchasing arrangements will
be managed or provided on a centralized basis. In addition, Aztec's senior
management will be responsible for implementing the Company's internal growth
and acquisition strategies. In particular, senior management will be assigned
responsibility for expanding cross-selling opportunities among the operating
companies.
Each of the present operating companies and any subsequently acquired
businesses will manage the professional services and technical support of their
respective businesses in a manner consistent with their traditional local
practices and as dictated by client needs. Depending on its size and the
services it provides, each operating company will employ its own senior
technical and sales professionals, including project managers, engineers,
technicians and developers, marketing personnel, and recruiters and
administrative personnel. Aztec will seek to identify and implement
opportunities to consolidate overlapping
49
<PAGE>
functions and achieve cost savings, if consistent with the client-service
objectives of the operating companies. As Aztec grows through acquisitions,
especially into other geographic regions, it may consider establishing regional
divisions to consolidate and improve administrative support functions.
SALES AND MARKETING. Aztec will focus its sales and marketing efforts on
companies with complex computing and communications requirements located
throughout the United States. To develop its clients, who will be principally
the chief information officers and chief financial officers of corporations,
Aztec will use a combination of sales engineering and consulting sales services,
including trade shows, professional seminars and radio advertisements. As of
December 31, 1997, Aztec employed 133 sales people across the country.
RETENTION OF SKILLED TECHNICAL AND SALES PROFESSIONALS. Aztec believes that
it must be able to attract and retain skilled technical and sales professionals
to achieve its business goals. To maximize the long-term retention of these
professionals, Aztec intends to put in place an aggressive performance-based
employee retention program. The program is expected to include: stock options; a
professional education policy; a progressive human resources program; and other
benefits designed to enhance long-term employee retention.
COMPETITION
The IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues than does the Company, and
have greater name recognition. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the price at
which others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future.
Aztec's principal competitors include Lucent Technologies Inc., Bell
Atlantic Corporation, Sapient Corporation, Cambridge Technology Partners
(Massachusetts), Inc., Digital Equipment Corporation, and International Business
Machines Corporation.
LEGAL PROCEEDINGS
Aztec is involved from time to time in legal proceedings arising in the
ordinary course of business. There are currently no material legal proceedings
pending to which Aztec is a party or to which any of its property is subject.
EMPLOYEES
As of January 1, 1998, Aztec employed 1,067 persons, of whom approximately
692 were technical professionals. Most of Aztec's employees work in professional
(including sales), admistrative, and technical positions. 297 of Aztec's
employees are represented by a labor union or subject to a collective bargaining
agreement. Aztec believes that its employee relations are generally good.
PROPERTIES
Aztec's headquarters are located in Boston, Massachusetts. In addition to
its headquarters, Aztec leases office and warehouse space in a number of
locations across the United States. Aztec does not believe that any of these
locations are material to its operations. The leases expire at various times
between 1998 and 2004.
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MANAGEMENT
DIRECTORS, OFFICERS, AND KEY EMPLOYEES
Following the Offering, it is anticipated that the directors, officers, and
key employees of Aztec will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
James E. Claypoole.................... 64 Chairman, Chief Executive Officer and Director*
Ira Cohen............................. 44 Chief Operating Officer*
Douglas R. Johnson.................... 45 Executive Vice President and Chief Financial Officer*
Jonathan J. Ledecky................... 40 Director**
Clifford Mitman, Jr................... 59 Director**
Benjamin Tandowski.................... 50 Director** and President of Professional Computer Solutions
Phillip Arturi........................ 40 President of Professional Network Services
Richard G. Erickson................... 36 President of Digital Network Associates
Thomas J. Foley....................... 43 President of Bay State
Larry Glaser.......................... 38 President of Fortran
Kelby Knoedler........................ 47 President of Entra
James Mahon........................... 50 President of Mahon
Robert McClory........................ 53 President of Compel
Jack Meehan........................... 48 President of Aztec International
Darren Metz........................... 35 President of Office Equipment Service
</TABLE>
- ------------------
* Executive Officer
** Messrs. Ledecky, Mitman and Tandowski are expected to join the Aztec Board
immediately following the completion of the Technology Distribution.
JAMES E. CLAYPOOLE has served as Chairman, Chief Executive Officer and
Director of Aztec since February 1998. He founded and has served as President of
Bay State Computer Group, an operating company of Aztec, since 1984 and as
Chairman of U.S. Office Products' Technology Solutions division since 1996. For
the past 15 years, Mr. Claypoole has served as a member of the board of
directors of the Digital Dealers Association and was its President from 1992 to
1994. He was Chairman of the Digital Dealers Association in 1995. Mr. Claypoole
has also served on a variety of manufacturers' councils.
IRA COHEN has served as Chief Operating Officer of Aztec since March 1998.
Since 1996, Mr. Cohen had worked as an independent consultant. Mr. Cohen founded
Copley Management Associates, a technology management consulting company, in
1979. In 1984, Mr. Cohen merged Copley Management Associates with DataTrend to
form Copley Systems, Inc. In 1993, after selling Copley Systems, Inc. (which had
grown from $2 million in annual revenue to $104 million in annual revenue over
the preceding nine years), Mr. Cohen was employed by CIC Systems as Chief
Operating Officer of its Copley Division from 1993 through 1996. Mr. Cohen's
non-compete agreement with CIC Systems has expired.
DOUGLAS R. JOHNSON has served as Executive Vice President and Chief
Financial Officer of Aztec since March 1998. Prior to coming to Aztec, Mr.
Johnson held the position of Vice President and Chief Financial Officer of Clam
Associates Incorporated during 1997. Mr. Johnson was Executive Vice President
and Chief Financial Officer of Discreet Logic Incorporated from 1995 to 1996. He
also held the position of Vice President of Finance and Administration and Chief
Financial Officer of Fusion Systems Corporation from 1993 to 1995. From 1990 to
1993, Mr. Johnson was Chief Financial Officer and Treasurer of Excalibur
Technology Corporation. From 1981 to 1990, Mr. Johnson held various financial
management positions at the Marriott Corporation, serving finally as Vice
President of Finance in that company's services group. Mr. Johnson is a
Certified Public Accountant.
JONATHAN J. LEDECKY will serve as a Director and an employee of Aztec and
the other Spin-Off Companies as of the Distribution Date. Mr. Ledecky founded
U.S. Office Products in October 1994, will serve as Chairman of the Board until
the Distribution Date, and served as its Chief Executive Officer until
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<PAGE>
November 1997. He founded Consolidation Capital Corporation in February 1997 and
serves as its Chairman and Chief Executive Officer. Mr. Ledecky has also served
as non-executive Chairman of the Board of USA Floral Products, Inc. since April
1997 and as director of UniCapital Corporation, since October 1997. Mr. Ledecky
served from 1989 to 1991 as the President of The Legacy Fund, Inc., a wholly
owned subsidiary of Steelcase Inc. Prior to his tenure at The Legacy Fund, Inc.,
Mr. Ledecky was a partner at Adler and Company and Senior Vice President at
Allied Capital Corporation, an investment management company.
CLIFFORD MITMAN, JR. will serve as a Director of Aztec. For the past six
years, Mr. Mitman has been President of Mitman Associates, a firm that provides
executive compensation and organization consulting services to a wide range of
companies. Prior to 1992, Mr. Mitman was a Vice President and Senior Consultant
with the firms of Towers, Perrin and The Wyatt Company. Mr. Mitman graduated
from Yale University and the Wharton School of Business.
BENJAMIN TANDOWSKI will serve as a Director of Aztec and he will continue to
serve as President of Professional Computer Solutions. Mr. Tandowski founded
Professional Computer Solutions in 1984 and has been its President since that
date. Previously, Mr. Tandowski was employed by Exxon Research and Union Carbide
Chemical and Plastics Division. He holds a Ph.D. in mechanical engineering from
the City University of New York, where he was a National Science Fellow.
PHILLIP ARTURI, PRESIDENT OF PROFESSIONAL NETWORK SERVICES, has 17 years of
experience in LAN/WAN infrastructure design, application engineering, and
systems integration. Prior to establishing Professional Network Services in
1989, Mr. Arturi implemented distributed processing solutions at GTE, and served
Caldor as MIS manager.
RICHARD G. ERICKSON, PRESIDENT OF DIGITAL NETWORK ASSOCIATES, has been a
principal of Digital Network Associates since 1986 and has over 15 years of
computer systems integration experience. He holds a B.S. in mechanical
engineering from Villanova University. Prior to joining Digital Network
Associates, Mr. Erickson held positions at Banyan Systems and Novell.
THOMAS J. FOLEY, PRESIDENT OF BAY STATE COMPUTER GROUP, has 19 years of
Network Systems/Applications experience. Mr. Foley has been employed by Bay
State Computer Group since 1985. Prior to his years at Bay State, Mr. Foley was
employed by a Boston computer company for six years. Mr. Foley holds a B.S. from
Suffolk University, and has taken extensive graduate business courses.
LARRY GLASER, PRESIDENT OF FORTRAN, established Fortran in the late 1970's
as a service and repair organization for telecommunications equipment. He has
been President of Fortran since that date.
KELBY KNOEDLER, PRESIDENT OF ENTRA, established Entra in 1984 after selling
his ownership-interest in CADO Business Systems of Ohio, which he founded in
1978. Since 1984, he has been the General Manager and President of Entra. He was
previously employed with Burroughs Corporation.
JAMES MAHON, PRESIDENT OF MAHON, has over 26 years of diverse experience in
the communications industry. Mr. Mahon was a founder and past president of
Computer Telephone Corporation, which went public in 1985. Mr. Mahon, who has
also held corporate-level positions at Rolm and Executone, founded Mahon in 1989
and has been President of Mahon since that date.
ROBERT M. MCCLORY, PRESIDENT OF COMPEL, founded Compel in 1972 and has been
its President since that date. From 1972 to 1979, he was General Manager of
Parsons Electric Company, a general contractor in Los Angeles, California. He is
a Registered Communications Distribution Designer.
JACK MEEHAN, PRESIDENT OF AZTEC INTERNATIONAL, founded Aztec International
in 1984 and has been its President and Chief Executive Officer since that date.
Previously, Mr. Meehan was employed by New York Telephone Company and by
Tie/communications.
DARREN METZ, PRESIDENT OF OFFICE EQUIPMENT SERVICE, has been the President
of Office Equipment Service since 1986. He holds a B.A. in computer science from
the University of Tennessee, and an M.B.A. from the University of Memphis.
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<PAGE>
ADDITIONAL DIRECTORS; COMMITTEES
Prior to the Technology Distribution, Aztec expects to elect three
additional directors, at least two of whom will be independent directors.
Directors are elected for one year terms and hold office until their successors
have been elected and qualified or until such director's earlier resignation or
removal, though the Aztec Board may adopt a classified board before the
Offering. Executive officers are elected annually and hold office until the next
meeting of stockholders or until such executive officer's earlier resignation or
removal.
The Aztec Board is expected to create an Audit Committee effective as of the
Offering. The Audit Committee will be charged with reviewing Aztec's annual
audit and meeting with Aztec's independent accountants to review Aztec's
internal control and financial management practices.
The Aztec Board is expected to create a Compensation Committee effective as
of the Offering Date. The Compensation Committee will be charged with making
recommendations to the Aztec Board regarding compensation of Aztec's executive
officers and administering any stock option plan Aztec may adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by Aztec for services rendered during the year ended April 25, 1998 to the
Chief Executive Officer and the other highly compensated executive officers of
Aztec (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
--------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------------------------------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
James E. Claypoole....................................... $ 307,500(1) $ 50,000 $ 54,360(2)
Chairman and Chief Executive Officer
Ira Cohen................................................
Chief Operating Officer (3)
Douglas Johnson..........................................
Executive Vice President and Chief Financial Officer
(4)
Elizabeth M. Claypoole................................... $ 160,000(5) 7,500(6)
Vice President, Treasurer, and Secretary
</TABLE>
- ----------------------
(1) Mr. Claypoole's salary was increased from $300,000 to $315,000 in November
1997.
(2) Includes life insurance premiums of $42,360 paid by Bay State on life
insurance policies for which Mr. Claypoole's estate is the beneficiary and
payment of automobile expenses of $12,000.
(3) Mr. Cohen was hired by Aztec on March 2, 1998. His salary is expected to be
$200,000 during his first year with Aztec.
(4) Mr. Johnson was hired on March 31, 1998. His salary is expected to be
$175,000 during his first year with Aztec.
(5) As of the end of fiscal year 1998, Ms. Claypoole was no longer an executive
officer of Aztec. Ms. Claypoole is currently employed by Aztec in a
non-executive officer capacity.
(6) Options to purchase U.S. Office Products Common Stock.
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are
53
<PAGE>
expected to be replaced with options to acquire Aztec Common Stock in connection
with the Technology Distribution. See "The Spin-Offs From U.S. Office Products."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM(4)
OPTIONS GRANTED IN EXERCISE EXPIRATION -----------------------
NAME GRANTED (#)(1)(2) FISCAL YEAR(3) PRICE ($/SH) DATE(2) 5%($) 10%($)
- ------------------------------- ----------------- --------------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James E. Claypoole............. 45,000 10.5% $ 15.17 4/28/07 $ 429,315 $ 1,087,968
Elizabeth M. Claypoole......... 6,000 1.4% $ 15.17 4/28/07 $ 57,242 $ 145,062
</TABLE>
- ----------------------
(1) The options granted are non-qualified stock options which are exercisable at
the market price on the date of grant generally beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares and which
expire ten years from the date of grant.
(2) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
<TABLE>
<S> <C>
Exercise Price (New) = Exercise Price Initial Public Offering Price of Common Stock in the Offering
(Old) x
Trading Price of U.S. Office Products Common Stock Pre-Technology Distribution
</TABLE>
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
<TABLE>
<S> <C>
Option Shares (New) = Option Shares (Old) Trading Price of U.S. Office Products Common Stock Pre-Technology Distribution
x
Initial Public Offering Price of Common Stock in the Offering
</TABLE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Technology Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events, such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the Technology Distribution and
the exercise price of such option. The intrinsic value of the Aztec Options
will be no greater than the intrinsic value of the U.S. Office Products
Options before the Distributions and the ratio of exercise price to market
price will be not less than the ratio before the Distributions.
(3) Total Options granted means all options granted to employees of Aztec.
(4) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
AGGREGATED OPTIONS FISCAL YEAR ENDED APRIL 25, 1998 AND FISCAL YEAR-END 1998
OPTION VALUES
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. No options were exercised
by the Named Officers during the fiscal year ended April 26, 1998. As described
above, all options were granted by U.S. Office Products as options to acquire
U.S. Office Products Common Stock and are expected to be replaced with options
to acquire shares of Aztec Common Stock in connection with the Technology
Distribution. See "The Spin-Offs From U.S. Office Products" and "Replacement of
Outstanding U.S. Office Products Options."
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS HELD FISCAL YEAR
SHARES ACQUIRED AT APRIL 25, 1998(4) END($)(1)(4)(5)
ON EXERCISE VALUE -------------------------- --------------------------
NAME (#)(2) REALIZED($)(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Claypoole.............. -- -- -- 45,000 -- --
Elizabeth M. Claypoole.......... -- -- -- 6,000 -- --
</TABLE>
- ----------------------
(1) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
<TABLE>
<CAPTION>
Exercise Price (New) = Exercise Price
(Old) x Initial Public Offering Price of Common Stock in the Offering
<S> <C>
Trading Price of U.S. Office Products Common Stock Pre-Technology Distribution
</TABLE>
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<PAGE>
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
<TABLE>
<S> <C>
Option Shares (New) = Option Shares (Old) Trading Price of U.S. Office Products Common Stock Pre-Technology Distribution
x
Initial Public Offering Price of Common Stock in the Offering
</TABLE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Technology Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events, such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the Technology Distribution and
the exercise price of such option. The intrinsic value of the Aztec options
will be no greater than the intrinsic value of the U.S. Office Products
Options before the Distributions and the ratio of exercise price to market
price will be not less than the ratio before the Distributions.
(2) Represents the number of shares received upon exercise or, if no shares were
received, the number of shares with respect to which options were exercised.
(3) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of the U.S.
Office Products Common Stock on the date of exercise.
(4) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(5) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products Common Stock at April 24, 1998.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS' OPTIONS
Aztec expects that all or substantially all vested and unvested options to
acquire shares of U.S. Office Products' Common Stock that are held by Aztec
employees on the Distribution Date will be replaced with options to acquire
shares of Aztec Common Stock. As of the Distribution Date, approximately 803,688
U.S. Office Products Options will be held by employees of Aztec. The number of
Aztec Options that will be outstanding after the Distributions will depend on
the trading prices of U.S. Office Products Common Stock around the time of the
Distributions and the public offering price of the Aztec Common Stock in the
Offering. For those reasons, the number of Aztec Options into which the U.S.
Office Products Options will convert is not yet determinable. The following
formulas will be used to adjust the number and exercise price of U.S. Office
Products Options. Such formulas will adjust solely for the Distributions and not
for other events, such as the Tender Offer. The exercise price of U.S. Office
Products Options will be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price of
Common Stock in the
Offering__________________
Trading Price of U.S. Office
Products Common Stock
Pre-Technology Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products
Common Stock Pre-Technology
Distribution
Initial Public Offering Price of
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Technology Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the expiration
of the Tender Offer and the completion of the Distributions. The foregoing
formula adjustments are intended to preserve for the holder of U.S. Office
Products Options the intrinsic value per option, measured as the difference
between the market value of one share of U.S. Office Products Common Stock at
the time of the Technology Distribution and the exercise price of such option.
The intrinsic value of the adjusted Aztec Options will be no greater than the
intrinsic value of the U.S. Office Products Options immediately before the
Distribution, and the ratio of exercise price to market price will be not less
than the ratio immediately before the Distributions.
1998 STOCK INCENTIVE PLAN
Aztec expects to adopt the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of
Aztec by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of Aztec, and by enabling
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Aztec to attract, retain and reward highly motivated and qualified employees.
The maximum number of shares of Aztec Common Stock that may be issued with
respect to awards granted under the Plan is 22.5% of the outstanding Aztec
Common Stock following the Technology Distribution and the Offering. The maximum
number of shares that may be issued with respect to awards granted under the
Plan to an individual in a calendar year may not exceed shares. The Plan will be
administered by the Compensation Committee of the Board of Directors. All
employees of the Company and its subsidiaries, as well as non-employee directors
of the Company, are eligible to receive awards under the Plan. The Plan
authorizes the Compensation Committee to make awards of stock options,
restricted stock, and other stock-based awards. The Compensation Committee will
determine the prices, vesting schedules, expiration dates and other material
conditions under which such awards may be exercised.
Mr. Ledecky will receive a stock option for Common Stock from Aztec,
pursuant to the Plan, as of the Distribution Date. The option is intended to
compensate Mr. Ledecky for his services to Aztec as an employee. The option will
cover up to 7.5% of the outstanding Common Stock determined as of the
Distribution Date without regard to the Offering. The option will have a per
share exercise price equal to the initial public offering price of Aztec Common
Stock.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the
Technology Distribution. Mr. Ledecky's option from the Company will be
exercisable immediately if Mr. Ledecky dies before the option expires or if
Aztec accelerates the exercise schedule of options for substantially all
management option holders. (In this latter case, Mr. Ledecky's option will
become exercisable on the same accelerated schedule as the other management
option holders.) All unexercised portions of the option will expire ten years
after its date of grant or, if applicable, as of the date Mr. Ledecky violates
his non-competition agreement with Aztec.
The Company expects that James E. Claypoole will also receive an option (the
"Claypoole Option") pursuant to the Plan for 4.5% of the outstanding Aztec
Common Stock as of the Distribution Date without regard to the Offering. The
Claypoole Option is anticipated to have the same terms as Mr. Ledecky's option,
including an exercise price equal to the initial public offering price of the
Aztec Common Stock. The estimated value of the Claypoole Option depends on the
initial public offering price of Aztec Common Stock and the trading volatility
of Aztec Common Stock. Based on an assumed initial public offering price of
$13.00 (which is equal to the mid-point of the price range set forth in the
preliminary prospectus for the Offering) and an assumed trading volatility index
of Aztec Common Stock of 45%, the estimated value of the option is $2,343,571.
In addition, management currently expects to recommend option grants to certain
executive officers and key personnel of the Company for approximately 2% of the
Common Stock following the Offering and the Technology Distribution, also at an
exercise price equal to the initial public offering price of the Aztec Common
Stock.
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into an agreement ("the Ledecky Services
Agreement") with U.S. Office Products on January 13, 1998, as amended, to become
effective on the Distribution Date and contingent on the consummation of the
Distributions. The Ledecky Services Agreement will expire on September 30, 1998
if none of the Distributions has occurred by that date. If the Ledecky Services
Agreement becomes effective, it will replace his November 4, 1997 employment
agreement with U.S. Office Products. The principal terms of this agreement, as
it is expected to be amended, and summarized here.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products Board and will provide high-level acquisition
negotiation services and strategic business advice. Under the Agreement, Mr.
Ledecky will remain an employee of U.S. Office Products, at an annual salary of
$48,000 through June 30, 2001. As a continuing employee of U.S. Office Products,
Mr. Ledecky will also retain his existing U.S. Office Products Options despite
his reduction in services to U.S. Office Products. U.S. Office Products can
terminate Mr. Ledecky's employment only for "cause" where cause consists of (i)
his conviction of or guilty or nolo contendere plea to a felony, (ii) his
engaging, despite notice, in conduct
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demonstrably and materially injurious to U.S. Office Products, or (iii) his
violation of the noncompetition agreement as it relates to U.S. Office Products.
If Mr. Ledecky resigns or is terminated, he will cease to vest in his U.S.
Office Products stock options and will have 90 days to exercise any vested
options.
It is expected that Aztec will enter into an employment agreement with Mr.
Ledecky which will implement assigned portions of the Ledecky Services
Agreement. Under the employment agreement, Mr. Ledecky will report to the Board
of Directors and senior management of Aztec. In such capacity, Mr. Ledecky will
provide high-level acquisition negotiation services and strategic business
advice. Aztec can require Mr. Ledecky's performance of such services, consistent
with his other contractual obligations to Consolidation Capital Corporation,
U.S. Office Products and the Other Spin-Off Companies. As an employee, Mr.
Ledecky will also be subject to the generally applicable personnel policies of
Aztec and will be eligible for such benefit plans in accordance with their
terms. Aztec will pay Mr. Ledecky an annual salary of $48,000 for up to two
years. Aztec may terminate Mr. Ledecky's employment with or without "cause",
where cause is defined as in the Ledecky Services Agreement as modified to refer
to Aztec. If without cause, the termination would entitle Mr. Ledecky to
severance equal to his salary for the lesser of 12 months or the remainder of
the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the Technology
Distribution has been completed. These provisions generally restrict Mr. Ledecky
from, among other things, investing in or working for or on behalf of any
business selling any products or services in direct competition with U.S. Office
Products, or other Spin-Off Companies (collectively, the "U.S. Office Products
Companies"), within 100 miles of any location where any of the U.S. Office
Products Companies conducts the competitive business. (For this purpose,
"products or services" are those that U.S. Office Products offered on January
13, 1998.) Notwithstanding this prohibition, Mr. Ledecky may serve in a policy
making role (but not engage in direct personal competition) with respect to the
following businesses: (i) certain businesses potentially competitive with Aztec
if those businesses (A) are acquired by electrical contracting and services
businesses, (B) had revenues of no more than $15 million in the prior year and
no more than 30% of the revenues of the acquiring business, and (C) have their
principal place of business in the same metropolitan area as that of the
acquiring business; (ii) businesses selling, supplying, or distributing
janitorial or sanitary products or services; (iii) businesses managing or
servicing office equipment (other than computers); (iv) businesses providing
internet access services; or (v) UniCapital Corporation's leasing businesses
(which include equipment leasing). The Ledecky Services Agreement prohibits Mr.
Ledecky from trying to hire away managerial employees of Aztec and the other
Spin-Off Companies or from calling upon customers of Aztec and the other
Spin-Off Companies to solicit or sell products or services in direct competition
with Aztec and the other Spin-Off Companies. Mr. Ledecky also may not hire away
for Consolidation Capital Corporation any person then or in the preceding one
year employed Aztec, or the other Spin-Off Companies. U.S. Office Products is
permitted to (and will) assign to Aztec, the ability to enforce the
non-competition provisions described above, which will then constitute part of
his employment agreement with Aztec.
Mr. Ledecky will receive a stock option for Aztec Common Stock from Aztec as
of the Distribution Date. The option is intended to compensate Mr. Ledecky for
his services to Aztec as an employee. That option will be granted under the
Plan. The option will cover up to 7.5% of the outstanding Aztec Common Stock,
determined as of the Distribution Date, without regard to the Offering. The
option will have a per share exercise price equal to the initial public offering
price of the Aztec Common Stock. The estimated value of this option depends on
the initial public offering price of Aztec Common Stock and the trading
volatility of Aztec Common Stock. Based on an assumed initial public offering
price of $13.00 (which is equal to the mid-point of the price range set forth in
the preliminary prospectus for the Offering) and an assumed trading volatility
index of Aztec Common Stock of 45%, the estimated value of the option is
$3,905,951.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the twelve-month anniversary of the
Technology Distribution. Mr. Ledecky's option from Aztec will be exercisable
immediately if Mr. Ledecky dies before the option expires or, if Aztec
accelerates
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the exercise schedule of options for substantially all management option
holders. (In this latter case, Mr. Ledecky's option will become exercisable on
the same accelerated schedule as the other management option holders. All
unexercised portions of the option will expire ten years after its date of grant
or, if applicable, as of the date Mr. Ledecky violates his non-competition
agreement with Aztec.
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EMPLOYMENT CONTRACTS AND RELATED MATTERS
In October 1996, Bay State entered into an employment agreement with James
E. Claypoole, its then Chief Executive Officer and President. The employment
agreement provides for an initial three-year term and successive one-year
extensions at the option of Bay State. Pursuant to this agreement, Mr. Claypoole
is entitled to receive a minimum annual salary of $300,000, incentive bonuses as
determined by the Board of Directors of Bay State and all perquisites and
benefits customarily provided by Bay State to its employees. In the event that
Mr. Claypoole's employment is terminated for any reason other than cause, Mr.
Claypoole's employment agreement provides that Mr. Claypoole is entitled to
receive his base salary and benefits for the longer of (i) three months from the
date of termination or (ii) the remaining time under the initial term of the
employment agreement. The employment agreement also prohibits Mr. Claypoole from
engaging in certain activities deemed competitive with Bay State or its
affiliates during the duration of his employment with Bay State and for the
longer of (i) a period of two years thereafter or (ii) as long as Mr. Claypoole
continues to receive severance payments from Bay State. Aztec anticipates that
immediately following the Technology Distribution, Mr. Claypoole's current
employment agreement with Bay State will be terminated and Aztec will enter into
a new employment agreement with Mr. Claypoole under which he will serve as
Aztec's Chairman and Chief Executive Officer and a director. While the terms of
this new agreement are subject to negotiation and no binding agreement has yet
been reached, it is anticipated that the agreement will be for a three year
term, provide for a base salary of approximately $375,000 and an annual bonus of
up to that amount if certain objectives have been realized. In addition, the
proposed agreement will have other terms typical of agreements with chief
executive officers of public companies in the technology area.
In October 1996, Bay State entered into an employment agreement with
Elizabeth M. Claypoole, its then Vice President and Chief Financial Officer. The
employment agreement provides for an initial three-year term and successive
one-year extensions at the option of Bay State. Pursuant to this agreement, Ms.
Claypoole is entitled to receive a minimum annual salary of $140,000, incentive
bonuses as determined by the President of Bay State and all perquisites and
benefits customarily provided by Bay State to its employees. In the event that
Ms. Claypoole's employment is terminated for any reason other than cause, Ms.
Claypoole's employment agreement provides that Ms. Claypoole is entitled to
receive her base salary and benefits for the longer of (i) three months from the
date of termination, or (ii) the remaining time under the initial term of the
employment agreement. The employment agreement also prohibits Ms. Claypoole from
engaging in certain activities deemed competitive with Bay State or its
affiliates during the duration of her employment with Bay State and for the
longer of (i) a period of two years thereafter, or (ii) as long as Ms. Claypoole
continues to receive severance payments from Bay State.
On March 2, 1998, Aztec hired Ira Cohen as its Chief Operating Officer.
Aztec expects to enter into an employment agreement with Mr. Cohen prior to the
Technology Distribution.
On March 31, 1998, Aztec hired Douglas R. Johnson as its Executive Vice
President and Chief Financial Officer. Aztec expects to enter into an employment
agreement with Mr. Johnson prior to the Technology Distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Aztec Board intends to create a Compensation Committee effective prior
to the Distribution Date. The Compensation Committee will be charged with
determining or making recommendations to the Aztec Board regarding the
compensation of executive officers of Aztec and administering any stock option
plan Aztec may adopt.
Until a Compensation Committee of the Aztec Board is created, decisions
regarding the compensation of executive officers of Aztec will be made by the
Aztec Board. No member of the Aztec Board has ever been an officer of Aztec or
any of its subsidiaries, except that Mr. Ledecky was the Chief Executive Officer
of U.S. Office Products until November 5, 1997 and will be Chairman of U.S.
Office Products until the Distribution Date, and Mr. Claypoole has been Chairman
of U.S. Office Products' Technology Solutions division.
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CERTAIN TRANSACTIONS
On October 15, 1996, U.S. Office Products acquired Bay State, which will be
a wholly-owned subsidiary of Aztec following the Technology Distribution, from
James E. Claypoole, Bay State's then Chief Executive Officer and President, and
Thomas J. Foley, Executive Vice President of Bay State, for 906,576 shares of
U.S. Office Products Common Stock valued at $20.74 per share. In connection with
the acquisition, Bay State also entered into an employment agreement with Mr.
Claypoole at a minimum annual base salary of $300,000 and an employment
agreement with Elizabeth M. Claypoole, Bay State's then Vice President and Chief
Financial Officer, at a minimum annual base salary of $140,000. See
"Management--Employment Contracts and Related Matters." These transactions with
U.S. Office Products were the subject of arm's-length negotiations.
For a discussion of matters related to the spin-off of Aztec from U.S.
Office Products, see "The Spin-Offs from U.S. Office Products."
For a discussion of transactions between Aztec and Mr. Ledecky, see
"Management--Replacement of Outstanding U.S. Office Products Options,--Ledecky
Services Agreement."
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PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of Common Stock that are expected to be beneficially owned as of April
25, 1998 and as adjusted to reflect the Offering and the Technology Distribution
(assuming no exercise of the Underwriters' over-allotment) by (i) all persons
known by Aztec to own beneficially more than 5% of the Common Stock, (ii) each
director and each Named Officer who is a stockholder, and (iii) all directors
and executive officers as a group. Except as otherwise indicated, the business
address of each of the following is 52 Roland Street, Boston, Massachusetts
02129.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF U.S. OFFICE NUMBER OF
SHARES OF PRODUCTS SHARES OF PERCENT OF
U.S. OFFICE COMMON STOCK AZTEC COMMON AZTEC COMMON
PRODUCT COMMON PRIOR TO STOCK STOCK AS
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK OFFERING AS ADJUSTED(1) ADJUSTED
- ---------------------------------------------------------- -------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
James E. Claypoole (5)(7)................................. 774,138(2) *
Jonathan J. Ledecky (6)(7)................................ 2,428,125(3) 1.8%
Elizabeth M. Claypoole (6)(7)............................. 4,317(4) *
All current executive officers and directors as a group 3,574,660 2.7%
(five persons)(6)(7)....................................
5% STOCKHOLDERS:
FMR Corp (5).............................................. 15,754,406 11.2%
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company (5).............. 8,262,886 5.9%
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------
* Less than 1%.
(1) The "Number of Shares of Aztec Common Stock, As Adjusted" will reflect the
results of the Tender Offer and the application of the Distribution Ratio.
It assumes no options are exercisable within 60 days.
(2) Includes 11,250 shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering. Excludes Mr. Claypoole's
option for 4.5% of the Aztec Common Stock that Aztec expects to grant under
the 1998 Stock Incentive Plan, which will not be exercisable until the
12-month anniversary of the Technology Distribution. See "Management-- 1998
Stock Incentive Plan".
(3) Excludes options for U.S. Office Products Common Stock that will not be
converted into options for Aztec Common Stock at the time of the Technology
Distribution. Also excludes Mr. Ledecky's option for up to 7.5% of the Aztec
Common Stock that will be granted under the Company's 1998 Stock Incentive
Plan, which will not be exercisable until the 12-month anniversary of the
Technology Distribution. See "Management--Ledecky Services Agreement."
(4) Includes 3,375 shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering.
(5) Based upon a Schedule 13G filed with the SEC with respect to U.S. Office
Products Common Stock.
(6) The value of unexercised options represents the difference between the
exercise price of such options and $16.875 the closing market price of U.S.
Office Products Common Stock at April 24, 1998.
(7) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Common Stock in the
Offering
Trading Price of U.S. Office
Products Common Stock
Pre-Technology Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock
Pre-Technology Distribution
Initial Public Offering Price of
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Technology Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events, such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the Technology Distribution and
the exercise price of such option. The intrinsic value of the Aztec Options
will be no greater than the intrinsic value of the U.S. Office Products
Options before the Distributions and the ratio of exercise price to market
price will be not less than the ratio before the Distributions. The
formulas will not affect when the options vest or when employees can
exercise the options.
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DESCRIPTION OF AZTEC CAPITAL STOCK
GENERAL
At the time of the Technology Distribution and the Offering Aztec's
authorized capital stock will consist of 150 million shares of Aztec Common
Stock, par value $.001 per share, and 1 million shares of preferred stock, par
value $.001 per share (the "Preferred Stock"). Upon completion of the Offering
and following the Technology Distribution, Aztec will have outstanding
approximately 26,340,000 shares of Aztec Common Stock and no shares of Preferred
Stock. Set forth below is a summary of the terms of Aztec's authorized capital
stock.
AZTEC COMMON STOCK
The holders of Aztec Common Stock are entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of Aztec Common Stock are entitled to such dividends as may be declared
in the discretion of the Aztec Board out of funds legally available therefore.
See "Dividend Policy." The holders of Aztec Common Stock are entitled to share
ratably in the net assets of Aztec upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding. The holders of Aztec Common Stock have no preemptive
rights to purchase shares of stock of Aztec. Shares of Aztec Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of Aztec. All of the shares of Aztec Common Stock to be distributed
pursuant to the Technology Distribution will be fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Aztec Board as
shares of one or more classes or series. Subject to the provisions of Aztec's
Certificate of Incorporation and limitations prescribed by law, the Aztec Board
is expressly authorized to adopt resolutions to issue the shares, to fix the
number of shares and to change the number of shares constituting any series, and
to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights, and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. Aztec has no current plans to issue any shares of Preferred Stock
of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Aztec Board to render more difficult or to discourage an attempt to obtain
control of Aztec by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of Aztec's management. The issuance of
shares of the Preferred Stock pursuant to the Aztec Board's authority described
above may adversely affect the rights of the holders of Aztec Common Stock. For
example, Preferred Stock issued by Aztec may rank prior to Aztec Common Stock as
to dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Aztec Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
Aztec Common Stock or may otherwise adversely affect the market price of Aztec
Common Stock.
ANTI-TAKEOVER PROVISIONS
CLASSIFIED BOARD
Aztec's Certificate of Incorporation may include provisions dividing the
Aztec Board's membership into three classes, each of which serves until the
third succeeding annual meeting with one class being
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elected at each annual meeting of stockholders. Under Delaware law, each class
will be as nearly equal in number as possible. As a result, at least two annual
meetings of stockholders may be required for Aztec's stockholders to change a
majority of the members of the Aztec Board. Aztec believes that a classified
Board of Directors will assure continuity and stability of Aztec's management
and policies, without diminishing accountability to stockholders. Aztec's
classified Board will ensure that a majority of directors at any given time will
have experience in the business and competitive affairs of Aztec.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation and Bylaws may provide that stockholder
action can be taken only at an annual or special meeting and cannot be taken by
written consent in lieu of a meeting. The Certificate of Incorporation and
Bylaws may also provide that special meetings of the stockholders can be called
only by the Chairman of the Board, or by holders of at least 33 1/3% of the
outstanding shares of Aztec stock entitled to vote generally for the election of
directors.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The Bylaws may establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders and for
nominations by stockholders of candidates for election as directors at an annual
or special meeting at which directors are to be elected. Only such business may
be conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Aztec Board, or by a stockholder who has
given to the Secretary of Aztec timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make the determination of whether business
has been properly brought before such meeting. Only persons who are nominated
by, or at the direction of, the Aztec Board, or who are nominated by a
stockholder who has given timely written notice, in proper form, to the
Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of Aztec. These provisions are intended to
establish orderly procedures for the conduct of Aztec's business and to allow
the Board of Directors adequate time to evaluate and respond to stockholder
initiatives. They may have the effect of impeding the ability of a stockholder
to present proposals or make limitations in a change of control context if the
requisite notice provision cannot be satisfied.
SHAREHOLDER RIGHTS PLAN
Aztec's Board of Directors is evaluating the adoption of a Rights Plan
pursuant to which stockholders would receive the right to acquire preferred
stock. This right would be triggered under certain circumstances occurring after
any group or person acquires more than 15% of the outstanding Aztec Common
Stock, or the commencement of a tender offer for the purchase of more than 15%
of the outstanding Aztec Common Stock. In such event, each holder of a right
would be entitled to receive a fraction of a share of preferred stock for a
nominal price. The rights have certain anti-takeover effects that would cause
substantial dilution to a person or group attempting to acquire a significant
interest in Aztec without first obtaining the approval of Aztec's Board of
Directors.
STATUTORY BUSINESS COMBINATION PROVISION
Aztec is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder
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<PAGE>
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. Under Section 203, an "interested stockholder" is defined as any
person who is: (i) the owner of 15% or more of the outstanding voting stock of
the corporation; or (ii) an affiliate or associate of the corporation if such
affiliate or associate was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder. Under Aztec's Certificate of Incorporation, the
affirmative vote of a majority of the directors is required to approve an
interested stockholder transaction.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. Aztec has not adopted such an amendment to
its Certificate of Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to Aztec's Certificate of Incorporation and under Delaware law,
directors of Aztec are not liable to Aztec or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or any transaction in
which a director has derived an improper personal benefit. Aztec's by-laws
provide that Aztec will, to the fullest extent permitted under Delaware law,
indemnify its officers and directors against any damages arising out of their
actions as officers or directors of Aztec.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Aztec Common Stock will be American
Stock Transfer & Trust Company.
EXPERTS
The consolidated financial statements of Aztec Technology Partners, Inc. as
of April 30, 1996 and April 26, 1997 and for each of the fiscal years ended
March 31, 1995, March 31, 1996 and April 26, 1997 included in this Information
Statement/Prospectus, except as they relate to Fortran as of March 31, 1996 and
March 31, 1995 and for each of the three years in the period ended March 31,
1996, have been audited by Price Waterhouse LLP, independent accountants, and
insofar as they related to Fortran Corp. by Rubin Koelmstedt and Nadler,
independent accountants, whose report dated June 7, 1996 thereon appears herein.
Such financial statements have been so included in reliance on the reports of
such independent accountants given on the authority of such firms as experts in
auditing and accounting.
The combined financial statements of Aztec East Inc. and Affiliates as of
December 31, 1996 and 1995 and for the years then ended included in this
Prospectus have been so included in reliance on the June 22, 1997 report of B.N.
Kozin Company, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Compel Corporation as of December 31, 1996 and
1995 and for the years then ended included in this Prospectus have been so
included in reliance on the January 30, 1998 report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of shares of Aztec Common Stock and certain tax matters
relating to the Distributions will be passed upon on behalf of Aztec and U.S.
Office Products by Wilmer, Cutler & Pickering, Washington, D.C.
63
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
---------
AZTEC TECHNOLOGY PARTNERS, INC. HISTORICAL FINANCIAL STATEMENTS
Report of Price Waterhouse LLP, Independent Accountants F-2
Report of Rubin, Koehmstedt and Nadler, Independent Auditors F-3
Consolidated Balance Sheet as of April 30, 1996, April 25, 1997 and January 24,
1998 (unaudited) F-4
Consolidated Statement of Income for the years ended March 31, 1995 and 1996, the
fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited) F-5
Consolidated Statement of Stockholder's Equity for the years ended March 31, 1995
and 1996, the fiscal year ended April 26, 1997 and the nine months ended January
24, 1998 (unaudited) F-6
Consolidated Statement of Cash Flows for the years ended March 31, 1995 and 1996,
the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited) F-7
Notes to Consolidated Financial Statements F-9
AZTEC EAST, INC. AND AFFILIATES
Report of B.N. Kozin Company, Independent Accountants F-22
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-23
Statement of Operations for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-24
Statement of Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited) F-25
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-26
Notes to Financial Statements F-27
COMPEL CORPORATION
Report of Price Waterhouse LLP, Independent Accountants F-30
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-31
Statement of Income for the years ended December 31, 1994, 1995 and 1996 and the
nine months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-32
Statement of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997 (unaudited) F-33
Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 (unaudited) and 1997 (unaudited) F-34
Notes to Financial Statements F-35
AZTEC TECHNOLOGY PARTNERS, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Introduction to Pro Forma Financial Information (unaudited) F-41
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited) F-42
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998
(unaudited) F-43
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997
(unaudited) F-44
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited) F-45
Notes to Pro Forma Combined Financial Statements (unaudited) F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Aztec Technology Partners, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Aztec Technology Partners, Inc.
("Aztec") and its subsidiaries at April 30, 1996 and April 26, 1997, and the
results of their operations and their cash flows for the fiscal years ended
March 31, 1995, March 31, 1996 and April 26, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Aztec's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Fortran Corp., a wholly-owned subsidiary, which
statements reflect total revenues of $20,243,000 and $20,775,000 for the fiscal
years ended March 31, 1995 and 1996, respectively. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Fortran
Corp., is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 4, 1998, except for Note 1 and the last paragraph of
Note 3, which are as of May 14, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-3
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 3)
APRIL 30, APRIL 26, JANUARY 24, JANUARY 24,
ASSETS 1996 1997 1998 1998
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents......................... $ 5,609 $ 1,106 $ 117 $
Accounts receivable, less allowance for doubtful
accounts of $123, $351 and $790, respectively... 19,966 22,342 46,615 46,615
Inventories....................................... 4,451 3,904 12,578 12,578
Receivable from U.S. Office Products.............. 1,216 7,862
Unbilled percentage of completion revenues........ 725 2,871 1,452 1,452
Prepaid expenses and other current assets......... 562 1,704 4,252 4,252
--------- --------- ----------- -----------
Total current assets.......................... 31,313 33,143 72,876 64,897
Property and equipment, net......................... 1,755 2,163 5,074 5,074
Goodwill, net....................................... 63,891 63,891
Other assets........................................ 877 2,005 506 506
--------- --------- ----------- -----------
Total assets.................................. $ 33,945 $ 37,311 $ 142,347 $ 134,368
--------- --------- ----------- -----------
--------- --------- ----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Short-term debt................................... $ 5,580 $ 76 $ 304 $ 304
Accounts payable.................................. 10,805 11,803 23,329 23,329
Accrued compensation.............................. 1,857 1,651 3,898 3,898
Deffered revenue.................................. 2,536 2,499 5,402 5,402
Income taxes payable.............................. 389 679 4,652 4,652
Accrued subchapter S corporation distributions.... 1,320
Other accrued liabilities......................... 1,482 1,847 3,443 3,443
--------- --------- ----------- -----------
Total current liabilities..................... 22,649 19,875 41,028 41,028
Long-term debt...................................... 799 167 386 4,696
Long-term payable to U.S. Office Products........... 4,786 9,957
Deferred income taxes............................... 857 857 857
--------- --------- ----------- -----------
Total liabilities............................. 23,448 25,685 52,228 46,581
--------- --------- ----------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity................................. 148 8,897 80,818 80,818
Retained earnings................................. 10,349 2,729 9,301 6,969
--------- --------- ----------- -----------
Total stockholder's equity.................... 10,497 11,626 90,119 87,787
--------- --------- ----------- -----------
Total liabilities and stockholder's equity.... $ 33,945 $ 37,311 $ 142,347 $ 134,368
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ---------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.......................................... $ 74,645 $ 97,567 $ 97,253 $ 72,494 $ 91,662
Services.......................................... 14,354 16,488 39,025 28,801 50,850
----------- ----------- ---------- ----------- -----------
Total revenues.................................. 88,999 114,055 136,278 101,295 142,512
----------- ----------- ---------- ----------- -----------
Cost of revenues:
Products.......................................... 58,351 75,640 91,148 67,782 86,074
Services.......................................... 7,507 8,473 10,981 8,267 21,821
----------- ----------- ---------- ----------- -----------
Total cost of revenues.......................... 65,858 84,113 102,129 76,049 107,895
----------- ----------- ---------- ----------- -----------
Gross profit.................................... 23,141 29,942 34,149 25,246 34,617
Selling, general and administrative expenses........ 14,942 20,510 21,525 15,637 22,951
Goodwill amortization expense....................... 414
Non-recurring acquisition costs..................... 2,274 1,906
----------- ----------- ---------- ----------- -----------
Operating income................................ 8,199 9,432 10,350 7,703 11,252
Other (income) expense:
Interest expense.................................. 331 420 324 310 169
Interest income................................... (118) (416) (168) (169) (167)
Other............................................. (111) (964) (53) 234 (14)
----------- ----------- ---------- ----------- -----------
Income before provision for income taxes............ 8,097 10,392 10,247 7,328 11,264
Provision for income taxes.......................... 401 750 3,524 1,771 4,692
----------- ----------- ---------- ----------- -----------
Net income.......................................... $ 7,696 $ 9,642 $ 6,723 $ 5,557 $ 6,572
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Per share amounts:
Basic............................................. $0.84 $0.71 $0.37 $0.32 $0.29
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Diluted........................................... $0.84 $0.71 $0.36 $0.32 $0.28
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Unaudited pro forma net income (see Note 8)......... $ 4,592 $ 4,033 $ 6,572
---------- ----------- -----------
---------- ----------- -----------
Unaudited pro forma income per share:
Basic............................................. $0.26 $0.23 $0.29
---------- ----------- -----------
---------- ----------- -----------
Diluted........................................... $0.25 $0.23 $0.28
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
DIVISIONAL RETAINED STOCKHOLDER'S
EQUITY EARNINGS EQUITY
----------- --------- -------------
<S> <C> <C> <C>
Balance at March 31, 1994................................................... $ 440 $ 6,305 $ 6,745
Transactions of Pooled Companies:
Capital distribution.................................................... (292) (292)
Cash dividends.......................................................... (3,087) (3,087)
Net income................................................................ 7,696 7,696
----------- --------- -------------
Balance at March 31, 1995................................................... 148 10,914 11,062
Cash dividends at Pooled Companies........................................ (7,389) (7,389)
Adjustments to conform the fiscal year-ends of Pooled Companies........... (2,818) (2,818)
Net income................................................................ 9,642 9,642
----------- --------- -------------
Balance at April 30, 1996................................................... 148 10,349 10,497
Transactions of Pooled Companies:
Undistributed earnings of subchapter S corporations..................... 8,749 (8,749)
Cash dividends paid and declared........................................ (5,594) (5,594)
Net income................................................................ 6,723 6,723
----------- --------- -------------
Balance at April 26, 1997................................................... 8,897 2,729 11,626
Unaudited data:
Issuance of U.S. Office Products common stock in conjunction with
acquisitions............................................................ 71,921 71,921
Net income................................................................ 6,572 6,572
----------- --------- -------------
Balance at January 24, 1998 (unaudited)..................................... $ 80,818 $ 9,301 $ 90,119
----------- --------- -------------
----------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 7,696 $ 9,642 $ 6,723 $ 5,557 $ 6,572
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 454 494 541 359 1,140
Non-recurring acquisition costs.................. 2,274 1,906
Gain on sale of division at Pooled Company....... (761)
Deferred taxes................................... (66) 645
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (5,963) (5,441) (2,376) (4,463) (7,815)
Inventory...................................... (2,162) 595 547 1,066 (2,171)
Prepaid expenses and other current assets...... 140 (585) (3,120) (1,789) 3,153
Accounts payable............................... 4,272 (475) 997 1,973 2,875
Accrued liabilities............................ 1,652 867 20 706 3,571
----------- ----------- ----------- ------ -----------
Net cash provided by operating activities.... 6,089 4,270 6,251 5,315 7,325
----------- ----------- ----------- ------ -----------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals........................................ (888) (552) (949) (806) (1,290)
Payments of non-recurring acquisition costs........ (1,814) (1,235) (460)
Deposits........................................... (83) (421) (1,312) (1,287)
Cash received in sale of division at Pooled
Company.......................................... 1,275
Cash received in acquisitions...................... 320
Other.............................................. 12 4 161
----------- ----------- ----------- ------ -----------
Net cash provided by (used in) investing
activities................................. (959) 306 (3,914) (3,328) (1,430)
----------- ----------- ----------- ------ -----------
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, net... (491) 3,683 (5,504) (3,396) (2,105)
Proceeds from issuance of long-term debt........... 2,126 1,196 305 236
Payments of long-term debt......................... (698) (937) (281) (1,984)
Payments of dividends at Pooled Companies.......... (3,087) (7,389) (4,274) (4,104) (1,320)
Advances from (payments to) U.S. Office Products
Company.......................................... 3,570 2,276 (1,475)
Capital distributed to stockholder's of Pooled
Company.......................................... (292)
Net change in cash due to conforming fiscal year-
ends of certain Pooled Companies................. 176
----------- ----------- ----------- ------ -----------
Net cash used in financing activities........ (1,744) (3,032) (6,840) (5,269) (6,884)
----------- ----------- ----------- ------ -----------
Net increase (decrease) in cash and cash
equivalents........................................ 3,386 1,544 (4,503) (3,282) (989)
Cash and cash equivalents at beginning of period..... 679 4,065 5,609 5,609 1,106
----------- ----------- ----------- ------ -----------
Cash and cash equivalents at end of period........... $ 4,065 $ 5,609 $ 1,106 $ 2,327 $ 117
----------- ----------- ----------- ------ -----------
----------- ----------- ----------- ------ -----------
</TABLE>
F-7
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
------------- ------------- ----------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 335 $ 526 $ 282 $ 213 $ 123
Income taxes paid.................................. $ 422 $ 452 $ 2,460 $ 1,087 $ 1,444
</TABLE>
The Company issued common stock in connection with certain business
combinations during the nine months ended January 24, 1998. The fair values of
the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JANUARY 24,
1998
---------------
<S> <C>
(UNAUDITED)
Accounts receivable.............................................................................. $ 16,457
Inventories...................................................................................... 6,503
Prepaid expenses and other current assets........................................................ 2,608
Property and equipment........................................................................... 2,347
Goodwill......................................................................................... 64,305
Other assets..................................................................................... 174
Short-term debt.................................................................................. (2,332)
Accounts payable................................................................................. (8,651)
Accrued liabilities.............................................................................. (7,607)
Long-term debt................................................................................... (2,203)
-------
Net assets acquired.......................................................................... $ 71,601
-------
-------
The acquisitions were funded as follows:
Common stock..................................................................................... $ 71,921
Cash received.................................................................................... (320)
-------
Total........................................................................................ $ 71,601
-------
-------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
1. BACKGROUND
Aztec Technology Partners, Inc. (the "Company") is a Delaware corporation
which is a wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Technology Solutions division as an independent publicly owned
company. This transaction is expected to be effected through the distribution of
shares of the Company to U.S. Office Products shareholders effective on or about
June 9, 1998 (the "Distribution"). Prior to the Distribution, U.S. Office
Products plans to contribute its equity interests in certain wholly-owned
subsidiaries] associated with U.S. Office Products' Technology Solutions
division to the Company. U.S. Office Products and the Company will enter into a
number of agreements to facilitate the Distribution and the transition of the
Company to an independent business enterprise. Additionally, in connection with
the Distribution, the Company anticipates selling 4.2 million shares of its
common stock (4.83 million shares if the over-allotment is sold) in an initial
public offering ("IPO").
The Technology Solutions division was created by U.S. Office Products in
October 1996 and completed five business combinations accounted for under the
pooling-of-interests method during the period from October 1996 to April 1997
("the Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
2. BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. The Company's statement of income
includes all of the related costs of doing business including an allocation of
certain general corporate expenses of U.S. Office Products which were not
directly related to these businesses including certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing, human resources as well as other general overhead
costs. These allocations were based on a variety of factors, dependent upon the
nature of the costs being allocated, including revenues, number and size of
acquisitions and number of employees. Management believes these allocations were
made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income includes
an allocation of interest expense on all debt allocated to the Company. See Note
7 for further discussion of interest expense.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-9
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on March 31 and December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from March 31 and December 31 to conform to U.S. Office Products' fiscal year,
which ends on the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired in business combinations accounted for under the purchase method.
Substantially all goodwill is amortized on a straight line basis over estimated
useful lives of 25-40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value.
F-10
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
REVENUE RECOGNITION
Revenue from hardware and packaged software sales is recognized upon
shipment provided there are no uncertainties regarding customer acceptance and
collectibility of related receivable is considered probable.
Revenue from software development contracts is recognized as work is
performed on a "time and materials" basis.
Revenues related to fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to the estimated total cost at completion. This method is used because
management considers accumulated costs to be the best available measure of
progress on these contracts. The cumulative impact of any revision in estimates
of the percent complete is reflected in the period in which the changes become
known. Losses on projects in progress are recognized when known.
Service revenues from consulting, installation and maintenance is recognized
ratably over the contact period or as the service is provided.
Payments received by the Company in advance of product delivery or
performance of services are deferred until earned.
The American Institute of Certified Public Accountants has approved a new
Statement of Position ("SOP"), SOP 97-2, "Software Revenue Recognition" which
will supersede SOP 91-1. Management has assessed this new SOP and believes that
its adoption will not have a material effect on the timing of the Company's
revenue recognition or cause changes to its revenue recognition policies.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of selling, general and administrative expenses. Advertising expense
for the fiscal years ended March 31, 1995 and 1996 and the fiscal year ended
April 26, 1997 was $404, $480 and $661, respectively. The Company also earns
co-op funds from certain vendors which can be used for advertising, trade shows
and telemarketing campaigns. These funds are included in the consolidated
statement of income as a credit to the corresponding selling, general and
F-11
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
administrative expense. Co-op funds for the fiscal years ended March 31, 1995
and 1996 and the fiscal year ended April 26, 1997 were $(564), $(789) and
$(1,453), respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations in the year
incurred. Research and development costs are included in the consolidated
statement of income as a component of selling, general and administrative
expenses.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals and various regulatory fees.
NET INCOME PER SHARE
Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The difference between the
weighted-average number of shares of common shares used for the diluted EPS is
comprised of the dilutive effect of outstanding common stock options. However, a
portion of the Company's employee stock options outstanding during the periods
presented were not included in the computation of diluted EPS as they were
anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
the fiscal year ended April 24, 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
F-12
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet information at January 24, 1998 adjusts the
historical January 24, 1998 balances to give effect to the allocation of $5,000
of total debt to the Company by U.S. Office Products. The Company will pay
$4,427 to U.S. Office Products (consisting of (i) the net of the $9,957 payable
to U.S. Office Products and the $7,862 receivable from U.S. Office Products and
(ii) a distribution of $2,332) with the use of available cash of $117 and $4,310
in borrowings drawn from the Company's existing working capital credit facility.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company will issue to U.S. Office Products
shareholders one share of its common stock for every five shares of U.S. Office
Products common stock held by each respective shareholder. The share data
reflected in the accompanying financial statements represents the historical
share data for U.S. Office Products for the period or as of the date indicated,
and retroactively adjusted to give effect to the one for five distribution
ratio.
4. BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 4,775,757 shares of U.S. Office Products
common stock to acquire the Pooled Companies.
The Pooled Companies and the number of shares issued are as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
- ------------------------------------------------------------------------------- -------------
<S> <C>
Bay State Computer Group....................................................... 906,576
Digital Network Associates, Inc. .............................................. 761,946
Fortran Corp. ................................................................. 1,650,000
Office Equipment Service, Inc. ................................................ 661,656
Professional Computer Solutions, Inc. ......................................... 795,579
-------------
Total shares issued.......................................................... 4,775,757
-------------
-------------
</TABLE>
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. All of the
Pooled Companies previously reported on fiscal years ending other than April 30,
1996 and April 26, 1997. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
Commencing on May 1, 1996, the year-ends of the Pooled Companies were
changed to April 26, 1997, resulting in an adjustment to retained earnings of
$(2,818) during the fiscal year ended April 30, 1996. This adjustment consisted
of revenues, costs and expenses, and dividends of $17,294, $15,026 and $5,086,
respectively, during the period of time between the Pooled Companies most
recently completed year-end and April 30, 1996.
F-13
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
AZTEC TECHNOLOGY POOLED
PARTNERS, INC. COMPANIES COMBINED
---------------- ----------- ----------
<S> <C> <C> <C>
For the fiscal year ended March 31, 1995
Revenues............................................................. $ $ 88,999 $ 88,999
Net income........................................................... $ $ 7,696 $ 7,696
For the fiscal year ended March 31, 1996
Revenues............................................................. $ $ 114,055 $ 114,055
Net income........................................................... $ $ 9,642 $ 9,642
For the fiscal year ended April 26, 1997
Revenues............................................................. $ 57,656 $ 78,622 $ 136,278
Net income........................................................... $ 2,109 $ 4,614 $ 6,723
For the nine months ended January 25, 1997 (unaudited):
Revenues............................................................. $ 29,030 $ 72,265 $ 101,295
Net income........................................................... $ 1,670 $ 3,887 $ 5,557
For the nine months ended January 24, 1998 (unaudited):
Revenues............................................................. $ 142,512 $ $ 142,512
Net income........................................................... $ 6,572 $ $ 6,572
</TABLE>
PURCHASE METHOD
During the nine months ended January 24, 1998, the Company made five
acquisitions accounted for under the purchase method for an aggregate purchase
price of $71,601, consisting of 3,255,107 shares of common stock with a market
value of $71,921 and a net of $320 of cash acquired. The total assets related to
these acquisitions were $92,394, including intangible assets of $64,305. The
results of these acquisitions have been included in the Company's results from
their respective dates of acquisition.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Land..................................................................... $ 143 $ 143
Buildings................................................................ 374 374
Furniture and fixtures................................................... 2,277 3,184
Warehouse equipment...................................................... 323 272
Equipment under capital leases........................................... 169 252
Leasehold improvements................................................... 211 155
--------- ---------
3,497 4,380
Less: Accumulated depreciation........................................... (1,742) (2,217)
--------- ---------
Net property and equipment............................................... $ 1,755 $ 2,163
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the fiscal years ended March 31, 1995 and 1996 and
April 26, 1997 was $454, $494 and $541, respectively.
F-14
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
6. GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
(UNAUDITED)
Goodwill......................................................................... $ 64,305
Less: Accumulated amortization................................................... (414)
-----------
Net goodwill................................................................... $ 63,891
-----------
-----------
</TABLE>
Amortization expense for the nine months ended January 24, 1998 was $414.
7. CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Credit facility with bank, average interest rate of 8.5% at April 30,
1996. ................................................................. $ 4,080 $
Payable to Pooled Company shareholder.................................... 1,208
Current maturities of long-term debt..................................... 292 76
----------- ---
Total short-term debt.................................................... $ 5,580 $ 76
----------- ---
----------- ---
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Notes payable, secured by certain assets of the Company, interest rates
ranging from 7.8% to 8.4%. ............................................ $ 1,002 $ 111
Capital lease obligations................................................ 89 132
----------- -----------
1,091 243
Less: Current maturities of long-term debt............................... (292) (76)
----------- -----------
Total long-term debt............................................... $ 799 $ 167
----------- -----------
----------- -----------
</TABLE>
F-15
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 76
1999................................................................ 124
2000................................................................ 43
---------
Total maturities of long-term debt $ 243
---------
---------
</TABLE>
PAYABLE TO U.S. OFFICE PRODUCTS
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses.
Interest has been allocated to the Company based upon the Company's average
outstanding payable balance with U.S. Office Products at U.S. Office Products
average interest rate during such period. An analysis of the activity in this
account is as follows:
<TABLE>
<S> <C>
Balance at April 30, 1996........................................... $
Payments of long-term debt of Pooled Companies upon acquisition..... 1,710
Payments of acquisition costs....................................... 1,362
Allocated corporate expenses........................................ 388
Operating costs paid by U.S. Office Products........................ 1,326
---------
Balance at April 26, 1997........................................... 4,786
Unaudited data:
Payments of long-term debt of Purchased Companies upon
acquisition......................................................... 1,159
Payments of acquisition costs....................................... 2,274
Allocated corporate expenses........................................ 838
Operating costs paid by U.S. Office Products........................ 900
---------
Balance at January 24, 1998 (unaudited)............................. $ 9,957
---------
---------
</TABLE>
The Company has earned interest on the receivable from U.S. Office Products
at the weighted average interest rate of U.S. Office Products in effect during
the periods. The receivable from U.S. Office Products was generated by the
Company primarily as a result of U.S. Office Products sweeping the Company's
excess cash through the centralized cash management system, which involves daily
advances or sweeps of cash to keep the cash balance at or near zero on a daily
basis. The Company's financial statements include allocations of net interest
expense from U.S. Office Products totaling $130 for the fiscal year ended
January 24, 1998.
At the date of Distribution, the Company has agreed to the allocation of
$5,000 in debt from U.S. Office Products. The allocation will first include debt
outstanding with third parties and the balance will represent intercompany debt
payable to U.S. Office Products. The debt payable to U.S. Office Products will
be payable upon the completion of the Distribution.
F-16
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
8. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes currently payable:
Federal................................................... $ 211 $ 485 $ 2,102
State..................................................... 190 331 777
----- ----- -----------
401 816 2,879
----- ----- -----------
Deferred income tax expense (benefit)....................... (66) 645
----- ----- -----------
Total provision for income taxes...................... $ 401 $ 750 $ 3,524
----- ----- -----------
----- ----- -----------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Inventory.............................................................. $ 50 $ 105
Allowance for doubtful accounts........................................ 16 49
Accrued liabilities.................................................... 124
--- -----
Total current deferred tax assets.................................. 66 278
--- -----
Long-term deferred tax liabilities:
Property and equipment................................................. 24
Other.................................................................. (881)
--- -----
Total long-term deferred tax liabilities........................... (857)
--- -----
Net deferred tax asset (liability)................................. $ 66 $ (579)
--- -----
--- -----
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
MARCH 31, MARCH 31, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 2.3 3.0 5.9
Subchapter S corporation income not subject to corporate
level taxation............................................ (32.3) (30.8) (20.8)
Nondeductible acquisition costs............................. 7.8
Other....................................................... 6.5
----- ----- -----
Effective income tax rate................................... 5.0% 7.2% 34.4%
----- ----- -----
----- ----- -----
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their
F-17
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
individual stockholders. Accordingly, the specific Pooled Companies provided no
federal income tax expense prior to their acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
APRIL 26,
1997
-------------------------
<S> <C>
Net income per consolidated statement of income...................... $ 6,723
Pro forma income tax provision adjustment............................ 2,131
------
Pro forma net income................................................. $ 4,592
------
------
</TABLE>
9. LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 76 $ 653
1999..................................................................... 58 598
2000..................................................................... 19 496
2001..................................................................... 479
2002..................................................................... 192
Thereafter............................................................... 431
----- -----------
Total minimum lease payments............................................. 153 $ 2,849
-----------
-----------
Less: Amounts representing interest...................................... (21)
-----
Present value of net minimum lease payments.............................. $ 132
-----
-----
</TABLE>
Rent expense for all operating leases for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 was $724, $778 and $871, respectively.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
F-18
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
DISTRIBUTION
On or before the date of the Distribution, the Company, U.S. Office Products
and the other Spin-Off Companies, will enter into a Distribution Agreement, Tax
Allocation Agreement, and Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement. These agreements
are expected to provide, among other things, for U.S. Office Products and the
Company to indemnify each other from tax and other liabilities relating to their
respective businesses prior to and following the Distribution. Certain of the
obligations of the Company and the other Spin-Off Companies to indemnify U.S.
Office Products are joint and several. Therefore, if one of the other Spin-Off
Companies fails to satisfy its indemnification obligations to U.S. Office
Products when such a loss occurs, the Company may be required to reimburse U.S.
Office Products for all or a portion of the losses that otherwise would have
been allocated to other Spin-Off Companies. In addition, the agreements will
allocate liabilities, including general corporate and securities liabilities of
U.S. Office Products not specifically related to the technology business,
between U.S. Office Products and the Company and the other Spin-Off Companies.
11. EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For the fiscal years ended March 31,
1995 and 1996 and April 26, 1997, the subsidiaries incurred expenses totaling
$314, $367 and $390, respectively, related to these plans.
12. STOCKHOLDER'S EQUITY
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive Plan covering employees of
U.S. Office Products. The Company expects to adopt an employee stock option plan
at approximately the time of the Distribution. Upon the Distribution, the
Company expects to replace the options to purchase shares of common stock of
U.S. Office Products held by employees with options to purchase shares of common
stock of the Company.
U.S. Office Products granted 580,027 options to Company employees under the
Plan during fiscal 1997; and the Company accounted for these options in
accordance with APB Opinion No. 25. Accordingly, because the exercise prices of
the options have equaled the market price on the date of grant, no compensation
expense was recognized for the options granted. Had compensation expense been
recognized based upon the fair value of the stock options on the grant date
under the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share for the year
ended April 26, 1997 would not have been materially effected.
Under a services agreement entered into with Jonathan J. Ledecky ("the
Ledecky Services Agreement"), the Board of Directors of U.S. Office Products has
agreed that Jonathan J. Ledecky will receive a stock option for Company Common
Stock from the Company as of the date of the Distribution. The U.S.
F-19
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
Office Products Board intends the option to be compensation for Mr. Ledecky's
services as a director of the Company, and certain services as an employee of
the Company. The option will cover up to 7.5% of the outstanding Company Common
Stock determined as of the date of the Distribution, with no anti-dilution
provisions in the event of issuance of additional shares of Common Stock (other
than with respect to stock splits or reverse stock splits). The option will have
a per share exercise price equal to the price of the IPO.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant options covering approximately 6.9% of the
outstanding shares of the Company's common stock, immediately following the
Distribution and prior to the IPO, to certain executive management personnel and
non-employee directors. The options will be granted under the 1998 Stock
Incentive Plan (the "Plan") and will have a per share exercise price equal to
the IPO price, with other terms to be determined by the Company's Board of
Directors. Total options available for grant under the Plan will be 24.0% of the
outstanding shares of the Company's common stock immediately following the
Distribution and the IPO, including the options to be granted to Mr. Ledecky on
that date.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
fiscal years ended March 31, 1996 and April 26, 1997 and the fiscal year ending:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1996
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 30,536 $ 27,653 $ 27,173 $ 28,693 $ 114,055
Gross profit.............................................. 9,490 7,462 6,249 6,741 29,942
Operating income (loss)................................... 5,296 3,036 1,222 (122) 9,432
Net income................................................ 5,315 2,936 1,103 288 9,642
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 34,263 $ 31,898 $ 35,134 $ 34,983 $ 136,278
Gross profit.............................................. 7,982 7,608 9,656 8,903 34,149
Operating income.......................................... 2,695 1,779 3,229 2,647 10,350
Net income................................................ 2,617 1,315 1,625 1,166 6,723
Pro forma income (see Note 8)............................. 1,787 898 1,348 559 4,592
</TABLE>
F-20
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 25, 1998
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 42,730 $ 36,875 $ 62,907 $ 142,512
Gross profit.............................................. 9,047 9,718 15,852 34,617
Operating income.......................................... 2,749 3,687 4,816 11,252
Net income................................................ 1,636 2,233 2,703 6,572
Pro forma income (see Note 8)............................. 1,636 2,233 2,703 6,572
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
DISTRIBUTION/ACQUISITION - PRO FORMA
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed five business combinations accounted for
under the purchase method in exchange for U.S. Office Products common stock with
a market value on their respective dates of acquisition of approximately
$71,900. The results of operations for the nine months ended January 24, 1998
include the results of the acquired companies from their respective dates of
acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Distribution and acquisitions described above
had been consummated as of the beginning of fiscal 1997. The results presented
below include certain pro forma adjustments to reflect the amortization of
intangible assets, adjustments in executive compensation of $2,172, $1,823 and
$312 for the fiscal year ended April 26, 1997, the nine months ended January 25,
1997 and the nine months ended January 24, 1998, respectively. and the inclusion
of a federal income tax provision on all earnings:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------------
ENDED JANUARY 25, JANUARY 24,
APRIL 26, 1997 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues................................ $ 228,912 $ 172,518 $ 191,074
Net income.............................. 9,454 7,030 9,476
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
PROPOSED CREDIT FACILITY
Aztec has entered into a commitment letter with BankBoston, N.A. for the
$200,000 Proposed Credit Facility. On closing of the Proposed Credit Facility,
which will occur on the earlier of 75 days following the Spin-Off or August 15,
1998, Aztec will have access to the full $200,000 amount; between the Spin-Off
and the closing, Aztec will have access to an interim unsecured $15,000 working
capital line of credit. The Proposed Credit Facility will mature five years from
the closing date of the Proposed Credit Facility; will be secured by all
material assets of Aztec; and will be subject to terms and conditions customary
for facilities of this kind, including certain financial covenants. Interest
rate options will be available to Aztec depending on the satisfaction of certain
specified financial ratios.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aztec East Inc. and Affiliates
We have audited the accompanying combined balance sheet of Aztec East Inc.
and Affiliates as of December 31, 1996 and 1995 and the related combined
statements of operations, of shareholders' equity and of cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aztec East Inc. and
Affiliates as of December 31, 1996 and 1995, and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
B.N. KOZIN COMPANY
Melville, New York
June 22, 1997
F-22
<PAGE>
AZTEC EAST INC. AND AFFILIATES
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C> <C>
1995 1996
--------- ---------
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash in banks................................................................. $ 486 $ 340 $ 1,186
Accounts receivable, less allowance for uncollectible of $25, $35, and $34,
respectively................................................................ 3,216 3,045 2,502
Notes receivable.............................................................. 320
Inventory..................................................................... 619 1,474 1,263
Prepaid expenses and other current assets..................................... 634 808 801
--------- --------- ------
Total current assets........................................................ 4,955 5,987 5,752
Property and equipment, net..................................................... 260 274 202
Intangible assets, net.......................................................... 347 318
Other assets.................................................................... 99 99
--------- --------- ------
Total assets................................................................ $ 5,314 $ 6,707 $ 6,272
--------- --------- ------
--------- --------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,199 $ 1,817 $ 698
Notes payable--bank........................................................... 900 400 400
Loans payable--stockholders................................................... 665 605
Accrued expenses.............................................................. 387 460 1,748
Taxes payable................................................................. 72 84 122
--------- --------- ------
Total current liabilities................................................... 3,223 3,366 2,968
Notes payable--bank............................................................. 1,366 1,066
--------- --------- ------
Total liabilities........................................................... 3,223 4,732 4,034
Stockholders' equity:
Capital stock, .01 par value, 100,000 shares authorized, 51,539 issued and
outstanding................................................................. 1 1 1
Paid-in capital............................................................... 37 37 37
Retained earnings............................................................. 2,053 1,937 2,200
--------- --------- ------
Total stockholders' equity.................................................. 2,091 1,975 2,238
--------- --------- ------
Total liabilities and stockholders' equity.................................. $ 5,314 $ 6,707 $ 6,272
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 22,613 $ 23,340 $ 17,399 $ 15,507
Cost of revenues...................................................... 15,927 15,923 11,900 9,425
--------- --------- --------- ---------
Gross profit...................................................... 6,686 7,417 5,499 6,082
Selling, general and administrative expenses.......................... 4,968 5,732 4,444 4,054
--------- --------- --------- ---------
Operating income...................................................... 1,718 1,685 1,055 2,028
Other (income) expenses:
Interest, net....................................................... (76) 24 23 61
Other, net.......................................................... (172) (86)
--------- --------- --------- ---------
(76) 24 (149) (25)
--------- --------- --------- ---------
Income before income taxes.......................................... 1,794 1,661 1,204 2,053
Provision for income taxes............................................ 84 68 49 122
--------- --------- --------- ---------
Net income............................................................ $ 1,710 $ 1,593 $ 1,155 $ 1,931
--------- --------- --------- ---------
--------- --------- --------- ---------
Unaudited pro forma information (see Note 1):
Income before provision from income taxes........................... $ 1,794 $ 1,661 $ 1,204 $ 2,053
Provision for income taxes.......................................... 718 664 482 821
--------- --------- --------- ---------
Pro forma net income................................................ $ 1,076 $ 997 $ 722 $ 1,232
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................. 51,539 $ 1 $ 37 $ 1,742 $ 1,780
Stockholder distributions.............................. (1,399) (1,399)
Net income............................................. 1,710 1,710
--------- ----------- ----------- ----------- ------
Balance at December 31, 1995............................. 51,539 1 37 2,053 2,091
Stockholder distributions.............................. (1,709) (1,709)
Net income............................................. 1,593 1,593
--------- ----------- ----------- ----------- ------
Balance at December 31, 1996............................. 51,539 1 37 1,937 1,975
Unaudited data:
Stockholder distributions.............................. (1,668) (1,668)
Net income............................................. 1,931 1,931
--------- ----------- ----------- ----------- ------
Balance at September 30, 1997 (unaudited)................ 51,539 $ 1 $ 37 $ 2,200 $ 2,238
--------- ----------- ----------- ----------- ------
--------- ----------- ----------- ----------- ------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
AZTEC EAST INC. AND AFFILIATES
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,710 $ 1,593 $ 1,155 $ 1,931
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 109 165 104 141
Changes in operating assets and liabilities:
Accounts receivable, net.................................... (522) 171 334 543
Inventory................................................... (221) (856) (698) 212
Prepaid expenses and other current assets................... (262) (174) (489) 327
Other assets................................................ (31) (249) 99
Intangible assets........................................... (361)
Accounts payable and accrued liabilities.................... 64 691 593 (398)
Income taxes payable........................................ 13 12
--------- ---------- ---------- ----------
Net cash provided by operating activities................. 860 1,241 750 2,855
--------- ---------- ---------- ----------
Cash flow from investing activities:
Purchases of equipment.......................................... (269) (165) (80) (41)
Issuance of notes receivable.................................... (320)
--------- ---------- ---------- ----------
Net cash used in investing activities..................... (269) (485) (80) (41)
--------- ---------- ---------- ----------
Cash flow from financing activities:
Principal payments on long-term debt............................ (100) (300)
Proceeds from long-term debt.................................... 1,567
Proceeds from notes payable..................................... 900 867
Payment on short-term debt...................................... (500)
Payments on loans payable to stockholders....................... (60)
Proceeds from loan payable to stockholders...................... 372
Distributions to stockholders................................... (1,399) (1,709) 114 (1,668)
--------- ---------- ---------- ----------
Net cash provided by (used in) financing activities....... (127) (902) 1,081 (1,968)
--------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.............. 464 (146) 1,751 846
Cash and cash equivalents, beginning of year...................... 22 486 486 340
--------- ---------- ---------- ----------
Cash and cash equivalents, end of year............................ $ 486 $ 340 $ 2,237 $ 1,186
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ 73 $ 218 $ 158 $ 171
Cash paid for taxes............................................. $ 84 $ 84 $ $ 121
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Aztec East Inc. and Affiliates ("the Company") is in the business of rework,
re-manufacture and repair of electronic and electromechanical equipment and
assemblies for the telecommunications industry and other commercial /industrial
markets. The Company also performs logistics management functions for their
major accounts. As of January 1, 1997, the Company changed its name to Aztec
International.
PROPERTY AND EQUIPMENT
The Company has elected to recover the cost of assets on the straight-line
method with useful lives ranging from 3-5 years.
INTANGIBLE ASSETS
The Company has elected to recover the costs of its intangible assets on the
straight-line method with an amortization period ranging from 60-180 months.
INCOME TAXES
The Company elected sub "S" status; therefore, there is no provision for
federal taxes on a corporate level. As of January 1, 1997, the Affiliated
Companies have merged and changed their names to Aztec International Inc.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
2. INVENTORIES
Inventories are stated at the lower of cost or market.
3. LEASE COMMITMENTS
The Company leases its facilities under operating leases expiring at various
times through 2006.
<TABLE>
<S> <C>
1997.............................................................. $ 399,196
1998.............................................................. 260,586
1999.............................................................. 263,292
2000.............................................................. 263,292
2001.............................................................. 203,882
2002-2006......................................................... 192,000
</TABLE>
4. NOTE RECEIVABLE
The notes receivable of $320,000 is at an interest rate of 10% and is
payable in twelve equal installments.
F-27
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PREPAIDS AND OTHER CURRENT ASSETS
The prepaids and other current assets include $592,467 and $4,496 loaned to
Unaffiliated Corporations owned by the stockholders. The loans were at a rate of
the average 30 day investment rate and are payable on demand.
6. OTHER ASSETS
The other receivables include $72,230 loaned to a stockholder in the
Company. This is payable over three years with interest based on prime.
7. BUSINESS CONCENTRATIONS
The Company receives 60% of its sales from one customer who is under
contract due to expire in 1998. The Companies have been performing services for
this customer on an ongoing basis since 1984.
8. BANK LINE OF CREDIT
The Company currently has a revolving credit line of $1,000,000 with First
Union Bank of Connecticut at an interest rate of .25% above bank's base rate.
The Company has collateralized the line with its entire assets. As at December
31, 1996, the Company has nothing outstanding. The credit line is due to expire
May 22, 1998.
9. NOTE PAYABLE
The Company has borrowed $2,000,000 from First Union Bank of Connecticut to
finance the Acquisition of Tie Communications Inc., Repair Department. The
interest rate on this debt is 2.25% above the Libor Rate and has a term of 60
months payable monthly. The current balance outstanding as of December 31, 1996
was $1,766,667.
10. LOANS PAYABLE--STOCKHOLDERS
Stockholders' loans are payable on demand and bear 12% interest.
11. 401(K) RETIREMENT PLAN
In December 1994, the Company established a defined contribution plan
(401(k)) for substantially all of its eligible employees. Employees may
contribute a percentage of their salary to the plan subject to statutory limits.
The Company will match these contributions up to certain limits.
12. STOCK OPTION PLAN
In August 1996, the Company established an Employee Incentive Stock Option
Plan. As of December 31, 1996, none of these options issued have been exercised.
13. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the nine month periods ended September
30, 1996 and 1997 have been prepared from the unaudited financial records of the
Company and in the opinion of management, reflect all adjustments, consisting
only of normal recurring items, necessary for a fair
F-28
<PAGE>
AZTEC EAST INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
presentation of the financial position, results of operations and cash flows for
the interim periods presented.
14. SUBSEQUENT EVENT (UNAUDITED)
The Company and its stockholders have entered into a definitive agreement
with U.S. Office Products Company (U.S. Office Products) pursuant to which U.S.
Office Products will acquire all outstanding shares of the Company's common
stock in exchange for common stock of U.S. Office Products.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Compel Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Compel Corporation at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 30, 1998
F-30
<PAGE>
COMPEL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 239,667 $ 235,703 $ 791,618
Trade accounts receivable, less allowance for doubtful accounts of
$122, $118 and $212, respectively................................ 5,412,655 6,372,103 7,052,999
Costs in excess of billings on uncompleted contracts............... 728,040 2,008,697 2,126,407
Inventories........................................................ 388,914 96,354
Prepaid expenses................................................... 230,256 205,755 36,279
Other current assets............................................... 72,000 68,300 162,056
------------ ------------- -------------
Total current assets........................................... 7,071,532 8,986,912 10,169,359
Property and equipment, net.......................................... 1,300,173 1,200,507 1,269,518
Other assets......................................................... 201,161 166,503 25,178
------------ ------------- -------------
Total assets................................................... $ 8,572,866 $ 10,353,922 $ 11,464,055
------------ ------------- -------------
------------ ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Line of credit..................................................... $ 1,700,000 $ 1,300,000
Current portion of long-term debt.................................. 458,086 $ 130,656 636,636
Note payable....................................................... 147,931 129,631
Accounts payable................................................... 1,552,858 3,170,087 2,404,812
Accrued liabilities................................................ 568,460 622,058 1,549,864
Due to affiliates and stockholders................................. 170,000 845,000
Billings in excess of costs on uncompleted contracts............... 468,052 1,467,673 803,167
------------ ------------- -------------
Total current liabilities...................................... 5,065,387 6,365,105 6,694,479
Long-term debt, excluding current portion............................ 294,037 322,262 214,765
Other long-term liabilities.......................................... 6,000 5,300
------------ ------------- -------------
Total liabilities.............................................. 5,365,424 6,692,667 6,909,244
Stockholders' equity:
Common stock, no par value. 1,000 shares authorized, 282 shares
issued and outstanding........................................... 14,100 14,100 14,100
Retained earnings.................................................. 3,193,342 3,647,155 4,540,711
------------ ------------- -------------
Total stockholders' equity..................................... 3,207,442 3,661,255 4,554,811
------------ ------------- -------------
Total liabilities and stockholders' equity..................... $ 8,572,866 $ 10,353,922 $ 11,464,055
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
COMPEL CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Contract revenue..................... $ 21,691,207 $ 26,293,606 $ 32,537,850 $ 23,035,599 $ 26,374,678
Contract costs....................... 16,943,984 20,192,713 24,806,202 17,472,934 19,402,422
------------- ------------- ------------- ------------- -------------
Gross profit................... 4,747,223 6,100,893 7,731,648 5,562,665 6,972,256
Selling, general and administrative
expenses........................... 4,142,486 4,468,271 4,740,899 3,607,253 4,159,972
------------- ------------- ------------- ------------- -------------
Income from operations......... 604,737 1,632,622 2,990,749 1,955,412 2,812,284
------------- ------------- ------------- ------------- -------------
Other (income) expense:
Interest expense................... 93,447 189,849 145,528 124,678 89,498
Interest income.................... (37,164) (28,419) (21,797) (15,291) (30,828)
Other expense (income)............. (22,217) (10,368) (80,795) (72,503) (31,727)
------------- ------------- ------------- ------------- -------------
34,066 151,062 42,936 36,884 26,943
------------- ------------- ------------- ------------- -------------
Income before provision for
income taxes................. 570,671 1,481,560 2,947,813 1,918,528 2,785,341
------------- ------------- ------------- ------------- -------------
Provision for state income taxes..... 6,000 21,000 30,000 38,753 50,785
------------- ------------- ------------- ------------- -------------
Net income........................... $ 564,671 $ 1,460,560 $ 2,917,813 $ 1,879,775 $ 2,734,556
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Unaudited pro forma information (see
Note 1):
Income before provision for income
taxes............................ $ 570,671 $ 1,481,560 $ 2,947,813 $ 1,918,528 $ 2,785,341
Provision for income taxes......... 228,269 592,624 1,179,125 767,411 1,114,136
------------- ------------- ------------- ------------- -------------
Pro forma net income............... $ 342,402 $ 888,936 $ 1,768,688 $ 1,151,117 $ 1,671,205
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
COMPEL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................................... 282 $ 14,100 $ 3,434,500 $3,448,600
Stockholder distributions...................................... (1,114,389) (1,114,389)
Net income..................................................... 564,671 564,671
--- --------- ------------ ------------
Balance at December 31, 1994..................................... 282 14,100 2,884,782 2,898,882
Stockholder distributions...................................... (1,152,000) (1,152,000)
Net income..................................................... 1,460,560 1,460,560
--- --------- ------------ ------------
Balance at December 31, 1995..................................... 282 14,100 3,193,342 3,207,442
Stockholder distributions...................................... (2,464,000) (2,464,000)
Net income..................................................... 2,917,813 2,917,813
--- --------- ------------ ------------
Balance at December 31, 1996..................................... 282 14,100 3,647,155 3,661,255
Unaudited data:
Stockholder distributions...................................... (1,841,000) (1,841,000)
Net income..................................................... 2,734,556 2,734,556
--- --------- ------------ ------------
Balance at September 30, 1997 (unaudited)........................ 282 $ 14,100 $ 4,540,711 $4,554,811
--- --------- ------------ ------------
--- --------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
COMPEL CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 564,671 $ 1,460,560 $ 2,917,813 $ 1,879,775 $ 2,734,556
Adjustments to reconcile net income:
Deprecation and amortization expense....... 351,553 370,361 381,904 291,154 271,439
Gain on sale of property, plant and
equipment................................ (10,603) (3,710) (11,385) (17,027) (19,545)
Changes in current assets and liabilities:
Accounts receivable...................... (1,128,424) (369,182) (959,448) (1,082,316) (680,896)
Costs in excess of billings on
uncompleted contracts.................. 393,233 437,722 (1,280,657) (54,261) (117,710)
Inventory................................ (388,914) 292,560 292,560 96,354
Prepaid expenses and other current
assets................................. (46,244) (53,705) 24,501 (82,893) 169,476
Other assets............................. (28,394) 93,693 37,658 53,916 42,269
Accounts payable......................... 458,824 (50,357) 1,617,229 235,900 (765,275)
Accrued expenses......................... (107,725) 86,789 53,598 451,668 927,806
Billings in excess of costs on
uncompleted contracts.................. 262,283 (383,846) 999,621 755,692 (664,506)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities........................... 709,174 1,199,411 4,073,394 2,724,168 1,993,968
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment.......... (209,596) (382,261) (204,584) (245,294) (449,647)
Proceeds from sale of equipment.............. 25,595 35,850 67,422 46,126 128,742
------------ ------------ ------------ ------------ ------------
Net cash used by investing
activities........................... (184,001) (346,411) (137,162) (199,168) (320,905)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (payments) on line of
credit..................................... 500,000 100,000 (1,700,000) (1,545,000) 1,300,000
Net borrowings (payments) from affiliates and
stockholders............................... 155,000 (25,000) 675,000 675,000 (230,380)
Net borrowings (payments) of notes payable... 18,611 37,122 (18,300) (13,725) (129,631)
Proceeds from issuance of long-term debt..... 125,180 500,000 85,009
Payments on long-term debt................... (268,247) (355,412) (432,896) (104,477) (301,146)
Distributions to stockholders................ (1,114,389) (1,152,000) (2,464,000) (1,416,000) (1,841,000)
------------ ------------ ------------ ------------ ------------
Net cash used by financing
activities........................... (583,845) (895,290) (3,940,196) (2,404,202) (1,117,148)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................. (58,672) (42,290) (3,964) 120,798 555,915
Cash and cash equivalents at beginning of
period....................................... 340,629 281,957 239,667 239,667 235,703
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period..... $ 281,957 $ 239,667 $ 235,703 $ 360,465 $ 791,618
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Supplemental disclosures:
Interest paid................................ $ 97,525 $ 189,849 $ 145,528 $ 124,678 $ 89,498
Income taxes paid............................ $ 80,000 $ 16,000 $ 20,000 $ 15,000 $ 18,000
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Compel Corporation (the Company), a California corporation, is engaged
principally in the design, installation and maintenance of wiring, cabling and
equipment related to data processing and communications systems. As a general
and electrical contractor, the Company serves a wide variety of commercial
customers throughout the western United States from offices in California and
Arizona.
Effective October 24, 1997, the Company and its stockholders entered into a
definitive agreement with U.S. Office Products Company (U.S. Office Products)
pursuant to which U.S. Office Products acquired all outstanding shares of the
Company's common stock in exchange for common stock of U.S. Office Products.
CONTRACT REVENUE AND COST RECOGNITION
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Management considers costs to
be the best available measure of progress on these contracts.
A contract is considered complete when all significant costs have been
incurred and the installation is operating according to specifications or has
been accepted by the customer.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers cash
equivalents to include all short-term investments with original maturities of
three months or less.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value using
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment held under
capital leases are stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets which range between 6 to 15
years. Property and equipment held under capital leases and leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 prescribes the accounting treatment for long-lived assets,
identifiable intangibles and goodwill related to those assets when there are
indications that the carrying values of those assets may not be recoverable. The
adoption of SFAS No. 121 in 1996 did not have a material effect on the Company's
financial position or results of operations.
F-35
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FEDERAL INCOME TAXES
The Company has elected to be treated as an S-Corporation for federal income
tax purposes and accordingly, no liability for federal income taxes has been
recorded. The Company is subject to franchise taxes in the state of California,
which has been appropriately reflected in the financial statements. The
unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal income taxes for the entire periods presented.
STATE FRANCHISE TAXES
State franchise taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Realization of the deferred tax asset is dependent an generating sufficient
taxable income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
2. DUE FROM AFFILIATE
Due from affiliate represents amounts due from an affiliated company bearing
interest at prime plus 1% and maturing December 31, 1999. The note is secured by
the affiliate's accounts receivable, inventory and property and equipment. The
outstanding balances, net of current portion, at December 31, 1995 and 1996 are
$180,000 and $120,000, respectively, and are included in other assets.
3. CONTRACTS IN PROGRESS
Amounts included in the financial statements which relate to contracts in
progress at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts........................... $ 3,738,534 $ 6,093,997
Billings on uncompleted contracts................................. 3,478,546 5,552,973
------------ ------------
$ 259,988 $ 541,024
------------ ------------
------------ ------------
</TABLE>
F-36
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONTRACTS IN PROGRESS (CONTINUED)
Amounts billed but not paid by customers under retainage provisions amounted
to $24,355 and $114,863 for December 31, 1995 and 1996, respectively, are
included in accounts receivable.
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Included in the accompanying balance sheet under the following
captions:
Costs in excess of billings on uncompleted contracts.............. $ 728,040 $ 2,008,697
Billings in excess of costs on uncompleted contracts.............. 468,052 1,467,673
---------- ------------
$ 259,988 $ 541,024
---------- ------------
---------- ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Transportation equipment.......................................... $ 1,447,655 $ 1,422,210
Machinery and equipment........................................... 1,533,360 1,710,497
Furniture and fixtures............................................ 152,429 155,772
Leasehold improvements............................................ 118,409 118,409
------------ ------------
3,251,853 3,406,888
Less accumulated depreciation and amortization.................... (1,951,680) (2,206,381)
------------ ------------
Property and equipment, net....................................... $ 1,300,173 $ 1,200,507
------------ ------------
------------ ------------
</TABLE>
Property and equipment includes property and equipment held under capital
leases of $358,204 and $470,029 and related accumulated amortization of $79,185
and $145,931 at December 31, 1995 and 1996, respectively.
Depreciation expense recorded for the years ended December 31, 1995 and 1996
was $291,176 and $235,973, respectively.
5. LEASES
At December 31, 1996, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
YEAR ENDING DECEMBER 31,
1997................................................................ $ 139,041 $ 241,314
1998................................................................ 118,755 231,191
1999................................................................ 75,751 92,876
2000................................................................ 28,755 --
2001................................................................ 793 --
---------- ----------
Total minimum lease payments........................................ 363,095 $ 565,381
----------
----------
Less estimated executory costs...................................... (18,106)
----------
Net minimum lease payments.......................................... 344,989
Less imputed interest............................................... (43,843)
----------
Present value of net minimum capital lease payments................. 301,146
Less current portion of obligations under capital leases............ (108,640)
----------
Obligations under capital leases, excluding current portion......... $ 192,506
----------
----------
</TABLE>
F-37
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
During the years ended December 31, 1995 and 1996, the Company incurred rent
expense of approximately $263,000 and $279,000, respectively.
6. DUE TO AFFILIATES AND STOCKHOLDERS
A summary of amounts due to affiliates and stockholders at December 31, 1995
and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Prime rate unsecured note payable to an affiliated company, due on
demand.............................................................. $ 50,000 $ 500,000
Prime rate plus 2% unsecured notes payable to an affiliated company,
due on demand....................................................... 80,000 105,000
Prime rate unsecured notes payable to stockholders, due on demand..... -- 200,000
8.25% unsecured note payable to a relative of a stockholder, due on
demand.............................................................. 40,000 40,000
---------- ----------
$ 170,000 $ 845,000
---------- ----------
---------- ----------
</TABLE>
7. NOTES PAYABLE
Notes payable represents a short-term loan from an insurance company. The
unsecured note bears interest at 5.49% and is due on demand.
8. BANK LINE OF CREDIT
The Company has a $2,000,000 revolving line of credit with a bank. The line
of credit allows the Company to borrow up to 70% of eligible accounts
receivable. Bank advances on the credit line are payable on demand. The Company
is given the option to request advances at the bank's prime rate or 2% over the
London Interbank Offered Rate (LIBOR). The credit line is secured by all
accounts receivable, inventory, equipment and other assets. The credit line is
guaranteed by the stockholders of the Company and an affiliated company up to
$1,500,000 each. The line of credit agreement contains certain restrictions and
covenants. The Company must maintain certain levels of working capital and net
worth and maintain certain financial ratios. The line of credit agreement
expires May 31, 1997. At December 31, 1995, $1,700,000 was outstanding. At
December 31, 1996, no borrowings were outstanding under this agreement. The line
of credit agreement has been extended for 90 days which expires on July 31,
1997.
F-38
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
A summary of long-term debt as of December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Prime rate plus 1.5% note payable with monthly installments of $2,136, due June 2003,
secured by transportation equipment................................................... $ 150,970 $ 139,637
8.9% note payable with monthly installments of $349, due August 1998, secured by
transportation equipment.............................................................. 9,912 6,467
6.9% note payable with monthly installments of $533, due November 1997, secured by
transportation equipment.............................................................. 12,701 5,668
London Interbank Offered Rate (LIBOR) plus 2%, note payable to a bank, with monthly
installments of $50,000, plus interest, with the entire outstanding balance due in
full in February 1996, secured by substantially all assets of the Company............. 300,000 --
Prime rate plus 1% note payable to a bank, payable with monthly installments of $7,333,
plus interest, due May 1996, secured by substantially all assets of the Company....... 15,791 --
Capital lease obligations............................................................... 262,749 301,146
----------- -----------
752,123 452,918
Less current portion of long-term debt.................................................. (458,086) (130,656)
----------- -----------
Long-term debt, excluding current portion............................................... $ 294,037 $ 322,262
----------- -----------
----------- -----------
</TABLE>
A summary of long-term debt matures as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 22,016
1998.............................................................. 16,251
1999.............................................................. 14,968
2000.............................................................. 16,535
2001.............................................................. 18,267
Thereafter........................................................ 63,735
---------
$ 151,772
---------
---------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
BUY/SELL AGREEMENT
The Company has an agreement with its two stockholders which, upon the death
of a stockholder, requires the Company to purchase the shares from the
stockholder's estate. The purchase price of such shares has been defined in the
Agreement and is covered by life insurance.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-39
<PAGE>
COMPEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS AND CREDIT CONCENTRATIONS
During the year ended December 31, 1995 and 1996, five and three customers
accounted for approximately 31% and 29% of the Company's total revenues,
respectively. Accounts receivable from these customers totaled $1,180,459 and
$682,268 as of December 31, 1995 and 1996, respectively.
During the year ended December 31, 1995 and 1996, two vendors accounted for
approximately 45% and 43% of the Company's purchases, respectively. Accounts
payable to these vendors totaled $337,902 and $767,908 as of December 31, 1995
and 1996, respectively.
12. RELATED PARTY TRANSACTIONS
The stockholders of the Company own significant ownership in several
affiliated companies. The principal business activities of the affiliated
companies are to design, install, service and maintain data grade environmental
conditioning systems; electrical contracting; and manufacturing data cabinets.
The Company purchases materials and services, as well as sells materials and
services to these affiliated companies.
The Company is a guarantor of a line of credit totaling $100,000 and an
equipment loan totaling $224,500 for an affiliated company.
During 1995 and 1996, the Company sold approximately $71,000 and $89,000 in
materials and services, charged $106,000 and $441,000 in corporate fees and
expenses to affiliated companies, respectively. Additionally, the Company
purchased $620,000 and $1,151,000 of materials and services from affiliated
companies. Included in trade payables at December 31, 1995 and 1996 is $0 and
$149,000, respectively, due to affiliated companies.
13. 401(K) RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan for the benefit of employees
who are 21 years of age, have completed at least one year of service and elect
to participate in the plan. The Company's management determines, at its
discretion, the Company's annual contribution, if any, to the plan. The
Company's annual contributions to the plan, if any, will be expensed in the year
they accrue. The Company made no contributions to the plan during 1995 or 1996.
14. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the nine month periods ended September
30, 1996 and 1997 have been prepared from the unaudited financial records of the
Company and in the opinion of management, reflect all adjustments, consisting
only of normal recurring items, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods
presented.
F-40
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
Aztec Technology Partners, Inc. (the "Company"), formerly the Technology
Solutions division of U.S. Office Products Company ("U.S. Office Products"),
through the distribution of shares of the Company to U.S. Office Products
stockholders (the "Distribution") and to acquisitions completed through May 1,
1998.
The pro forma combined balance sheet gives effect to the Technology
Distribution as if such transaction had occurred as of the Company's most recent
balance sheet date, January 24, 1998.
The pro forma combined statements of income for the fiscal year ended April
26, 1997 and the nine month periods ended January 24, 1998 and January 25, 1997
give effect to the Technology Distribution and the acquisitions of Compel
Corporation, Aztec East, Inc. and Affiliates ("Aztec East, Inc.") and three
other individually insignificant companies in business combinations accounted
for under the purchase method which have been completed during the fiscal year
ending April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"), as if all such
transactions had occurred on May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes the audited financial information of the Company for the year ended
April 26, 1997 and the unaudited financial information of the Fiscal 1998
Purchase Acquisitions for the period from May 1, 1996 through April 26, 1997.
The pro forma combined statements of income for the nine months ended
January 24, 1998 includes the unaudited financial information of the Company for
the nine months ended January 24, 1998 and the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from April 27, 1997
through the earlier of their respective dates of acquisition or January 24,
1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the five companies acquired by the Company during the fiscal
year ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overhead costs have been allocated to the
Company using one of several factors, dependent on the nature of the costs being
allocated, including, revenues, number and size of acquisitions and number of
employees. Interest costs have been allocated to the Company based upon the
Company's average intercompany balance with U.S. Office Products at U.S. Office
Products' weighted average interest rate during such periods.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-41
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AZTEC
TECHNOLOGY PRO FORMA
PARTNERS, PRO FORMA PRO FORMA OFFERING PRO FORMA
INC. ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 117 $ (117)(a) $ $ 49,278(c) $ 44,968
(4,310)(c)
Accounts receivable, net........... 46,615 46,615 46,615
Inventories........................ 12,578 12,578 12,578
Receivable from U.S. Office
Products......................... 7,862 (7,862)(a)
Unbilled percentage of completion
revenues......................... 1,452 1,452 1,452
Prepaid and other current assets... 4,252 4,252 4,252
------------- ----------- ---------- ----------- ----------
Total current assets........... 72,876 (7,979) 64,897 44,968 109,865
Property and equipment, net.......... 5,074 5,074 5,074
Goodwill, net........................ 63,891 63,891 63,891
Other assets......................... 506 506 506
------------- ----------- ---------- ----------- ----------
Total assets................... $ 142,347 $ (7,979) $ 134,368 $ 44,968 $ 179,336
------------- ----------- ---------- ----------- ----------
------------- ----------- ---------- ----------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt.................... $ 304 $ $ 304 $ $ 304
Accounts payable................... 23,329 23,329 23,329
Accrued compensation............... 3,898 3,898 3,898
Deferred revenue................... 5,402 5,402 5,402
Income taxes payable............... 4,652 4,652 4,652
Other accrued liabilities.......... 3,443 3,443 3,443
------------- ----------- ---------- ----------- ----------
Total current liabilities...... 41,028 41,028 41,028
Long-term debt....................... 386 4,310(a) 4,696 (4,310)(c) 386
Long-term payable to U.S. Office
Products........................... 9,957 (9,957)(a)
Deferred income taxes................ 857 857 857
------------- ----------- ---------- ----------- ----------
Total liabilities.............. 52,228 (5,647) 46,581 (4,310) 42,271
------------- ----------- ---------- ----------- ----------
Stockholder's equity:
Common stock....................... 22(b) 22 4(c) 26
Additional paid-in capital......... 80,796(b) 80,796 49,274(c) 130,070
Divisional equity.................. 80,818 (80,818)(b)
Retained earnings.................. 9,301 (2,332)(a) 6,969 6,969
------------- ----------- ---------- ----------- ----------
Total stockholder's equity..... 90,119 (2,332) 87,787 49,278 137,065
------------- ----------- ---------- ----------- ----------
Total liabilities and
stockholder's equity......... $ 142,347 $ (7,979) $ 134,368 $ 44,968 $ 179,336
------------- ----------- ---------- ----------- ----------
------------- ----------- ---------- ----------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-42
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
TECHNOLOGY INDIVIDUALLY PRO FORMA
PARTNERS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA OFFERING PRO FORMA
INC EAST, INC. CORPORATION ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......... $ 142,512 $ 9,808 $ 20,545 $ 18,209 $ $ 191,074 $ 191,074
Cost of revenues.. 107,895 6,056 14,452 13,228 141,631 141,631
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
Gross
profit.... 34,617 3,752 6,093 4,981 49,443 49,443
Selling, general
and
administrative
expenses........ 22,951 2,407 2,914 3,275 (312)(d) 31,235 31,235
Amortization
expense......... 414 12 813(f) 1,239 1,239
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
Operating
income.... 11,252 1,333 3,179 1,706 (501) 16,969 16,969
Other (income)
expense:
Interest
expense....... 169 87 71 127 (154)(g) 300 (259)(j) 41
Interest
income........ (167) (39) (20) 226(g)
Other........... (14) (117) (30) (91) (252) (252)
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
Income before
provision for
income taxes.... 11,264 1,402 3,158 1,670 (573) 16,921 259 17,180
Provision for
income taxes.... 4,692 55 49 339 2,310(h) 7,445 114(h) 7,559
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
Net income........ $ 6,572 $ 1,347 $ 3,109 $ 1,331 $ (2,883) $ 9,476 $ 145 $ 9,621
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
------------ ----------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average
shares
outstanding:
Basic........... 22,952 22,140(i) 22,507(k)
Diluted......... 23,437 22,140(i) 22,507(k)
Net income per
share:
Basic........... $ 0.29 $ 0.43 $ 0.43
------------ --------- -----------
------------ --------- -----------
Diluted......... $ 0.28 $ 0.43 $ 0.43
------------ --------- -----------
------------ --------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-43
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
AZTEC FISCAL 1998
TECHNOLOGY INDIVIDUALLY PRO FORMA
PARTNERS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA OFFERING PRO FORMA
INC. EAST, INC. CORPORATION ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 101,295 $ 18,289 $ 25,873 $ 27,061 $ $ 172,518 $ $ 172,518
Cost of revenues.... 76,049 12,319 19,754 19,753 127,875 127,875
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.. 25,246 5,970 6,119 7,308 44,643 44,643
Selling, general and
administrative
expenses.......... 15,637 4,729 3,533 6,161 (1,823)(d) 28,876 28,876
639(e)
Amortization
expense........... 16 1,223(f) 1,239 1,239
Non-recurring
acquisition
costs............. 1,906 1,906 1,906
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating
income...... 7,703 1,225 2,586 1,147 (39) 12,622 12,622
Other (income)
expense:
Interest expense.. 310 127 104 151 (392)(g) 300 (259)(j) 41
Interest income... (169) (89) (18) (1) 277(g)
Other............. 234 (291) (64) (111) (232) (232)
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before
provision for
income taxes...... 7,328 1,478 2,564 1,108 76 12,554 259 12,813
Provision for income
taxes............. 1,771 64 30 338 3,321(h) 5,524 114(h) 5,638
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.......... $ 5,557 $ 1,414 $ 2,534 $ 770 $ (3,245) $ 7,030 $ 145 $ 7,175
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average
shares
outstanding:
Basic............. 17,196 22,140(i) 22,507(k)
Diluted........... 17,565 22,140(i) 22,507(k)
Net income per
share:
Basic............. $ 0.32 $ 0.32 $ 0.32
------------- ----------- -----------
------------- ----------- -----------
Diluted........... $ 0.32 $ 0.32 $ 0.32
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-44
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
AZTEC FISCAL 1998
TECHNOLOGY INDIVIDUALLY PRO FORMA
PARTNERS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA OFFERING PRO FORMA
INC. EAST INC. CORPORATION ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 136,278 $ 23,626 $ 33,630 $ 35,378 $ $ 228,912 $ $ 228,912
Cost of revenues.... 102,129 15,553 25,407 26,061 169,150 169,150
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.. 34,149 8,073 8,223 9,317 59,762 59,762
Selling, general and
administrative
expenses.......... 21,525 6,063 4,961 8,028 (2,172)(d) 39,134 39,134
729(e)
Amortization
expense........... 22 1,629(f) 1,651 1,651
Non-recurring
acquisition
costs............. 2,274 2,274 2,274
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating
income...... 10,350 1,988 3,262 1,289 (186) 16,703 16,703
Other (income)
expense:
Interest expense.. 324 174 124 210 (432)(g) 400 (345)(j) 55
Interest income... (168) (111) (27) (3) 309(g)
Other............... (53) (323) (67) (136) (579) (579)
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before
provision for
income taxes...... 10,247 2,248 3,232 1,218 (63) 16,882 345 17,227
Provision for income
taxes............. 3,524 112 39 245 3,508(h) 7,428 152(h) 7,580
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.......... $ 6,723 $ 2,136 $ 3,193 $ 973 $ (3,571) $ 9,454 $ 193 $ 9,647
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average
shares
outstanding:
Basic............. 18,005 22,140(i) 22,507(k)
Diluted........... 18,352 22,140(i) 22,507(k)
Net income per
share:
Basic............. $ 0.37 $ 0.43 $ 0.43
------------- ----------- -----------
------------- ----------- -----------
Diluted........... $ 0.36 $ 0.43 $ 0.43
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-45
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. BALANCE SHEET
(a) Represents the allocation of $5,000 of total debt to the Company by U.S.
Office Products. The Company will repay $4,427 to U.S. Office Products
(consisting of (i) the net of the $9,957 payable to U.S. Office Products and
the $7,862 receivable from U.S. Office Products and (ii) a distribution of
$2,332) with the use of available cash of $117 and $4,310 in borrowings
drawn from the Company's existing working capital credit facility.
(b) Adjustment to reflect the reclassification of divisional equity to common
stock and additional paid-in-capital as a result of the Aztec Distribution.
The Aztec Distribution will result in the issuance of 22,140 shares of
Common Stock.
(c) Adjustment to reflect $49,278 of net proceeds from the sale of 4,200 shares
of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of $4,310 of the proceeds to repay debt.
2. STATEMENT OF INCOME
(d) Adjustment to reflect reductions in executive compensation as a result of
the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for
the foreseeable future and are not reasonably likely to affect operating
performance.
(e) Adjustment to reflect additional corporate overhead during the period prior
to the formation of the Technology Solutions division by U.S. Office
Products as if the division had been formed at May 1, 1996.
(f) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 Purchase
Acquisitions for the periods prior to the respective dates of acquisition.
The Company has recorded goodwill amortization in the historical financial
statements from the respective dates of acquisition forward. The goodwill is
being amortized over periods ranging from 25-40 years.
(g) Adjustment to reflect the reductions in interest expense and interest
income. Interest expense is being calculated on the debt outstanding at
January 24, 1998 of $5,000 at a weighted average interest rate of
approximately 8.0%. The adjustment also reflects a reduction in interest
income to zero as the company expects to use all available cash to repay
debt rather than for investment purposes. Pro forma interest expense will
fluctuate $55 on an annual basis for each 0.125% change in interest expense.
(h) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 44%. The
difference between the effective tax rate of 44% and the statutory tax rate
of 35% relates primarily to state income taxes and non-deductible goodwill.
This adjustment assumes that all companies were taxed at 44% regardless of
how they were taxed prior to being acquired by the Company, including those
companies that previously paid no taxes under subchapter S.
(i) The weighted average shares outstanding used to calculate pro forma earnings
per share of 22,140 is calculated based upon approximately 110,700 shares of
U.S. Office Products common stock expected
F-46
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. STATEMENT OF INCOME (CONTINUED)
to be outstanding on the date of the Aztec Distribution divided by five,
which is the Distribution Ratio. The shares of U.S. Office Products common
stock expected to be outstanding on the date of the Aztec Distribution are
based upon (a) approximately 133,800 shares currently outstanding, plus (b)
approximately 8,900 shares expected to be issued on conversion of U.S.
Office Products convertible debt, plus (c) approximately 5,000 shares
expected to be issued on exercise of outstanding U.S. Office Products stock
options, minus (d) approximately 37,000 shares expected to be accepted in
U.S. Office Products' equity self-tender which is part of the Strategic
Restructuring Plan.
(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of a portion of the net proceeds from the Offering of $4,310 to
repay debt at an annual interest rate of 8.0%.
(k) The weighted average shares outstanding used to calculate pro forma as
adjusted earnings per share of 22,507 is based upon the 22,140 shares of
common stock issued as a result of the Aztec Distribution and 367 shares
issued in the Offering that were used to repay debt.
F-47
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND TECHNOLOGY DISTRIBUTION
The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the securities. All of such
expenses except the Securities and Exchange Commission registration fee are
estimated:
<TABLE>
<S> <C>
SEC Registration................................................ $ 25,822
Nasdaq Listing Fee.............................................. $ 47,500
Legal Fees and Expenses......................................... $ 500,000
Accounting Fees and Expenses.................................... $ 500,000
Printing Fees and Expenses...................................... $ 350,000
Miscellaneous................................................... $ 1,678
Total....................................................... $1,500,000
</TABLE>
- ------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of Aztec's Certificate of Incorporation provides that Aztec
shall indemnify its directors and officers to the fullest extent permitted by
the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of Aztec's Certificate of Incorporation states that directors
of Aztec will not be liable to Aztec or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to Aztec or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the state of Delaware, which makes directors liable for unlawful dividends or
unlawful stock repurchases or redemptions or (iv) for any transaction from which
the director derived an improper personal benefit.
Article IV of the Aztec's Bylaws provides that Aztec shall indemnify its
officers and directors (and those serving at the request of Aztec as an officer
or director of another corporation, partnership, joint venture, trust or other
enterprise), and may indemnify its employees and agents (and those serving at
the request of Aztec as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred, if such officer, director, employee or agent
acted in good faith and in a
II-1
<PAGE>
manner reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In a derivative action,
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such officer, director, employee or agent in
the defense or settlement of such action or suit, and no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to Aztec unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Unless the Aztec Board of Directors otherwise determines in a specific case,
expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the officer or director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1)or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the District of
Columbia on May 15, 1998.
AZTEC TECHNOLOGY PARTNERS, INC.
By: /s/ JAMES E. CLAYPOOLE
-----------------------------------
Name: James E. Claypoole
Title: Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration tatement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ----------------------------------- ------------------------- ----------------
/s/ JAMES E. CLAYPOOLE Chairman of the Board of
- ----------------------------------- Directors and
James E. Claypoole Chief Executive Officer May 15, 1998
(Principal Executive
Officer)
/s/ DOUGLAS R. JOHNSON Executive Vice President
- ----------------------------------- and
Douglas R. Johnson Chief Financial Officer May 15, 1998
(Principal Financial and
Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation
3.2* Certificate of Amendment of Certificate of Incorporation
3.3* Certificate of Amendment of Certificate of Incorporation
3.4* Bylaws
4.1** Form of certificate representing shares of Common Stock
5 *** Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8 *** Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec Technology
Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.2*** Form of Tax Allocation Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec Technology
Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.3** Employment Agreement, dated October 15, 1996, between Bay State Computer Group and James E. Claypoole.
10.4*** Ledecky Services Agreement
10.5** Employment Agreement, dated October 15, 1996, between Bay State Computer Group and Elizabeth M.
Claypoole
10.6* Form of Tax Indemnification Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.7* Form of Employee Benefits Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.8*** Credit Agreement
10.9*** 1998 Stock Incentive Plan
11 *** Statement re computation of per share earnings
21 * Subsidiaries of Registrant
23.1*** Consent of Wilmer, Cutler & Pickering (contained in Exhibits 5 and 8 hereto)
23.2* Consent of Price Waterhouse LLP
23.3* Consent of Rubin, Koehmstedt and Nadler
23.4* Consent of B.N. Kozin Company
23.5* Consent of Price Waterhouse LLP
23.6** Consent of Jonathan Ledecky to be named as a director
23.7** Consent of James E. Claypoole to be named as a director
23.8* Consent of Clifford Mitman, Jr. to be named as director
23.9* Consent of Benjamin Tandowski to be named as director
27 ** Financial data schedule
</TABLE>
- ------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
PARADIGM CONCEPTS, INC.
ARTICLE ONE
The name of the Corporation is: Paradigm Concepts, Inc.
ARTICLE TWO
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is the Prentice-Hall Corporation System,
Inc.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is One Hundred Fifty-One Million (151,000,000)
shares, of which One Million (1,000,000) shares, designated as Preferred Stock,
shall have a par value of One Tenth of One Cent ($.001) per share (the
"Preferred Stock"), and One Hundred Fifty Million (150,000,000) shares,
designated as Common Stock, shall have a par value of One Tenth of One Cent
($.001) per share (the "Common Stock").
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of this Certificate of Incorporation and the limitations prescribed by law, the
Board of Directors is expressly authorized by adopting resolutions to issue the
shares, fix the number of shares and change the number of shares constituting
any series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(and whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), a redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, without any further action or vote by the
stockholders.
COMMON STOCK
1. DIVIDENDS.
Subject to the preferred rights of the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with respect to
any such class or series of Preferred Stock, the holders of the Common Stock
shall be entitled to receive, as and when declared by the Board of Directors out
of the funds of the Corporation legally available therefor, such dividends
(payable in cash, stock or otherwise) as the Board of Directors may from time to
time determine, payable to stockholders of record on such
<PAGE>
dates, not exceeding 60 days preceeding the dividend payment dates, as shall be
fixed for such purpose by the Board of Directors in advance of payment of each
particular dividend.
2. LIQUIDATION.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after the distribution or payment
to the holders of shares of any class or series of Preferred Stock as provided
by the Board of Directors with respect to any such class or series of Preferred
Stock, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among and paid to the holders of Common Stock
ratably in proportion to the number of shares of Common Stock held by them
respectively.
3. VOTING RIGHTS.
Except as otherwise required by law or as provided by the Board of Directors
with respect to any class or series of Preferred Stock, the entire voting power
and all voting rights shall be vested exclusively in the Common Stock. Each
holder of shares of Common Stock shall be entitled to one vote for each share
standing in his name on the books of the Corporation.
ARTICLE FIVE
The name and mailing address of the sole incorporator is Dale
Proctor-Hammond, c/o Wilmer, Cutler & Pickering, 2445 M Street, N.W.,
Washington, D.C. 20037
ARTICLE SIX
1. BOARD OF DIRECTORS.
The number of directors of the Corporation shall consist of not less than
one, the exact number to be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by the affirmative vote of a majority of the
entire Board of Directors. No director need be a stockholder. The Directors
shall be elected at each annual meeting of stockholders to hold office until
their successors have been duly elected and qualified. At each annual meeting of
stockholders at which a quorum is present, the persons receiving a plurality of
the votes cast shall be directors.
2. VACANCIES.
Any vacancy on the Board of Directors resulting from death, retirement,
resignation, disqualification or removal from office or other cause, as well as
any vacancy resulting from an increase in the number of directors which occurs
between annual meetings of the stockholders at which directors are elected,
shall be filled only by a majority vote of the remaining directors then in
office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Notwithstanding the foregoing, whenever the holders of one or more classes
or series of Preferred Stock shall have the right, voting separately, as a class
or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to ARTICLE FOUR applicable thereto, and each director so elected shall
not be subject to the provisions of this ARTICLE SIX unless otherwise provided
therein.
3. POWER TO MAKE, ALTER AND REPEAL BY-LAWS.
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, alter and repeal the By-laws
of the Corporation.
2
<PAGE>
ARTICLE SEVEN
The Corporation reserves the right to amend, alter, change or repeal any
provision in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute.
ARTICLE EIGHT
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
ARTICLE NINE
The Corporation shall, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as the same may be amended and supplemented,
indemnify each director and officer of the Corporation from and against any and
all of the expenses, liabilities or other matters referred to in or covered by
said section and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, agreement, vote of stockholders, vote of disinterested directors or
otherwise, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such persons and the Corporation may purchase and maintain
insurance on behalf of any director or officer to the extent permitted by
Section 145 of the Delaware General Corporation Law.
ARTICLE TEN
Whenever a compromise or arrangement is proposed between the Corporation and
its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
IN WITNESS THEREOF, I, the undersigned, for the purpose of forming a
corporation pursuant to the General Corporation Law of the State of Delaware, do
make, file and record this Certificate and do certify that the facts stated
herein are true, and I accordingly hereto set my hand this 12th day of February,
1998.
/S/ DALE PROCTOR-HAMMOND
--------------------------------------
Dale Proctor-Hammond
Incorporator
3
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
PARIDIGM CONCEPTS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is: Paradigm Concepts, Inc.
2. The certificate of incorporation of the Corporation is hereby amended
by striking out Article First thereof and by substituting in lieu of said
Article the following new Article First:
"The name of the corporation (hereinafter called the "Corporation") is:
Aztec Consulting, Inc."
3. The amendment of the certificate of incorporation herein certified
has been duly adopted, and written consent has been given in accordance with
the provisions of Sections 228 and 242 of the General Corporation Law of the
State of Delaware.
Signed on April 31, 1998
/S/ JAMES E. CLAYPOOLE
--------------------------------------
Name: James E. Claypoole
Title: Chairman
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
AZTEC CONSULTING, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is: Aztec Consulting, Inc.
2. The certificate of incorporation of the Corporation is hereby amended
by striking out Article First thereof and by substituting in lieu of said
Article the following new Article First:
"The name of the corporation (hereinafter called the "Corporation") is:
Aztec Technology Partners, Inc."
3. The amendment of the certificate of incorporation herein certified
has been duly adopted, and written consent has been given in accordance with
the provisions of Sections 228 and 242 of the General Corporation Law of the
State of Delaware.
Signed on April 23, 1998
/S/ JAMES E. CLAYPOOLE
--------------------------------------
James E. Claypoole
Chairman
<PAGE>
EXHIBIT 3.4
BY LAWS
OF
PARADIGM CONCEPTS, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date, at such time and at such place within or
without the State of Delaware as may be designated by the Board of Directors,
for the purpose of electing Directors and for the transaction of such other
business as may be properly brought before the meeting.
SECTION 2. SPECIAL MEETINGS. Except as otherwise provided in the Certificate
of Incorporation, a special meeting of the stockholders of the Corporation may
be called at any time by the Board of Directors, the Chairman of the Board or
the President and shall be called by the Chairman of the Board, the President or
the Secretary at the request in writing of stockholders holding together at
least twenty-five percent of the number of shares of stock outstanding and
entitled to vote at such meeting. Any special meeting of the stockholders shall
be held on such date, at such time and at such place within or without the State
of Delaware as the Board of Directors or the officer calling the meeting may
designate. At a special meeting of the stockholders, no business shall be
transacted and no corporate action shall be taken other than that stated in the
notice of the meeting unless all of the stockholders are present in person or by
proxy, in which case any and all business may be transacted at the meeting even
though the meeting is held without notice.
SECTION 3. NOTICE OF MEETINGS. Except as otherwise provided in these By-Laws
or by law, a written notice of each meeting of the stockholders shall be given
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder of the Corporation entitled to vote at such meeting
at his address as it appears on the records of the Corporation. The notice shall
state the place, date and hour of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
SECTION 5. ADJOURNED MEETINGS. Whether or not a quorum shall be present in
person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting.
<PAGE>
If the adjournment is for more than thirty days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
adjourned meeting.
SECTION 6. ORGANIZATION. The Chairman of the Board or, in his absence, the
President or any Vice President shall call all meetings of the stockholders to
order, and shall act as Chairman of such meetings. In the absence of the
Chairman of the Board, the President and all of the Vice Presidents, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting shall elect
a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as Secretary of the meeting. It shall be the duty of the
secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. VOTING. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. When
directed by the presiding officer or upon the demand of any stockholder, the
vote upon any matter before a meeting of stockholders shall be by ballot. Except
as otherwise provided by law or by the Certificate of Incorporation, Directors
shall be elected by a plurality of the votes cast at a meeting of stockholders
by the stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes.
SECTION 8. INSPECTORS. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by two or more Inspectors who may
be appointed by the Board of Directors before the meeting, or if not so
appointed, shall be appointed by the presiding officer at the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and noted.
Prompt notice of
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the taking of any such corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need to be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be fixed from time to time by
resolution passed by a majority of the Board of Directors. The Directors shall,
except as hereinafter otherwise provided for filling vacancies, be elected at
the annual meeting of stockholders, and shall hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
SECTION 2. REMOVAL, VACANCIES AND ADDITIONAL DIRECTORS. The stockholders
may, at any special meeting the notice of which shall state that it is called
for that purpose, remove, with or without cause, any Director and fill the
vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class. Vacancies caused by any such removal and not filled by
the stockholders at the meeting at which such removal shall have been made, or
any vacancy caused by the death or resignation of any Director or for any other
reason, and any newly created directorship resulting from any increase in the
authorized number of Directors, may be filled by the affirmative vote of a
majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. PLACE OF MEETING. The Board of Directors may hold its meetings in
such place or places in the State of Delaware or outside the State of Delaware
as the Board from time to time shall determine.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board or Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman of the Board, the
President or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two days before the meeting or by causing
the same to be transmitted by telegraph, cable or wireless or least one day
before the meeting to each Director. Unless otherwise indicated in the notice
thereof, any and all business other than an amendment of these By-Laws may be
transacted at any special meeting, and an amendment of these By-Laws may be
acted upon if the notice of the meeting shall have stated that the amendment of
these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
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SECTION 6. QUORUM. Subject to the provisions of Section 2 of this Article
II, a majority of the members of the Board of Directors in office (but in no
case less than one-third of the total number of Directors nor less than two
Directors) shall constitute a quorum for the transaction of business and the
vote of the majority of the Directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board there is less than a quorum present, a
majority of those present may adjourn the meeting from time to time.
SECTION 7. ORGANIZATION. The Chairman of the Board shall preside at all
meetings of the Board of Directors. In the absence of the Chairman of the Board,
an acting Chairman shall be elected from the Directors present to preside at
such meeting. The Secretary of the Corporation shall act as Secretary of all
meetings of the Directors; but in the absence of the Secretary, the Chairman
appoint any person to act as Secretary of the meeting.
SECTION 8. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided by resolution
passed by a majority of the whole Board, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and the affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending these By-Laws; and unless such resolution, these By-laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 9. CONFERENCE TELEPHONE MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or by these By-Laws, the members of the Board of
Directions or any committee designated by the Board, may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. CONSENT OF DIRECTORS OR COMMITTEE IN LIEU OF MEETING. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the, Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of
the Board, a President, one or more Vice Presidents, a Secretary and a
Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 7 of this Article III.
The Chairman of the Board, the President, one or more Vice Presidents, the
Secretary and the Treasurer shall be elected by the Board of Directors at its
first meeting after each annual meeting of the stockholders. The failure to hold
such election shall not of itself terminate the term of office of any officer.
All officers shall hold office
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at the pleasure of the Board of Directors. Any officer may resign at any time
upon written notice to the Corporation. Officers may, but need not, be
Directors. Any number of offices may be held by the same person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to this contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
Any vacancy caused by the death of any officer, his resignation, his
removal, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of
the Board shall be subject to the control of the Board of Directors, and shall
have such powers and shall perform such duties as may be assigned to him from
time to time by these By-Laws or by the Board of Directors. In addition, he
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors. All actions heretofore taken by the Chairman of the Board in
the name or on behalf of the Corporation, including the execution and delivery
in the name and on behalf of the Corporation of agreements, bonds, contracts,
deeds, mortgages, certificates for shares of stock of the Corporation and other
instruments, documents and certificates are in all respects ratified, approved,
confirmed and adopted as of the date of such action, execution or delivery, with
the same effect as if expressly authorized by the By-laws of the Corporation on
the date thereof.
SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. Unless otherwise specified by
the Board of Directors, the President shall be the Chief Executive Officer of
the Corporation and, subject to the control of the Board of Directors, shall
have general charge and control of all the Corporation's business and affairs,
and shall have all powers and perform all duties incident to the office of
President. In the absence of the Chairman of the Board, he shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors and
shall have such other powers and perform such other duties as may from time to
time be assigned to him by these By-Laws or by the Board of Directors.
SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice President
shall have all powers and shall perform all duties incident to the office of
Vice President and shall have such other powers and perform such other duties as
may from time to time be assigned to him by these By-Laws or by the Board of
Directors or the President.
SECTION 5. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep the
minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose; he shall attend
to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and shall have all powers and
shall perform all duties incident to the office of Secretary and shall also have
such other powers and shall perform such other duties as may from time to time
be assigned to him by these By-Laws or by the Board of Directors or the
President.
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SECTION 6. THE POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have
custody of, and when proper shall pay out, disburse or otherwise dispose of, all
funds and securities of the Corporation which may have come into his hands; he
may endorse on behalf of the Corporation for collection checks, notes and other
obligations and shall deposit the same to the credit of the Corporation in such
bank or banks or depositary or depositaries as the Board of Directors may
designate; he shall sign all receipts and vouchers for payments made to the
Corporation; he shall enter or cause to be entered regularly in the books of the
Corporation kept for the purpose full and accurate accounts of all money
received or paid or otherwise disposed of by him and whenever required by the
Board of Directors or the President shall render statements of such accounts; he
shall, at all reasonable times, exhibit his books and accounts to any Director
of the Corporation upon application at the office of the Corporation during
business hours; and he shall have all powers and he shall perform all duties
incident to the office of Treasurer and shall also have such other powers and
shall perform all duties incident to the office of Treasurer and shall also have
such other powers and shall perform such other duties as may from time to time
be assigned to him by these By-Laws or by the Board of Directors or the
President.
SECTION 7. ADDITIONAL OFFICERS. The Board of Directors may from time to time
elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
SECTION 8. GIVING OF BOND BY OFFICERS. All Officers of the Corporation, if
required to do so by the Boards of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board of
Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meeting shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation shall
be entitled to receive such compensation for their services as shall from time
to time be determined by the Board of Directors.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. NATURE OF INDEMNITY. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was or has
agreed to become a Director or officer of the Corporation, or is or was serving
or has agreed to serve at the request of the Corporation as a Director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or omitted in
such capacity, and may indemnify any person who was or is a party or is
threatened to be made a party to such an action, suit or proceeding by reason of
the fact that he is or was or has agreed to become an employee or agent of the
Corporation, or is; or was serving or has agreed to serve at the request of the
Corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses
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(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
action, suit or proceeding and any appeal therefrom, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; except
that in the case of an action or suit by or in the right of the Corporation to
procure a Judgment in its favor (1) such indemnification shall be limited to
expenses (including attorneys' fees) actually and reasonably incurred by such
person in the defense or settlement of such action or suit, and (2) no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. SUCCESSFUL DEFENSE. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
SECTION 3. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any indemnification
of a Director or officer of the Corporation under Section 1 of this Article IV
(unless ordered by a court) shall be made by the Corporation unless a
determination is made that indemnification of the Director or officer is not
proper in the circumstances because he has not met the applicable standard of
conduct set forth in Section 1. Any indemnification of an employee or agent of
the Corporation under Section 1 (unless ordered by a court) may be made by the
Corporation upon a determination that indemnification of the employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Section 1. Any such determination shall be made (1) by the
Board of Directors by a majority vote of a quorum consisting of Directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum its
not obtainable, or, even if obtainable a quorum of disinterested Directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
SECTION 4. ADVANCE PAYMENT OF EXPENSES. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. SURVIVAL: PRESERVATION OF OTHER RIGHTS. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any
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action, suit, or proceeding previously or thereafter brought or threatened based
in whole or in part upon any such state of facts. Such a contract right may not
be modified retroactively without the consent of such Director, officer,
employee or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
SECTION 6. SEVERABILITY. If this Article IV or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. SUBROGATION. In the event of payment of indemnification to a
person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable
under this Article IV to make any payment in connection with any claim made
against a person described in Section 1 of this Article IV to the extent such
person has otherwise received payment (under any insurance policy, by-law or
otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE V
STOCK-SEAL-FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES OF STOCK. The certificates for shares of
stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the Chairman of the Board, the President or
a Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be issued and delivered as through the person or
persons who signed such certificate or certificates had not ceased to be such
officer or officers of the corporation.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such shares and the date of issue thereof shall be entered on
the books of the corporation.
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Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. Whenever a person owning
a certificate for shares of stock of the Corporation alleges that it has been
lost, stolen or destroyed, he shall file in the office of the Corporation an
affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or described
certificate in lieu of which the new certificate is issued.
SECTION 3. TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof, in person or
by his attorney duly authorized in writing, upon surrender and cancellation of
certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment, of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock; or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is delivered to the Corporation and the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any dividends
declared upon the stock of the Corporation shall be payable on such date or
dates as the Board of Directors shall determine. If the date fixed for the
payment of any dividend shall in any year fall upon a legal holiday, then the
dividend payable on such date shall be paid on the next day not a legal holiday.
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SECTION 7. CORPORATE SEAL. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be kept in the
custody of the Secretary. A duplicate of the seal may be kept and be used by any
officer of the Corporation designated by the Board of Directors, the Chairman of
the Board or the President.
SECTION 8. FISCAL YEAR. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. LOANS. No loans and no renewals of any loans shall be contracted
on behalf of the Corporation except as authorized by the Board of Directors.
When authorized to do so, any officer or agent of the Corporation may effect
loans and advances for the Corporation from any bank, trust company or other
institution or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the Corporation. When authorized so to do, any
officer or agent of the Corporation may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the corporation, any and all stocks, securities and other
personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same. Such authority may be general or confined
to specific instances.
SECTION 3. CONTRACTS. Except as other wise provided in these By-Laws or by
law or as otherwise directed by the Board of Directors, the Chairman of the
Board, the President or any Vice President shall be authorized to execute and
deliver, in the name and on behalf of the corporation, all agreements, bonds,
contracts, deeds, mortages, and other instruments, either for the Corporation's
own account or in a fiduciary or other capacity, and the seal of the
corporation, if appropriate, shall be affixed thereto by any of such officers or
the Secretary or an Assistant Secretary. The Board of Directors, the Chairman of
the Board, the President or any Vice President designated by the Board of
Directors, the Chairman of the Board or the President may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto. The
grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. WAIVERS OF NOTICE. Whenever any notice whatever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION 5. OFFICES OUTSIDE OF DELAWARE. Except as otherwise required by the
laws of the State of Delaware, the Corporation may have an office or offices and
keep its books, documents and papers outside of the State of Delaware at such
place or places as from time to time may be determined by the Board of Directors
or the Chairman of the Board.
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ARTICLE VII
AMENDMENTS
These By-Laws and any amendment thereof may be altered, amended or repealed,
or new By-Laws may be adopted, by the Board of Directors at any regular or
special meeting by the affirmative vote of a majority of all of the members of
the Board, provided in the case of any special meeting at which all of the
members of the Board are not present, that the notice of such meeting shall have
stated that the amendment of these By-Laws was one of the purposes of the
meeting; but these By-Laws and any amendment thereof may be altered, amended or
repealed or new By-Laws may be adopted by the holders of a majority of the total
outstanding stock of the Corporation entitled to vote at any annual meeting or
at any special meeting, provided, in the case of any special meeting, that
notice of such proposed alteration, amendment, repeal or adoption is included in
the notice of the meeting.
11
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AGREEMENT
AND
PLAN OF DISTRIBUTION
Dated as of May __, 1998
between
U.S. Office Products Company,
Workflow Management, Inc.,
School Specialty, Inc.,
Aztec Technology Partners, Inc.
and
Navigant International, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................2
SECTION 1.01 General.........................................................................2
SECTION 1.02 References; Interpretation.....................................................16
ARTICLE II
PRELIMINARY TRANSACTIONS................................................................................16
SECTION 2.01 Stock Transfers................................................................16
SECTION 2.02 Liabilities....................................................................16
SECTION 2.03 Transfer of Certain Licenses and Permits.......................................17
SECTION 2.04 Transfer and Assumption Documentation..........................................18
SECTION 2.05 Intercompany Accounts..........................................................18
SECTION 2.06 Elimination of Guarantees......................................................19
SECTION 2.07 Assignments and Transfers Not Effected Prior to the
Distribution.................................................................................19
SECTION 2.08 Debt...........................................................................20
SECTION 2.09 Assignment of Acquisition Claims...............................................20
SECTION 2.10 Pledged Shares.................................................................21
SECTION 2.11 Other Transactions.............................................................21
ARTICLE III
THE DISTRIBUTION........................................................................................21
SECTION 3.01 Directors and Employees........................................................21
SECTION 3.02 Mechanics of Distribution......................................................21
SECTION 3.03 Timing of Distribution.........................................................22
ARTICLE IV
MUTUAL RELEASE..........................................................................................22
ARTICLE V
INDEMNIFICATION.........................................................................................23
SECTION 5.01 Indemnification by the Company.................................................23
SECTION 5.02 Indemnification by Printco.....................................................24
SECTION 5.03 Indemnification by Schoolco....................................................25
SECTION 5.04 Indemnification by Techco......................................................25
SECTION 5.05 Indemnification by Travelco....................................................26
SECTION 5.06 Limitations on Indemnification Obligations.....................................27
SECTION 5.07 Procedures for Indemnification of Third Party Claims...........................27
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 5.08 Indemnification Payments.......................................................29
SECTION 5.09 Defaults.......................................................................29
SECTION 5.10 Tax Adjustments................................................................30
SECTION 5.11 MCI Agreement..................................................................30
SECTION 5.12 Survival of Indemnities........................................................30
ARTICLE VI
COVENANTS...............................................................................................31
SECTION 6.01 Provision of Corporate Records.................................................31
SECTION 6.02 Access to Information..........................................................31
SECTION 6.03 Retention of Records...........................................................31
SECTION 6.04 Witness Services...............................................................32
SECTION 6.05 Reimbursement..................................................................32
SECTION 6.06 Confidentiality................................................................32
SECTION 6.07 Further Assurances.............................................................33
ARTICLE VII
INSURANCE...............................................................................................33
SECTION 7.01 General........................................................................33
SECTION 7.02 Distributed Companies' Insurance...............................................33
SECTION 7.03 Access to the Company's Insurance Program and to the
Transferred Policies.........................................................................34
SECTION 7.04 Insurance Recoveries...........................................................34
SECTION 7.05 Insurance Representations......................................................35
SECTION 7.06 Assignment.....................................................................36
SECTION 7.07 Deductibles and Maximums.......................................................36
SECTION 7.08 Conflicts Between Article VII and the Company's Insurance
Program......................................................................................36
ARTICLE VIII
CONDITIONS..............................................................................................36
SECTION 8.01 Conditions to Obligations of the Company.......................................36
ARTICLE IX
DISPUTE RESOLUTION......................................................................................38
SECTION 9.01 Mediation and Binding Arbitration..............................................38
SECTION 9.02 Initiation of Negotiation......................................................38
SECTION 9.03 Submission to Mediation........................................................38
SECTION 9.04 Selection of Mediator..........................................................38
SECTION 9.05 Treatment of Negotiation and Mediation.........................................38
SECTION 9.06 Arbitration....................................................................38
SECTION 9.07 Confidentiality................................................................40
SECTION 9.08 Notices........................................................................40
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 9.09 Consolidation..................................................................40
ARTICLE X
MISCELLANEOUS...........................................................................................40
SECTION 10.01 Modification, Amendment or Termination........................................40
SECTION 10.02 Waiver; Remedies..............................................................40
SECTION 10.03 Counterparts..................................................................41
SECTION 10.04 Notices.......................................................................41
SECTION 10.05 Entire Agreement..............................................................42
SECTION 10.06 Certain Obligations...........................................................42
SECTION 10.07 Assignment....................................................................42
SECTION 10.08 Captions......................................................................42
SECTION 10.09 Severability..................................................................43
SECTION 10.10 Equitable Relief..............................................................43
SECTION 10.11 Third Party Beneficiaries.....................................................43
SECTION 10.12 Expenses......................................................................43
SECTION 10.13 Exhibits and Schedules........................................................43
SECTION 10.14 Governing Law.................................................................43
SECTION 10.15 Consent to Jurisdiction........................................................43
SECTION 10.16 Ancillary Agreements..........................................................44
SECTION 10.17 Survival of Agreements........................................................44
SECTION 10.18 Successors and Assigns........................................................44
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF DISTRIBUTION
AGREEMENT AND PLAN OF DISTRIBUTION dated as of May __, 1998,
between U.S. OFFICE PRODUCTS COMPANY, a Delaware corporation (the "Company"),
WORKFLOW MANAGEMENT, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Printco"), SCHOOL SPECIALTY, INC., a Delaware corporation and
wholly owned subsidiary of the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS,
INC., a Delaware corporation and wholly owned subsidiary of the Company
("Techco"), and NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly
owned subsidiary of the Company ("Travelco"). Certain capitalized terms used
herein without definition have the meanings specified in Section 1.01.
W I T N E S S E T H:
WHEREAS the Board of Directors of the Company has approved the
form, terms and provisions of this Agreement, pursuant to which and subject to
the terms of which (a) the Company will distribute all the issued and
outstanding shares of common stock of the Distributed Companies held by the
Company (as to the shares of each Distributed Company, the "Printco Common
Shares," the "Schoolco Common Shares," the "Techco Common Shares," and the
"Travelco Common Shares") to the holders of record of shares of common stock of
the Company (the "Company Common Stock"), other than shares held in the treasury
of the Company, (b) each Distributed Company will assume entirely such
Distributed Company's Liabilities and other liabilities specified herein, (c)
each Distributed Company will agree to indemnify the Company and hold it
harmless from and against its Pro Rata Share of certain Shared Liabilities and
(d) certain other transactions will be consummated, all as set forth in Article
II hereof (the "Preliminary Transactions");
WHEREAS the purpose of the Preliminary Transactions and the
Distributions is to divest the Company of all businesses, operations and
Liabilities other than the Retained Business, Retained Assets and Retained
Liabilities of the Company and its Subsidiaries;
WHEREAS it is the intention of the parties to this Agreement
that for U.S. federal income tax purposes the Distributions shall qualify as
tax-free spin-offs under Section 355 of the Code and shall not be taxable under
Section 355(e) of the Code; and
WHEREAS in order to effect the separation of ownership of the
Company and the Distributed Companies, this Agreement sets forth the principal
corporate transactions required to effect the Preliminary Transactions and the
Distributions and sets forth other agreements that will govern certain other
matters following the Distributions.
NOW, THEREFORE, in consideration of the premises, and of the
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01 General. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"AAA" shall mean the American Arbitration Association.
"Acquisition Agreement" shall mean each of the merger, stock
purchase, asset purchase or other acquisition agreements pursuant to which
certain of the Distributed Company Subsidiaries were acquired by the Company or
any of its Subsidiaries prior to the Distributions.
"Acquisition Claim" shall mean any and all rights or claims
that the Company or any of its Subsidiaries may have against the sellers of the
Distributed Company Subsidiaries under any of the Acquisition Agreements.
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
Person, another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
"Agent" shall mean American Stock Transfer & Trust Company, as
transfer agent for the Company.
"Ancillary Agreements" shall mean the Employee Benefits
Agreement, the Tax Allocation Agreement, the Imagenet Licensing Agreement and
the Lead Generation System Licensing Agreement.
"Assets" shall mean any and all assets, properties and rights,
whether tangible or intangible, whether real, personal or mixed, whether fixed,
contingent or otherwise, and wherever located, including, without limitation,
the following:
(i) real property interests (including leases), land,
plants, buildings and improvements;
(ii) machinery, equipment, tooling, vehicles, furniture and
fixtures, leasehold improvements, repair parts, tools,
plant, and office equipment and other tangible personal
property, together with any rights or claims arising
2
<PAGE>
out of the breach of any express or implied warranty by
the manufacturers or sellers of any of such assets or
any component part thereof;
(iii) inventories, including raw materials, work-in-process,
finished goods, parts, accessories and supplies;
(iv) cash, bank accounts, notes, loans and accounts
receivable (whether current or not current), interests
as beneficiary under letters of credit, advances and
performance and surety bonds;
(v) certificates of deposit, banker's acceptances, shares
of stock, bonds, debentures, evidences of indebtedness,
certificates of interest or participation in
profit-sharing agreements, collateral-trust
certificates, preorganization certificates or
subscriptions, transferable shares, investment
contracts, voting-trust certificates, puts, calls,
straddles, options, swaps, collars, caps and other
securities or hedging arrangements of any kind;
(vi) financial, accounting and operating data and records
including, without limitation, books, records, notes,
sales and sales promotional data, advertising
materials, credit information, cost and pricing
information, customer and supplier lists, reference
catalogs, payroll and personnel records, minute books,
stock ledgers, stock transfer records and other similar
property, rights and information;
(vii) patents, patent applications, trademarks, trademark
applications and registrations, trade names, service
marks, service mark applications and registrations,
service names, copyrights and copyright applications
and registrations, commercial and technical information
including engineering, production and other designs,
drawings, specifications, formulae, technology,
computer and electronic data processing programs and
software, inventions, processes, trade secrets,
know-how, confidential information and other
proprietary property, rights and interest and all
rights thereto;
(viii) agreements, leases, contracts, sale orders, purchase
orders, open bids and other commitments and all rights
therein;
(ix) prepaid expenses, deposits and retentions held by third
parties;
(x) claims, causes of action, choses in action, rights
under insurance policies, rights under express or
implied warranties, rights of recovery, rights of
set-off, rights of subrogation and all other rights of
any kind;
(xi) licenses, franchises, permits, authorizations and
approvals; and
3
<PAGE>
(xii) goodwill and going concern value.
"Assignee" shall have the meaning set forth in Section 2.07.
"Assignor" shall have the meaning set forth in Section 2.07.
"CDR-PC" shall mean CDR-PC Acquisition, L.L.C., a Delaware
limited liability company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Company" shall have the meaning set forth in the heading of
this Agreement.
"Company Debt" shall mean all Liabilities of the Company and
its Subsidiaries under or arising out of the Credit Agreement, dated as of
August 21, 1996, among the Company, various lending institutions and Bankers
Trust Company, as agent.
"Company Common Stock" shall have the meaning set forth in
the recitals to this Agreement.
"Company Indemnitees" shall mean the Company, each Affiliate
of the Company after the Distribution Date, Clayton, Dubilier & Rice, Inc.,
CDR-PC, Clayton, Dubilier & Rice Fund V Limited Partnership, CD&R Associates V
Limited Partnership, each of their respective partners, members, directors,
officers, employees and agents and each of the heirs, executors, successors and
assigns of any of the foregoing.
"Company Transaction Costs" shall mean Transaction Costs
incurred by the Company in connection with the Transactions.
"Conveyancing and Assumption Instruments" shall have the
meaning set forth in Section 2.04.
"Conveyancing Instruments" shall have the meaning set forth
in Section 2.04.
"Covered Claims" shall mean those Liabilities that,
individually or in the aggregate, and if reported timely, are covered within the
terms and conditions of any Policy in the Insurance Program.
"Defaulted Payment Obligation" shall have the meaning set
forth in Section 5.09.
"Dispute" shall have the meaning set forth in Section 9.01.
4
<PAGE>
"Distributed Companies" shall mean Printco, Schoolco, Techco
and Travelco.
"Distributed Companies' Assets" shall mean the Printco
Assets, the Schoolco Assets, the Techco Assets and the Travelco Assets.
"Distributed Companies' Businesses" shall mean the Printco
Business, the Schoolco Business, the Techco Business and the Travelco Business.
"Distributed Companies' Indemnitees" shall mean the Printco
Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees.
"Distributed Companies' Liabilities" shall mean the Printco
Liabilities, the Schoolco Liabilities, the Techco Liabilities and the Travelco
Liabilities.
"Distributed Company Subsidiaries" shall mean the Printco
Subsidiaries, the Schoolco Subsidiaries, the Techco Subsidiaries and the
Travelco Subsidiaries.
"Distributed Company Transaction Costs" shall mean, as to any
Distributed Company, the Transaction Costs incurred by such Distributed Company
or the Company that relate to such Distributed Company's IPO or credit
facilities described in Section 2.08.
"Distribution Date" shall mean such date as hereafter may be
determined by the Company's Board of Directors as the date as of which the
Distributions shall be effected.
"Distribution Record Date" shall mean such date as hereafter
may be determined by the Company's Board of Directors as the record date for the
Distributions.
"Distribution Shares" shall mean the Printco Common Shares,
the Schoolco Common Shares, the Techco Common Shares and the Travelco Common
Shares.
"Distribution Time" shall mean 11:59 P.M. (Eastern time) on
the Distribution Date.
"Distributions" shall mean the distributions on the
Distribution Date to holders of record of shares of Company Common Stock, as
of the Distribution Record Date, other than shares held in the treasury of
the Company, of (i) all the Printco Common Shares on the basis of one Printco
Common Share for each outstanding shares of Company Common Stock, (ii)
all the Schoolco Common Shares on the basis of one Schoolco Common Share for
each outstanding shares of Company Common Stock, (iii) all the Techco
Common Shares on the basis of one Techco Common Share for each
outstanding shares of Company Common Stock, and (iv) all the Travelco Common
Shares on the basis of one Travelco Common Share for each outstanding
shares of Company Common Stock.
5
<PAGE>
"Earn-Out Payment Liability" shall mean any contingent cash
payment required to be made after the Distribution Date by the Company or any of
its Subsidiaries to sellers of certain Distributed Company Subsidiaries or
Retained Subsidiaries under circumstances that may arise under the Acquisition
Agreements.
"Employee Benefits Agreement" shall mean the Employee
Benefits Agreement between the Company and the Distributed Companies
substantially in the form of Exhibit I hereto.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Guaranteed Liability" shall have the meaning set forth in
Section 2.06.
"Guaranteed Party" shall have the meaning set forth in
Section 2.06.
"Guarantor" shall have the meaning set forth in Section 2.06.
"Imagenet Licensing Agreement" shall have the meaning set
forth in Schedule 2.11.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' and accountants' fees and expenses and any and
all out-of-pocket expenses) arising from Third Party Claims or any Indemnifying
Party's breach of its obligations under the Ancillary Agreements or this
Agreement, including all losses, liabilities, claims, damages, demands, costs or
expenses reasonably incurred in investigating, preparing for or defending
against any Actions or potential Actions or in asserting, preserving or
enforcing any rights hereunder (including, without limitation, rights under
Article V) or under any Ancillary Agreement.
"Indemnifying Party" shall have the meaning set forth in
Section 5.06.
"Indemnitee" shall have the meaning set forth in Section
5.06.
"Information" of a party shall mean any and all information
that such party or any of its Representatives furnishes or has furnished to the
receiving party or any of its Representatives whether furnished orally or in
writing or by any other means or gathered by inspection and regardless of
whether the same is specifically marked or designated as "confidential" or
"proprietary," together with any and all notes, memoranda, analyses,
compilations, studies or other documents (whether in hard copy or electronic
media) prepared by the receiving party or any of its Representatives which
contain or otherwise reflect such Information, together with any and all copies,
extracts or other reproductions of any of the same; provided, however, that for
the purposes hereof all information relating to the Distributed Companies, the
Distributed Companies' Businesses or the Distributed
6
<PAGE>
Companies' Assets in the possession of the Company at the Distribution Time
shall be deemed to have been furnished by the related Distributed Company and
all information relating to the Retained Business or the Retained Assets in the
possession of the Distributed Companies or any of the Distributed Company
Subsidiaries at the Distribution Time shall be deemed to have been furnished by
the Company; provided further, however, that the term "Information" does not
include information that:
(a) at the time of disclosure is generally
available to and known by the public (other than as a result of a violation of
this Agreement or any other confidentiality obligation, whether directly or
indirectly, by a party to this Agreement or any of its Representatives);
(b) is available to the receiving party on a
non-confidential basis from a source other than the providing party or its
Representatives, provided that such source is not known by the receiving party
to be subject to a confidentiality agreement regarding such information; or
(c) has been independently acquired or developed by
the receiving party without violation of any of the obligations of the receiving
party or its Representatives under this Agreement.
"Information Statements" shall mean the Information
Statements/Prospectuses to be sent to the holders of shares of Company Common
Stock, as of the Distribution Record Date, in connection with the Distributions,
including any amendments or supplements thereto, which are included as exhibits
to the registration statements on Forms S-1 filed by the Distributed Companies,
as applicable, under the Securities Act.
"Insurance Program" shall mean, collectively, the series of
policies pursuant to which various insurance carriers provide insurance coverage
to the Company and its Affiliates in respect of claims or occurrences relating
to, without limitation, property damage, bodily injury, business interruption,
transit, fire, non-owned aircrafts, crime, fiduciary liability, general
liability, products' liability, professional liability, automobile liability and
employer's liability.
"Investment Agreement" shall mean the Investment Agreement,
dated as of January 12, 1998, as amended, between the Company and CDR-PC, as the
same may be amended from time to time.
"IPO" shall mean, as to any Distributed Company, the initial
public offering of securities to be conducted by such company, which offering is
scheduled to occur on or about the Distribution Date.
7
<PAGE>
"IPO Prospectus" shall mean, as to any Distributed Company,
the Registration Statement/Prospectus prepared in connection with such
Distributed Company's IPO.
"Lead Generation System Licensing Agreement" shall have the
meaning set forth in Schedule 2.11.
"Liabilities" shall mean any and all debts, liabilities,
obligations, claims, damages, fees, costs and expenses, absolute or contingent,
matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or
unknown, whenever arising, including, without limitation, those debts,
liabilities, obligations, claims, damages, fees, costs and expenses, arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"Mediation Period" shall have the meaning set forth in Section
9.03.
"MCI Agreement" shall mean the Special Customer Arrangement,
effective as of November 15, 1997, by and between MCI Telecommunications
Corporation and the Company.
"NASDAQ" shall mean the NASDAQ National Market System.
"Nonassignable Contract" shall have the meaning set forth in
Section 2.07.
"Person" shall mean any natural person, corporation, trust,
limited liability company, joint venture, association, company, partnership,
entity, unincorporated organization or government, or any agency or political
subdivision thereof.
"Pledged Shares" shall mean any Company Common Stock pledged
or assigned to the Company as of the Distribution Date as collateral security by
sellers of certain of the Distributed Company Subsidiaries under the Acquisition
Agreements.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies, commercial
general liability policies, fiduciary liability, automobile, aircraft, property
and casualty, workers' compensation and employee dishonesty insurance policies,
bonds and self-insurance and captive insurance company arrangements, together
with the rights, benefits and privileges thereunder.
"Preliminary Transactions" shall have the meaning set forth in
the recitals to this Agreement.
8
<PAGE>
"Printco" shall have the meaning set forth in the heading of
this Agreement.
"Printco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Printco and the Printco Subsidiaries under the Acquisition Agreements
pursuant to which Printco and the Printco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Printco Assets" shall mean (a) the Assets of Printco and the
Printco Subsidiaries and (b) the rights of Printco and the Printco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Printco Assets shall not include any claim of Printco against the Company
relating to the payment of finders' fees or other compensation in respect of
customers referred to the Company by Printco or the payment of rebates or other
compensation in respect of office products sold by Printco.
"Printco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Printco and
the Printco Subsidiaries including all businesses, Assets and operations
conducted or owned by Printco and the Printco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Printco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Printco Indemnitees" shall mean Printco, the Printco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Printco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Printco and the Printco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all Liabilities of the Company and its Subsidiaries
arising primarily out of or relating primarily to the management or conduct of
the Printco Business or the administration of the Printco Subsidiaries, (iii)
all Specified Securities Liabilities of Printco, (iv) all Liabilities of the
Company relating to any Earn-Out Payment Liabilities arising out of any of the
Acquisition Agreements pursuant to which any of the Printco Subsidiaries or any
part of the Printco Business was acquired, (v) the Distributed Company
Transaction Costs of Printco, (vi) $1,000,000 of the Company Transaction Costs
and (vii) any Company Debt allocated to Printco pursuant to Section 2.08 of this
Agreement.
"Printco Subsidiaries" shall mean the Subsidiaries of Printco
as listed on Exhibit II.
"Pro Rata Share" shall mean, (i) as to any Distributed
Company, the percentage that is equal to the average of (a) the ratio of the pro
forma fiscal year 1998
9
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revenues for such Distributed Company to the fiscal year 1998 consolidated
revenues of the Company (prior to the Distributions), and (b) the ratio of the
pro forma fiscal year 1998 net income for such Distributed Company to the fiscal
year 1998 consolidated net earnings of the Company (prior to the Distributions),
and (ii) as to the Company, the percentage that is equal to 100% less the sum of
the Pro Rata Share percentages of the Distributed Companies as defined in (i)
above. Estimations of the Company's Pro Rata Share and each Distributed
Company's Pro Rata Share using financial data for the nine-month period ended
January 24, 1998 are set forth in Exhibit III.
"Proxy" shall mean the definitive proxy statement dated May 1,
1998, distributed by the Company to the holders of the Company Common Stock,
describing and seeking approval for (i) the investment provided for in the
Investment Agreement and (ii) a one-for-four reverse stock split, as the same
may be amended.
"Recovery" shall mean those monies received by an insured from
an insurance carrier or paid by an insurance carrier on behalf of an insured
pursuant to a claim under an insurance policy in the Insurance Program.
"Recovery Costs" shall have the meaning set forth in Section
7.04.
"Representatives" of either party shall mean such party's
Affiliates, directors, officers, partners, employees, agents or other
representatives (including attorneys, accountants and financial advisors).
"Retained Assets" shall mean (a) all the Assets of the Company
and its Subsidiaries except for the Distributed Companies' Assets, and (b) the
rights of the Company and its Subsidiaries under this Agreement and the
Ancillary Agreements.
"Retained Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by the Company
and the Retained Subsidiaries, including all businesses, Assets or operations
conducted or owned by the Company or its Subsidiaries that have been sold or
otherwise disposed of or discontinued, (other than the Distributed Companies'
Assets, Distributed Companies' Businesses and the business of managing and
administering the Distributed Companies' Subsidiaries).
"Retained Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of the Company and the Retained Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all Liabilities of the Company and its Retained
Subsidiaries arising primarily out of or relating primarily to the management or
conduct of the Retained Business or the administration of the Retained
Subsidiaries, (iii) all Specified Securities Liabilities of the Company, (iv)
all Liabilities of the Company relating to any Earn-Out Payment Liabilities
arising out of any of the Acquisition Agreements pursuant to which any of the
Retained Subsidiaries or any part of
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the Retained Business was acquired, (v) all of the Company Transaction Costs
(excluding, in aggregate, the $4,000,000 that is treated as part of the
Distributed Companies' Liabilities) and (vi) any indebtedness for borrowed money
of the Company other than Company Debt to be allocated to the Distributed
Companies pursuant to Section 2.08 of this Agreement.
"Retained Subsidiaries" shall mean (x) all of the Subsidiaries
of the Company other than the Distributed Companies and the Distributed Company
Subsidiaries, and (y) 1186203 Ontario Limited, 1243231 Ontario Limited and
1203803 Ontario Limited, and their respective Subsidiaries.
"Schoolco" shall have the meaning set forth in the heading of
this Agreement.
"Schoolco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Schoolco and the Schoolco Subsidiaries under the Acquisition Agreements
pursuant to which Schoolco and the Schoolco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Schoolco Assets" shall mean (a) the Assets of Schoolco and
the Schoolco Subsidiaries and (b) the rights of Schoolco and the Schoolco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Schoolco Assets shall not include any claim of Schoolco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Schoolco or the payment of
rebates or other compensation in respect of office products sold by Schoolco.
"Schoolco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Schoolco and
the Schoolco Subsidiaries including all businesses, Assets or operations
conducted or owned by Schoolco and the Schoolco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Schoolco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Schoolco Indemnitees" shall mean Schoolco, the Schoolco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Schoolco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Schoolco and the Schoolco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries or Affiliates, arising primarily out of or relating primarily to
the management or conduct of the Schoolco Business or the administration of the
Schoolco Subsidiaries, (iii) all Specified Securities Liabilities of Schoolco,
(iv) all Liabilities of the Company relating to any Earn-Out Payment Liabilities
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arising out of any of the Acquisition Agreements pursuant to which any of the
Schoolco Subsidiaries or any part of the Schoolco Business was acquired, (v) the
Distributed Company Transaction Costs of Schoolco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Schoolco
pursuant to Section 2.08 of this Agreement.
"Schoolco Subsidiaries" shall mean the Subsidiaries of
Schoolco as listed on Exhibit II.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securities Laws" shall mean the Exchange Act, the Securities
Act and foreign, provincial and state securities laws.
"Shared Liability" shall mean (i) any Liability of the Company
and its Subsidiaries, including without limitation a Liability arising under the
Securities Laws, that (x) arises out of an act or omission that occurred prior
to the Distribution Date, and (y) is not a Retained Liability, Printco
Liability, Schoolco Liability, Techco Liability or Travelco Liability, and (ii)
the Liabilities listed on Exhibit IV. By way of example and not of limitation,
Shared Liabilities shall include: any Liability arising in connection with the
Proxy or Tender Offer (other than a liability relating to information supplied
by a specific subsidiary of the Company); and any Liability relating to the
operation of the Company's headquarters arising prior to the Distribution Date;
and any other liability not relating to the business of any particular Retained
Subsidiary or Distributed Company Subsidiary.
"Special Insurance Recoveries" shall mean Recoveries whenever
received by the Company (i) relating to insured casualty losses of a Distributed
Company or Distributed Company Subsidiary occurring prior to the Distribution
Date and (ii) not actually used by the relevant Distributed Company or
Distributed Company Subsidiary to rebuild, reconstruct, renovate or repair
properties or facilities that suffered such loss.
"Specified Securities Liabilities" shall mean (a) as to any
Distributed Company, any Liability under the Securities Laws arising out of or
relating to (x) the Information Statement (other than Liabilities relating to
those sections of the Information Statements specified on Exhibit V) and/or IPO
Prospectus of such Distributed Company, and (y) any other securities filings or
disclosures made by, or the failure to make filings or disclosures required to
be made by, the Company or any of its Subsidiaries prior to the Distribution
Date to the extent such Liability arises primarily out of material omissions
made by or materially incorrect, false, or misleading information supplied by
such Distributed Company or any of its Subsidiaries; and (b) as to the Company,
any Liability under the Securities Laws arising out of or relating to any
securities filings or disclosures made by, or the failure to make filings or
disclosures required to be made by, the Company, or any of its
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Subsidiaries prior to the Distribution Date to the extent such Liability arises
primarily out of material omissions made by or materially incorrect, false or
misleading information supplied by the Retained Business or a Retained
Subsidiary.
"Subsidiary" shall mean any corporation, partnership, joint
venture or other entity (i) in which another entity owns, directly or
indirectly, ownership interests sufficient to elect a majority of the Board of
Directors (or persons performing similar functions) (irrespective of whether at
the time any other class or classes of ownership interests of such corporation,
partnership, joint venture or other entity shall or might have such voting power
upon the occurrence of any contingency) or (ii) of which another entity is a
general partner or an entity performing similar functions (e.g., a trustee or
managing member).
"Tax" shall mean all U.S. federal, state, local and foreign
taxes and assessments, including all interest, penalties and additions imposed
with respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation
Agreement between the Company and the Distributed Companies substantially in the
form of Exhibit VI hereto, as and to the extent amended and restated as of the
closing of the Transactions.
"Techco" shall have the meaning set forth in the heading of
this Agreement.
"Techco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Techco and the Techco Subsidiaries under the Acquisition Agreements pursuant
to which Techco and the Techco Subsidiaries were acquired by the Company or any
of its Subsidiaries.
"Techco Assets" shall mean (a) the Assets of Techco and the
Techco Subsidiaries and (b) the rights of Techco and the Techco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Techco Assets shall not include any claim of Techco against the Company relating
to the payment of finders' fees or other compensation in respect of customers
referred to the Company by Techco or the payment of rebates or other
compensation in respect of office products sold by Techco.
"Techco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Techco and
the Techco Subsidiaries including all businesses, Assets or operations conducted
or owned by Techco and the Techco Subsidiaries that have been sold or otherwise
disposed of or discontinued.
"Techco Common Shares" shall have the meaning set forth in the
recitals to this Agreement.
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"Techco Indemnitees" shall mean Techco, the Techco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Techco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Techco and the Techco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Techco Business or the administration of the Techco
Subsidiaries, (iii) all Specified Securities Liabilities of Techco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Techco
Subsidiaries or any part of the Techco Business was acquired, (v) the
Distributed Company Transaction Costs of Techco, (vi) $1,000,000 of the Company
Transaction Costs and (vii) any Company Debt allocated to Techco pursuant to
Section 2.08 of this Agreement.
"Techco Subsidiaries" shall mean the Subsidiaries of Techco as
listed on Exhibit II.
"Tender Offer" shall mean, collectively, (i) the cash tender
offer by the Company to purchase approximately 37 million shares (including
shares issuable upon exercise of outstanding stock options) of Company Common
Stock at a price of $27 per share commenced on May 4, 1998, and (ii) the tender
offer of the Company to purchase any and all of its $230.0 million outstanding 5
1/2% Convertible Subordinated Notes due 2003 for a purchase price of 94.5% of
the principal amount, plus accrued interest, commenced on May 5, 1998.
"Third Party Claim" shall have the meaning set forth in
Section 5.07.
"Transaction Costs" shall mean all transaction costs including
legal, accounting, investment banking, financial advisory and other fees
incurred by a party hereto (or one of its Subsidiaries) in connection with the
Transactions or any of the other transactions described in, or contemplated by,
IPO Prospectuses and Section 2.08.
"Transactions" shall mean the execution, delivery and
performance of this Agreement, the Ancillary Agreements, and the Investment
Agreement and the consummation of the Preliminary Transactions, the
Distributions, the Proxy, the Tender Offer, the 2001 Note Exchange Offer and any
other transactions contemplated by this Agreement, the Ancillary Agreements and
the Investment Agreement, including without limitation the financing of the
Company related thereto, but not including the initial public offerings by the
Distributed Companies or the financings of the Distributed Companies.
"Transferred Policies" shall have the meaning set forth in
Section 7.02(b).
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"Travelco" shall have the meaning set forth in the heading of
this Agreement.
"Travelco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Travelco and the Travelco Subsidiaries under the Acquisition Agreements
pursuant to which Travelco and the Travelco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Travelco Assets" shall mean (a) the Assets of Travelco and
the Travelco Subsidiaries and (b) the rights of Travelco and the Travelco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Travelco Assets shall not include any claim of Travelco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Travelco or the payment of
rebates or other compensation in respect of office products sold by Travelco.
"Travelco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Travelco and
the Travelco Subsidiaries including all businesses, Assets or operations
conducted or owned by Travelco and the Travelco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Travelco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Travelco Indemnitees" shall mean Travelco, the Travelco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Travelco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Travelco and the Travelco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Travelco Business or the administration of the Travelco
Subsidiaries, (iii) all Specified Securities Liabilities of Travelco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Travelco
Subsidiaries or any part of the Travelco Business was acquired, (v) the
Distributed Company Transaction Costs of Travelco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Travelco
pursuant to Section 2.08 of this Agreement.
"Travelco Subsidiaries" shall mean the Subsidiaries of
Travelco as listed on Exhibit II.
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"2001 Note Exchange Offer" shall mean the Company's offer to
exchange its 5 1/2% Convertible Subordinated Notes due 2001 for Company Common
Stock at a temporarily reduced conversion price commenced on May 1, 1998.
SECTION 1.02 References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
or "Article" are, unless otherwise specified, to one of the Sections and
Articles of this Agreement. Any time the word "including" is used herein it
means "including without limitation".
ARTICLE II
PRELIMINARY TRANSACTIONS
SECTION 2.01 Stock Transfers.
(a) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Printco all its right, title and
interest in and to all the shares of capital stock of the Printco Subsidiaries.
(b) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Schoolco all its right, title and
interest in and to all the shares of capital stock of the Schoolco Subsidiaries.
(c) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Techco all its right, title and
interest in and to all the shares of capital stock of the Techco Subsidiaries.
(d) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Travelco all its right, title and
interest in and to all the shares of capital stock of the Travelco Subsidiaries.
Immediately after the stock transfers set forth in this Section 2.01, the
Company shall not own any capital stock of (or other equity interest in) any of
the Distributed Company Subsidiaries.
SECTION 2.02 Liabilities.
(a) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Printco hereby unconditionally agrees to cause each
Printco Subsidiary that has incurred a Printco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
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(b) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Schoolco hereby unconditionally agrees to cause each
School Subsidiary that has incurred a Schoolco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
(c) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Techco hereby unconditionally agrees to cause each Techco
Subsidiary that has incurred a Techco Liability to pay, perform and discharge
such Liability when due in accordance with its terms.
(d) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Travelco hereby unconditionally agrees to cause each
Travelco Subsidiary that has incurred a Travelco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
SECTION 2.03 Transfer of Certain Licenses and Permits.
(a) In furtherance of the transfer of the capital
stock of the Printco Subsidiaries to Printco and the assumption of the Printco
Liabilities set forth in this Article II, at or prior to the Distribution Time,
(i) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Printco Business but which are held in the name of the Company or any
Retained Subsidiary shall be duly and validly transferred by the Company or such
Subsidiary to Printco or the appropriate Printco Subsidiary, and (ii) all
transferrable licenses, permits and authorizations issued by governmental or
regulatory entities which are used primarily in connection with the Retained
Business but which are held in the name of Printco or the Printco Subsidiaries
shall be duly and validly transferred by Printco or such Subsidiary to the
Company or the appropriate Subsidiary of the Company.
(b) In furtherance of the transfer of the capital
stock of the Schoolco Subsidiaries to Schoolco and the assumption of the
Schoolco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Schoolco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Schoolco or the appropriate Schoolco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Schoolco or the Schoolco
Subsidiaries shall be duly and validly transferred by Schoolco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
(c) In furtherance of the transfer of the capital
stock of the Techco Subsidiaries to Techco and the assumption of the Techco
Liabilities set forth in this Article
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II, at or prior to the Distribution Time, (i) all transferrable licenses,
permits and authorizations issued by governmental or regulatory entities which
are used primarily in connection with the Techco Business but which are held in
the name of the Company or any Retained Subsidiary shall be duly and validly
transferred by the Company or such Subsidiary to Techco or the appropriate
Techco Subsidiary, and (ii) all transferrable licenses, permits and
authorizations issued by governmental or regulatory entities which are used
primarily in connection with the Retained Business but which are held in the
name of Techco or the Techco Subsidiaries shall be duly and validly transferred
by Techco or such Subsidiary to the Company or the appropriate Subsidiary of the
Company.
(d) In furtherance of the transfer of the capital
stock of the Travelco Subsidiaries to Travelco and the assumption of the
Travelco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Travelco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Travelco or the appropriate Travelco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Travelco or the Travelco
Subsidiaries shall be duly and validly transferred by Travelco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
SECTION 2.04 Transfer and Assumption Documentation. In
furtherance of the transfer of the capital stock of the Distributed Company
Subsidiaries to the relevant Distributed Companies and the assumption of the
Distributed Companies' Liabilities set forth in this Article II, at or prior to
the Distribution Time, (i) the parties hereto shall execute and deliver, and
cause their respective Subsidiaries to execute and deliver, such deeds, bills of
sale, stock powers, certificates of title, assignments of leases and contracts
and other instruments of contribution, grant, conveyance, assignment, transfer
and delivery necessary to evidence such contribution, grant, conveyance,
assignment, transfer and delivery (collectively, the "Conveyancing Instruments")
and (ii) each party hereto or the appropriate Subsidiary of such party shall
execute and deliver such instruments of assumption (together with the
Conveyancing Instruments, the "Conveyancing and Assumption Instruments") as and
to the extent necessary to evidence such assumption.
SECTION 2.05 Intercompany Accounts. All intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder) between any Distributed Company or Distributed Company Subsidiary, on
the one hand, and the Company or any of the Retained Subsidiaries, on the other
hand, including, without limitation, in respect of any cash balances, any cash
balances representing deposited checks or drafts for which only a provisional
credit has been allowed or any cash held in any centralized cash management
system, shall be settled or otherwise eliminated prior to the Distribution Date.
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SECTION 2.06 Elimination of Guarantees. To the extent that any
of the parties to this Agreement or any Subsidiary thereof is a guarantor of or
obligor for (a "Guarantor") any Liability of any other party to this Agreement
or any Subsidiary thereof (a "Guaranteed Party"), the Guarantor and the
Guaranteed Party shall use their commercially reasonable efforts to have, on or
prior to the Distribution Date, or as soon as practicable thereafter, the
Guarantor removed as guarantor of or obligor for such Liability of the
Guaranteed Party (a "Guaranteed Liability"). In the event that the Guarantor
cannot be removed as guarantor of or obligor for such Guaranteed Liability, the
Guaranteed Party agrees that until such Guaranteed Liability is discharged in
full, the Guaranteed Party shall take no action, and shall not permit any of its
Subsidiaries to take any action, which will have the effect of increasing the
contingent liability or exposure of the Guarantor or any of its Subsidiaries
with respect to such Guaranteed Liability. This Section 2.06 shall not apply to
the obligations set forth on Schedule 2.06.
SECTION 2.07 Assignments and Transfers Not Effected Prior to
the Distribution. Anything contained herein to the contrary notwithstanding, (a)
this Agreement shall not constitute an agreement to assign or transfer any
agreement, contract, lease, license, permit, sales order, purchase order, open
bid or other commitment if an assignment, attempted assignment, transfer or
attempted transfer of the same without the consent of a third party would
constitute a breach thereof or in any way impair the rights of the Distributed
Companies or the Company or any of their respective Subsidiaries thereunder (any
such item being referred to as a "Nonassignable Contract") and (b) nothing
herein shall be deemed to require the transfer of any Assets or the assumption
of any Liabilities which by their terms or operation of law cannot be
transferred or assumed. To the extent that any assignments or transfers
contemplated by this Article II shall not have been consummated at or prior to
the Distribution Time, the parties hereto and their respective Subsidiaries
shall cooperate and use commercially reasonable efforts to obtain any necessary
consents or approvals for the assignment of all Nonassignable Contracts, the
transfer of all Assets and the assumption of all Liabilities contemplated to be
assigned, transferred or assumed pursuant to this Article II and shall otherwise
cooperate and use reasonable best efforts to effect any such assignments,
transfers or assumptions as promptly following the Distribution Time as shall be
practicable. In the event that any consent required with respect to a
Nonassignable Contract is not obtained or an attempted assignment thereof would
be ineffective or would impair either party's rights under any such
Nonassignable Contract, then the party obligated to assign such Nonassignable
Contract (the "Assignor") will promptly pay or cause to be paid to the assignee
thereof (the "Assignee"), when received, all monies received by the Assignor
with respect to any such Nonassignable Contract and in consideration thereof the
Assignee shall pay, perform and discharge on behalf of the Assignor all the
Assignor's Liabilities, thereunder in a timely manner and in accordance with the
terms thereof. In the event that any such transfer of Assets or assumption of
Liabilities has not been consummated, from and after the Distribution Time, the
party retaining such Asset or Liability shall hold such Asset in trust for the
use and benefit of the party entitled thereto (at the expense of the party
entitled thereto) or retain such Liability for the account
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of the party by whom such Liability is to be assumed pursuant hereto, as the
case may be. The parties hereto will take such other action as may be reasonably
requested by the Assignee or party to whom such Asset is to be transferred, or
by whom such Liability is to be assumed, as the case may be, in order to place
such party, insofar as is reasonably possible, in the same position as would
have existed had such Nonassignable Contract been assigned, or such Asset or
Liability been transferred or assumed, as contemplated hereby. As and when any
required consent to the assignment of a Nonassignable Contract is obtained or
any such Asset or Liability becomes transferable or able to be assumed, such
assignment, transfer or assumption shall be effected forthwith. The parties
agree that, as of the Distribution Time, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership over all Assets, together
with all rights, powers and privileges incident thereto, and shall be deemed to
have assumed all Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party is entitled to acquire or required to assume
pursuant to the terms of this Agreement or any of the Ancillary Agreements.
SECTION 2.08 Debt. On or prior to the Distribution Date, each
Distributed Company shall obtain bank credit facilities, borrow funds under such
facilities and pay such moneys borrowed to reduce the Company Debt equal in
amount to (i) the amounts reflected in relation to such Distributed Company on
Schedule 2.08, and (ii) the amount of any debt incurred by the Company after the
date of the Investment Agreement in connection with the acquisition of any
entities that, upon the Distributions, will become a Subsidiary of such
Distributed Company, which money shall be paid to the Company to be applied to
the Company Debt.
SECTION 2.09 Assignment of Acquisition Claims. The Company
shall contribute, grant, convey, assign, transfer and deliver to Printco,
Schoolco, Techco and Travelco all the Company's rights and interest in and to
the Printco Acquisition Claims, the Schoolco Acquisition Claims, the Techco
Acquisition Claims and the Travelco Acquisition Claims, respectively.
Notwithstanding the assignment of the foregoing Acquisition Claims under this
Section 2.09: (i) the net recoveries of Printco arising out of the Printco
Acquisition Claims shall be shared between Printco and the Company, as they are
collected, in a ratio of 20% to 80%, respectively, until the Company has
received the amount shown on Schedule 2.09 (including through any Special
Insurance Proceeds retained by the Company pursuant to Section 7.04), after
which time any net recoveries from the Printco Acquisition Claims shall be
shared, as they are collected, between Printco and the Company in a ratio of 95%
to 5%, respectively, (ii) the net recoveries of Schoolco arising out of the
Schoolco Acquisition Claims shall be shared, as they are collected, between
Schoolco and the Company in a ratio of 20% to 80%, respectively, until the
Company has received the amount shown on Schedule 2.09, after which time any net
recoveries from the Schoolco Acquisition Claims shall be shared, as they are
collected, between Schoolco and the Company in a ratio of 95% to 5%,
respectively, (iii) the net recoveries from the Techco Acquisition Claims shall
be assigned 100% to Techco, and (iv) the net recoveries from the Travelco
Acquisition Claims shall be assigned 100% to Travelco.
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SECTION 2.10 Pledged Shares. The Company shall hold all
Pledged Shares for the purposes specified in, and distribute such Pledged Shares
as provided pursuant to, Schedule 2.10.
SECTION 2.11 Other Transactions. In furtherance of the
transfer of the capital stock of the Distributed Company Subsidiaries to the
relevant Distributed Companies and the assumption of the Distributed Companies'
Liabilities set forth in this Article II, at or prior to the Distribution Time,
the parties agree to effect the transactions, if any, described in Schedule 2.11
attached hereto.
ARTICLE III
THE DISTRIBUTION
SECTION 3.01 Directors and Employees.
(a) The Company shall cause all those individuals
who will be officers or directors of the Company or any Retained Subsidiary
immediately after the Distribution Time to resign, effective as of the
Distribution Time, from all officer or director positions with any of the
Distributed Companies or Distributed Company Subsidiaries in which they serve.
(b) The Company shall cause all those individuals
who will be officers or directors of any of the Distributed Companies or the
Distributed Company Subsidiaries immediately after the Distribution Time to
resign, effective as of the Distribution Time, from all officer or director
positions with the Company or any Retained Subsidiary in which they serve.
SECTION 3.02 Mechanics of Distribution.
(a) Delivery of Shares to Agent. Following
consummation of the transactions contemplated by Section 2.01 and subject to the
closing conditions set forth in Article VIII the Company shall deliver to the
Agent, for the benefit of holders of record of the Company Common Stock as at
the close of business on the Distribution Record Date, the share certificates
representing (i) all the Printco Common Shares, (ii) all the Schoolco Common
Shares, (iii) all the Techco Common Shares and (iv) all the Travelco Common
Shares, and shall instruct the Agent to distribute such share certificates to
such holders of the Company Common Stock upon notice from the Company that the
conditions to the obligation of the Company to consummate the Distributions have
been satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares. Immediately following the
Distributions, the Company shall not own any capital stock of the Distributed
Companies or the Distributed Company Subsidiaries.
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(b) Distribution of Certificates. The
Distributions shall be effected by the distribution to each holder of record
of Company Common Stock, as of the Distribution Record Date, of certificates
representing one Printco Common Share for each shares of Company
Common Stock, one Schoolco Common Share for each shares of Company Common
Stock, one Techco Common Share for each shares of Company Common Stock, one
Travelco Common Share for each shares of Company Common Stock and
of cash in lieu of fractional shares as set forth in Section 3.02(c). The
Company shall instruct the Agent to distribute the Distribution Shares and
the cash in lieu of fractional shares as promptly as practicable after the
Distribution Time.
(c) Payment for Fractional Shares. No certificate
or scrip representing fractional shares of the Distribution Shares shall be
distributed to holders of the Company Common Stock as part of the Distributions.
Each holder of Company Common Stock who would otherwise be entitled to receive a
fractional share of the common stock of any of the Distributed Companies
pursuant to the Distributions shall receive cash in lieu of such fractional
share. As soon as practicable after the Distribution Date, the Company shall
direct the Agent to determine the number of fractional shares of any of the
Distribution Shares allocable to each holder of record of Company Common Stock
as of the Distribution Record Date who will receive cash in lieu of such
fractional shares, to aggregate all such fractional shares into whole shares and
sell the whole shares obtained thereby in open market transactions or otherwise,
in each case at then prevailing trading prices, and to cause to be distributed
to each such holder, in lieu of any fractional share, such holder's ratable
share of the proceeds of such sale, after making appropriate deductions of the
amount required to be withheld for U.S. federal income tax purposes and after
deducting an amount equal to all brokerage charges, commissions and transfer
taxes attributed to such sale.
SECTION 3.03 Timing of Distribution. The Board of Directors of
the Company shall, or shall authorize certain officers of the Company to,
formally declare the Distributions and shall authorize the Company to effect the
Distributions at the Distribution Time, subject to the satisfaction or waiver of
the conditions set forth in Article VIII. The Distributions shall be deemed to
be effective upon notification by the Company to the Agent that the conditions
to the obligations of the Company to consummate the Distributions have been
satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares.
ARTICLE IV
MUTUAL RELEASE
Effective as of the Distribution Time and except as otherwise
specifically set forth in this Agreement or any of the Ancillary Agreements,
each of the parties hereto, on its own behalf and on behalf of each of its
respective Subsidiaries, releases and forever discharges all of the other
parties hereto and their respective Subsidiaries, and their
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respective officers, directors, agents, Affiliates, record and beneficial
security holders (including, without limitation, trustees and beneficiaries of
trusts holding such securities), advisors and Representatives (in their
respective capacities as such) and their respective heirs, executors,
administrators, successors and assigns, of and from all debts, demands, actions,
causes of action, suits, accounts, covenants, contracts, agreements, damages,
claims and Liabilities whatsoever of every name and nature, both in law and in
equity, which the releasing party has or ever had, which arise out of or relate
to the Transactions or the IPOs; provided, however, that the foregoing general
release shall not apply to (i) any Liabilities (including Liabilities with
respect to indemnification) assumed, transferred, assigned, allocated or arising
under this Agreement, any of the Ancillary Agreements or the Investment
Agreement and shall not affect any party's right to enforce this Agreement, any
Ancillary Agreement or the Investment Agreement in accordance with their
respective terms, (ii) any Liabilities of the Company, any of its Subsidiaries
or any seller of a Retained Subsidiary or Distributed Company Subsidiary arising
out of the agreement pursuant to which such Retained Subsidiary or Distributed
Company Subsidiary was acquired by the Company or any of its Subsidiaries or any
other agreement to which the Company or any of its Subsidiaries and such a
seller (acting in the capacity of a seller) are parties, or (iii) any Liability
arising out of an agreement between any party to this Agreement and Jonathan J.
Ledecky. Each party understands and agrees that, except as otherwise
specifically provided in this Agreement or the Ancillary Agreements, none of the
parties is, in this Agreement or the Ancillary Agreements or otherwise,
representing or warranting in any way as to the Assets, business or Liabilities
transferred, assumed or retained as contemplated hereby or as to any consents or
approvals required in connection with the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements, it being agreed and
understood that each party shall take or keep all of its Assets "as is" and that
it shall bear the economic and legal risk that conveyance of such Assets shall
prove to be insufficient or that the title to any Assets shall be other than
good and marketable and free from encumbrances of any nature whatsoever;
provided, however, that the foregoing disclaimer shall not apply to any
representations made by the Company, any of its Subsidiaries or any seller of a
Retained Subsidiary or Distributed Company Subsidiary under the agreement
pursuant to which such Retained Subsidiary or Distributed Company Subsidiary was
acquired.
ARTICLE V
INDEMNIFICATION
SECTION 5.01 Indemnification by the Company. Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, (a) the Company and, as to any particular Indemnifiable
Loss, the Retained Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the
Distributed Companies' Indemnitees from and against, and pay or reimburse the
Distributed Companies' Indemnitees for, any and all Indemnifiable Losses, as
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incurred, of the Distributed Companies' Indemnitees arising out of, relating to
or resulting from (i) the Retained Liabilities, the Retained Assets or the
Retained Business or (ii) the breach by the Company or any of the Retained
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to or arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) the Company shall bear the costs of and indemnify, defend and hold harmless
the Printco Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and
the Travelco Indemnitees from the Company's Pro Rata Share of Indemnifiable
Losses, as incurred, that relate to, arise out of or result from the Shared
Liabilities; provided, however, that the Company shall have no obligation to
indemnify any of the Distributed Companies' Indemnitees for any Indemnifiable
Losses arising out of, relating to or resulting from (y) the gross negligence,
bad faith or wilful misconduct of the relevant Distributed Company or
Distributed Company Subsidiary after the Distribution Time or (z) the failure of
such Distributed Company or any of its Subsidiaries to perform its obligations
under any agreement in accordance with the terms of such agreement after the
Distribution Time.
SECTION 5.02 Indemnification by Printco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Printco and, as to any particular Indemnifiable Loss, the Printco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Schoolco Indemnitees, the Techco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Schoolco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Printco Liabilities, the Printco Assets,
the Printco Business or the Printco Acquisition Claims, (ii) the breach by
Printco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time and (b) Printco shall bear the costs of and indemnify, defend
and hold harmless the Company Indemnitees, the Schoolco Indemnitees, the Techco
Indemnitees and the Travelco Indemnitees from Printco's Pro Rata Share of
Indemnifiable Losses, as incurred, that relate to, arise out of or result from
the Shared Liabilities; provided, however, that Printco shall have no obligation
to indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the
Techco Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable, after the Distribution Time or (y)
the failure of the Company, Schoolco, Techco or Travelco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time; provided further, however, that Printco shall have no obligation to
indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the Techco
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Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.02 to the extent that Printco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.02 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.03 Indemnification by Schoolco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Schoolco and, as to any particular Indemnifiable Loss, the
Schoolco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Schoolco Liabilities, the Schoolco Assets,
the Schoolco Business or the Schoolco Acquisition Claims and (ii) the breach by
Schoolco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time, and (b) Schoolco shall bear the costs of and indemnify,
defend and hold harmless the Company Indemnitees, the Printco Indemnitees, the
Techco Indemnitees and the Travelco Indemnitees from Schoolco's Pro Rata Share
of Indemnifiable Losses, as incurred, that relate to, arise out of or result
from the Shared Liabilities; provided, however, that Schoolco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Techco Indemnitees and the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Printco, Techco or Travelco, as
applicable, after the Distribution Time or (y) the failure of the Company,
Printco, Techco or Travelco, or any of their respective Subsidiaries, as
applicable, to perform its obligations under any agreement in accordance with
the terms of such agreement after the Distribution Time; provided further,
however, that Schoolco shall have no obligation to indemnify any of the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees or the Travelco
Indemnitees for any Indemnifiable Losses pursuant to clause (b) of this Section
5.03 to the extent that Schoolco has previously indemnified such Indemnitees for
Losses pursuant to clause (b) of this Section 5.03 in an aggregate amount equal
to or exceeding $1.75 million.
SECTION 5.04 Indemnification by Techco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Techco and, as to any particular Indemnifiable Loss, the Techco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Printco Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees arising out
of, relating to or resulting
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from (i) the Techco Liabilities, the Techco Assets, the Techco Business or the
Techco Acquisition Claims and (ii) the breach by Techco or any of its
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to, arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Techco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees from Techco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Techco shall have no obligation to indemnify any of the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees for any Indemnifiable Losses relating to, arising out of or
resulting from (x) the gross negligence, bad faith or wilful misconduct of the
Company, Printco, Schoolco or Travelco, as applicable, after the Distribution
Time or (y) the failure of the Company, Printco, Schoolco or Travelco, or any of
their respective Subsidiaries, as applicable, to perform its obligations under
any agreement in accordance with the terms of such agreement after the
Distribution Time; provided further, however, that Techco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Schoolco Indemnitees or the Travelco Indemnitees for any Indemnifiable
Losses pursuant to clause (b) of this Section 5.04 to the extent that Techco has
previously indemnified such Indemnitees for Losses pursuant to clause (b) of
this Section 5.04 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.05 Indemnification by Travelco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Travelco and, as to any particular Indemnifiable Loss, the
Travelco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the Techco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Techco Indemnitees arising out of,
relating to or resulting from (i) the Travelco Liabilities, the Travelco Assets,
the Travelco Business or the Travelco Acquisition Claims and (ii) the breach by
Travelco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to
or arise from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Travelco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Techco Indemnitees from Travelco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Travelco shall have no obligation to indemnify any of
the Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and
the Techco Indemnitees for any Indemnifiable Losses relating to, arising out of
or resulting from (x) the gross negligence, bad faith or wilful misconduct of
the Company, Printco, Schoolco or Techco, as applicable, after the Distribution
Time or
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(y) the failure of the Company, Printco, Schoolco or Techco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time ; provided further, however, that Travelco shall have no obligation to
indemnify any of the Company Indemnitees, the Printco Indemnitees, the Schoolco
Indemnitees or the Techco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.05 to the extent that Travelco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.05 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.06 Limitations on Indemnification Obligations. The
amount that any party (an "Indemnifying Party") is or may be required to pay to
any other Person (an "Indemnitee") pursuant to Sections 5.01, 5.02, 5.03, 5.04
or 5.05, as applicable, shall be reduced (retroactively or prospectively) by any
Insurance Proceeds, settlement recoveries or other amounts actually recovered by
or on behalf of such Indemnitee in respect of the related Indemnifiable Loss. If
an Indemnitee shall have received the payment required by this Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
actually receive Insurance Proceeds, settlement recoveries or other amounts in
respect of such Indemnifiable Loss, then such Indemnitee shall pay to such
Indemnifying Party a sum equal to the amount of such Insurance Proceeds,
settlement recoveries or other amounts actually received, up to the aggregate
amount of any payments made by such Indemnifying Party pursuant to this
Agreement in respect of such Indemnifiable Loss. Amounts paid by an Indemnifying
Party pursant to clause (b) of Sections 5.01, 5.02, 5.03, 5.04 or 5.05 which are
paid with, or reimbursed by, Insurance Proceeds, settlement recoveries or other
amounts actually recovered, by or on behalf of an Indemnifying Party, in respect
of the related Indemnifiable Loss, shall not count toward the limit on each
party's Shared Liabilities set forth in the second proviso of Sections 5.01,
5.02, 5.03, 5.04 or 5.05, as applicable.
SECTION 5.07 Procedures for Indemnification of Third Party
Claims.
(a) If a claim or demand is made against an
Indemnitee by any person who is not a party, or an Affiliate of a party, to this
Agreement or any of the Ancillary Agreements (a "Third Party Claim") as to which
such Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 10 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent that the
defense or conduct of such Third Party Claim by the Indemnifying Party shall
have been actually and materially prejudiced as a result of such failure (except
that the Indemnifying Party shall not be liable for any expenses incurred during
the period in which the Indemnitee failed to give such notice); provided
further, however, that in no event shall such failure to notify the Indemnifying
Party (i) constitute prejudice suffered by the Indemnifying Party if it has
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otherwise received notice of the Third Party Claim or (ii) relieve it from any
liability or obligation that it may otherwise have to such Indemnitee.
Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly
(and in any event within 10 business days) after the Indemnitee's receipt
thereof, copies of all notices and documents (including court papers) received
by the Indemnitee relating to the Third Party Claim.
(b) (i) If a Third Party Claim is made against an
Indemnitee, the Indemnifying Party shall be entitled to participate in the
defense thereof and, if it so chooses and acknowledges in writing its obligation
to indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party, provided that such counsel is not reasonably
objected to by the Indemnitee, and, thereafter, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
elects to assume the defense of a Third Party Claim pursuant to this subsection
(b)(i), the Indemnitee shall have the right to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party, it being understood that the Indemnifying
Party shall have full control of such defense, and the Indemnifying Party shall
be liable for the reasonable fees and expenses of counsel employed by the
Indemnitee for any period during which the Indemnifying Party has failed to
assume the defense thereof.
(ii) Notwithstanding subsection (b)(i) of this
Section 5.07, if the Indemnitee reasonably believes that a Third Party Claim
could lead to a material adverse effect on its business, it shall be entitled to
retain control of (and the related Indemnifying Party shall not be entitled to
assume), or to reassert control over, the defense of the claim and shall be
entitled to be reimbursed for its reasonable out-of-pocket expenses attributable
to such defense. If the Indemnitee elects to retain control of, or to reassert
control over, the defense of a Third Party Claim pursuant to this subsection
(b)(ii), the Indemnifying Party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnitee, it being understood that the Indemnitee
shall have full control of such defense.
(c) If the Indemnifying Party elects to assume the
defense of any Third Party Claim pursuant to subsection (b)(i) of this Section
5.07, all of the Indemnitees shall cooperate with the Indemnifying Party in the
defense or prosecution thereof. If the Indemnitee elects to retain control of,
or to reassert control over, the defense of any Third Party Claim pursuant to
subsection (b)(ii) of this Section 5.07, the Indemnifying Party shall cooperate
with the Indemnitee in the defense or prosecution thereof. Such cooperation
shall include the retention and, upon the Indemnitee's or Indemnifying Party's
request, as applicable, the provision to such party of records and information
which are reasonably relevant to such Third Party Claim and making employees
available on a mutually convenient basis to provide additional information
regarding any material provided hereunder.
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(d) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Third Party Claim seeks
an order, injunction or other equitable relief or relief for other than money
damages against the Indemnitee which the Indemnitee reasonably determines in
good faith, after conferring with its counsel, cannot be separated from any
related claim for money damages. If such equitable relief or other relief
portion of the Third Party Claim can be so separated from that for money
damages, the Indemnifying Party shall be entitled to assume the defense of the
portion relating to money damages.
(e) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Indemnitee reasonably
determines in good faith, after conferring with its counsel, that the Indemnitee
has available to it one or more defenses or counterclaims that are inconsistent
with one or more of those that may be available to the Indemnifying Party in
respect of such Third Party Claim.
(f) Whether or not the Indemnifying Party shall
have assumed the defense of a Third Party Claim, in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Indemnifying Party's prior written consent (which
consent shall not be unreasonably withheld or delayed); provided, however, that
the Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases in writing the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such settlement,
compromise or discharge would not otherwise adversely affect the Indemnifying
Party. If the Indemnifying Party shall have assumed the defense of a Third Party
Claim (and the Indemnitee shall not have reasserted control over the defense of
such claim pursuant to Section 5.07(b)(ii)), the Indemnitee shall agree to any
settlement, compromise or discharge of a Third Party Claim that the Indemnifying
Party may recommend and that by its terms does not obligate the Indemnitee to
pay any of the liability in connection with such Third Party Claim, releases the
Indemnitee completely and unconditionally in connection with such Third Party
Claim and does not provide for injunctive or other nonmonetary relief affecting
the Indemnitee.
SECTION 5.08 Indemnification Payments. Indemnification
required by this Article V shall be made by prompt periodic payments of the
amount thereof during the course of the investigation, preparation or defense,
as and when bills are received or loss, liability, claim, damage, cost or
expense is incurred.
SECTION 5.09 Defaults. In the event that any obligation of any
Indemnifying Party to indemnify an Indemnitee as required by Sections 5.02,
5.03, 5.04 and
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5.05 proves to be uncollectible by the Indemnitee despite reasonable collection
efforts (a "Defaulted Payment Obligation"), such Defaulted Payment Obligation
shall be treated as a Shared Liability and shall be shared by the Company and
the Distributed Companies as provided in clause (b) of Sections 5.02, 5.03, 5.04
and 5.05; provided, however, that for purposes of calculating each
non-defaulting party's Pro Rata Share of such Shared Liability, "Pro Rata Share"
for each non-defaulting party shall be calculated as the fraction (a) the
numerator of which is such party's Pro Rata Share and (b) the denominator of
which is the sum of each non-defaulting party's Pro Rata Share. Defaulted
Payment Obligations shall count toward the limit on each party's Shared
Liabilities set forth in the second proviso to Sections 5.02, 5.03, 5.04 and
5.05, as applicable.
SECTION 5.10 Tax Adjustments. The amount of any Indemnifiable
Loss shall be (i) increased by the amount of any net Tax cost actually incurred
by the Indemnitee arising from any payments required by this Article V (other
than this Section 5.10) and received from the Indemnifying Party, together with
such additional amounts as are necessary so that the aggregate payments received
from the Indemnifying Party on account of such Indemnifiable Loss, net of any
such net Tax cost and any net Tax cost actually incurred by the Indemnitee as a
result of the receipt or accrual of such additional amounts, is equal to the
amount of such Indemnifiable Loss; and (ii) reduced by the amount of any net Tax
benefit actually realized by the Indemnitee arising from the incurrence or
payment of any such Indemnifiable Loss; provided however, that in the event such
net Tax benefit is subsequently reduced as a result of the carryback of any
other Tax benefit, or disallowed, the Indemnifying party shall promptly pay the
Indemnitee the amount of such reduction or disallowance. For purposes of this
Section 5.10, a net Tax benefit shall be deemed to be "actually realized" only
to the extent of the excess of (i) the aggregate amount of Taxes that would have
been shown as due and payable on the U.S. federal, state and local income Tax
returns of the Indemnitee in the taxable period in which such net Tax benefit is
actually realized if such Indemnifiable Loss had not been incurred, and no
payment had been made in respect of such Indemnifiable Loss by the Indemnifying
Party over (ii) the aggregate amount of Taxes actually shown as due and payable
on such Tax returns.
SECTION 5.11 MCI Agreement. Notwithstanding Sections 5.01,
5.02, 5.03, 5.04 and 5.05, each of the parties hereto agrees to indemnify and
hold the other parties hereto harmless for any Liability under the MCI Agreement
attributable to the failure of such party to meet the required targets under the
MCI Agreement set forth on Schedule 5.11.
SECTION 5.12 Survival of Indemnities. The obligations of the
parties under this Article V shall survive the sale or other transfer by any of
them of any Assets or businesses or the assignment by any of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related to
such Assets, businesses or Liabilities.
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ARTICLE VI
COVENANTS
SECTION 6.01 Provision of Corporate Records. Prior to or as
promptly as practicable after the Distribution Time, the Company shall deliver
to each Distributed Company copies of, or, if in the possession of such
Distributed Company or its Subsidiaries, such Distributed Company shall retain,
all corporate books and records and the relevant portions (or copies thereof) of
all corporate books and records relating directly and primarily to such
Distributed Company's Assets, such Distributed Company's Business, or such
Distributed Company's Liabilities, including, in each case, all agreements,
litigation files and government filings, whether or not active. From and after
the Distribution Time, all such books, records and other items or such copies
thereof shall be the property of such Distributed Company; provided however,
that nothing in this Section 6.01 shall preclude the Company from retaining
duplicates of all such corporate records that are delivered to a Distributed
Company.
SECTION 6.02 Access to Information. From and after the
Distribution Time each party hereto shall afford to each other party and their
respective authorized accountants, counsel and other designated representatives
reasonable access and duplicating rights (at such other party's expense) during
normal business hours and upon reasonable advance notice, subject to the
confidentiality provisions hereof and any additional appropriate restrictions
for classified, privileged or confidential information, to all Information
within the possession or control of such party or to which it has access
relating to the business, Assets or Liabilities of such other party as they
existed prior to the Distribution Time or relating to or arising in connection
with the relationship between the Retained Business, on the one hand, and the
Distributed Companies' Businesses, on the other hand, on or prior to the
Distribution Time, insofar as such access is reasonably required for a
reasonable purpose. Without limiting the foregoing, Information may be requested
under this Section 6.02 for audit, accounting, claims, litigation and Tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
SECTION 6.03 Retention of Records. Except as provided in this
Agreement or any of the Ancillary Agreements or as otherwise agreed in writing,
if any Information relating to the business, Assets or Liabilities of a party
hereto, as they existed prior to the Distribution Time or as they are
transferred, assumed or imposed pursuant to this Agreement, is retained by one
of the other parties hereto, the party retaining such Information shall, and
shall cause its Subsidiaries to, retain all such Information in such party's
possession or under its control until such Information is at least ten years old
except that if, prior to the expiration of such period, the party retaining such
information wishes to destroy or dispose of any such Information that is at
least three years old, prior to destroying or disposing of any of such
Information, (a) such party shall provide no less than 30 days' prior written
notice to the other party, specifying the Information proposed to be destroyed
or disposed of and (b) if, prior to the scheduled date for such destruction or
disposal, the other party requests in writing
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that any of the Information proposed to be destroyed or disposed of be delivered
to such other party, the party proposing to dispose of or destroy such
Information shall arrange for the delivery of the requested Information to a
location specified by, and at the expense of, the requesting party.
SECTION 6.04 Witness Services. From and after the Distribution
Time, each of the parties hereto shall use commercially reasonable efforts to
make available to each other party hereto, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses to
the extent that (i) such persons may reasonably be required in connection with
the prosecution, investigation or defense of any Action or threatened Action in
which the requesting party may from time to time be involved and (ii) there is
no conflict in the Action or threatened Action between the requesting party and
the other party.
SECTION 6.05 Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing books and records,
access to Information or witness services to the other party under this Article
VI shall be entitled to receive from the recipient, upon the presentation of
invoices therefor, payments for supplies, disbursements and other out-of-pocket
expenses and direct and indirect costs of employees, as may be reasonably
incurred in providing such books and records, access to Information or witness
services.
SECTION 6.06 Confidentiality.
(a) Each party hereto shall keep, and shall cause
its Representatives to keep, the other party's Information strictly confidential
and will disclose such Information only to such of its Representatives who need
to know such Information and who agree to be bound by this Section 6.06 and not
to disclose such Information to any other Person or entity. Without the prior
written consent of the other party, each party and its Representatives shall not
disclose the other party's Information to any Person or entity except as may be
required by law or judicial process or in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements and, in each
case, in accordance with this Section 6.06. Each party agrees to be responsible
for any breach of this confidentiality provision by any of its Representatives.
(b) In the event that any party hereto or any of
its Representatives becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process),
or determines that it is necessary in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements, to disclose all
or any part of the other party's Information, the receiving party or its
Representatives shall promptly notify the other party of such compulsion or
determination in writing, and consult with and assist the other party in seeking
a protective order or request for other appropriate remedy. In the event that
such protective order or other
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remedy is not obtained or the other party waives compliance with the terms
hereof, such receiving party or its Representatives, as the case may be, shall
disclose only that portion of the Information which, in the opinion of the
receiving party's outside counsel, is legally required to be disclosed, and
shall exercise all commercially reasonable efforts to assure that confidential
treatment will be accorded such Information by the Persons or entities receiving
such Information. The providing party shall be given an opportunity to review
the Information prior to disclosure.
SECTION 6.07 Further Assurances. In case at any time after the
Distribution Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers at such time of each party to this Agreement shall promptly take
all such action. Without limiting the foregoing, the Company and the Distributed
Companies or their respective Subsidiaries, as appropriate, shall use
commercially reasonable efforts to obtain all consents and approvals, to enter
into all agreements and to make all filings and applications that may be
required or are reasonably necessary for the consummation of the Transactions,
including, without limitation, all applicable governmental and regulatory
filings.
ARTICLE VII
INSURANCE
SECTION 7.01 General. Except as provided in this Article, the
Company shall keep in effect all policies under its Insurance Program as of the
date hereof insuring the Distributed Companies' Assets and the operations of the
Distributed Companies' Businesses until 12:00 midnight (Eastern time) on the
Distribution Date, except to the extent that a Distributed Company shall have
earlier obtained appropriate coverage and notified the Company in writing to
that effect. Except for the Transferred Policies (as defined below), beginning
at 12:01 a.m. (Eastern time) on the day following the Distribution Date, the
Distributed Companies will cease to be insured under all policies in the
Company's Insurance Program. Each Distributed Company understands that the
effect of these actions will be to eliminate insurance coverage under the
Insurance Program for future occurrences under such Policies, and in some cases
(as set forth in Section 7.03(b)), for prior occurrences that might have given
or may give rise to liabilities for which such Distributed Company and its
Affiliates would be responsible.
SECTION 7.02 Distributed Companies' Insurance.
(a) Each Distributed Company will purchase and pay
for the types and amounts of insurance coverage that it reasonably deems
appropriate and sufficient for the period beginning on and continuing after the
Distribution Date, including Broad Form Contractual Liability insurance coverage
as to such Distributed Company's indemnity obligations set forth in this
Agreement.
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(b) The Company shall transfer, on or prior to the
Distribution Date, the Policies in the Company's Insurance Program listed on
Schedule 7.02(b) (the "Transferred Policies") to certain of the Distributed
Companies designated as Transferees on such schedule.
(c) Each Distributed Company agrees that the
Company has made no warranty, expressed or implied, and no representation that
the insurance described in Sections 7.01, 7.02(a) or 7.02(b) above is or will be
adequate or sufficient to meet such Distributed Company's current or future
insurance needs.
SECTION 7.03 Access to the Company's Insurance Program and to
the Transferred Policies.
(a) Except as provided in Section 7.03(b), each
Distributed Company and its Affiliates shall have access through the Company
after the Distribution Date to such coverages and limits as may be available
under the Company's Insurance Program for Covered Claims occurring prior to the
Distribution Date. Such access shall be subject to available coverage and to all
of the terms, conditions, exclusions, retentions and limits of such Policies.
(b) The Distributed Companies and their Affiliates'
access to the Company's Insurance Program as provided in Section 7.03(a) hereof
shall be limited as to Policies listed on Schedule 7.03(b) in that the
Distributed Companies shall have no access to any insurance provided by such
Policies after the Distribution Date other than for Covered Claims the Company
has reported to its carriers or underwriters as of the Distribution Date.
(c) The Company and its Affiliates shall have
access through the relevant Distributed Company after the Distribution Date to
coverages and limits under the Transferred Policies to the extent specified in
Schedule 7.02(b). Such access shall be subject to available coverage and to all
the terms, conditions, exclusions, retentions and limits on such Transferred
Policies.
SECTION 7.04 Insurance Recoveries.
(a) The Company shall use reasonable efforts to
obtain Recoveries for the Distributed Companies and their Affiliates from the
Company's insurance carriers for coverage available under Section 7.03 and shall
keep the Distributed Companies reasonably informed of the Company's efforts
under this Section 7.04. The Company will reimburse the Distributed Companies
for any Recovery obtained by it on behalf of such Distributed Company or
Affiliate thereof pursuant to such claims; provided, however, that Special
Insurance Recoveries shall be shared between the Company and the relevant
Distributed Company in the same manner as any net recoveries of an Acquisition
Claim of such Distributed Company (payable at that time) would be shared between
the Company and such
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Distributed Company pursuant to Section 2.09, including that, if the net
recoveries from an Acquisition Claim of such Distributed Company are not
required to be shared in any manner with the Company pursuant to Section 2.09,
any Special Insurance Recoveries related to such Distributed Company should be
entirely payable to it. Any Distributed Company receiving a Recovery in its
entirety under this Section 7.04 shall pay all costs incurred by the Company
after the Distribution Date in making the related claim pursuant to this Section
7.04, including the salaries of the Company's officers and employees based on
the portion of time spent on such claims ("Recovery Costs"), and such Recovery
Costs incurred in pursuing the claim may be deducted from the Recovery. As to
any Recovery Costs incurred in relation to Special Insurance Recoveries, the
party or parties receiving such Special Insurance Recoveries, or a portion
thereof, shall bear the related Recovery Costs in proportion to the share of the
Special Insurance Recoveries such party receives. Each Distributed Company
agrees to make available to the Company such of its employees as the Company may
reasonably request as witnesses or deponents in connection with the Company's
management of claims, at such Distributed Company's sole cost and expense
notwithstanding Sections 6.04 and 6.05. Each Distributed Company agrees that, if
the Company has paid a Recovery to it for such a claim and such Distributed
Company receives proceeds from any other person with respect to such claim, it
will pay over to the Company the amount of proceeds it has received.
(b) In relation to the Transferred Policies, the
relevant Distributed Company shall use reasonable efforts to obtain recoveries
for the Company and its Affiliates from the Distributed Company's insurance
carrier for coverage available under the Transferred Policies and shall keep the
Company reasonably informed of such Distributed Company's efforts under this
Section 7.04. The Distributed Company will reimburse the Company for any
Recovery obtained by it on behalf of the Company or an Affiliate thereof
pursuant to such claims. The Company shall pay all costs incurred by the
Distributed Company after the Distribution Date in making any claim pursuant to
this Section 7.04, including the salaries of the Distributed Company's officers
and employees based on the portion of time spent on such claims, and such costs
incurred in pursuing a claim may be deducted from any Recovery for such claim.
The Company agrees to make available to the Distributed Company such of its
employees as the Distributed Company may reasonably request as witnesses or
deponents in connection with the Distributed Company's management of claims, at
the Company's sole cost and expense notwithstanding Sections 6.04 and 6.05. The
Company agrees that, if the Distributed Company has paid a Recovery to it for
such a claim and the Company receives proceeds from any other person with
respect to such claim, it will pay over to the Distributed Company the amount of
proceeds it has received.
SECTION 7.05 Insurance Representations. Each Distributed
Company hereby represents and warrants to the Company that no representation by
such Distributed Company (or any of its officers, directors or Subsidiaries)
relating to information underlying any Insurance Policy of the Company contains
an untrue statement of material fact or omits
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to state a material fact necessary to make a statement contained therein, in
light of the circumstances under which they were made, not misleading with
respect to such information.
SECTION 7.06 Assignment. Except to the extent that the
Transferred Policies are considered to be assigned by the Company to the
relevant Distributed Company, nothing in this Agreement shall be deemed to
constitute (or to reflect) an assignment of any insurance policy or insurance
benefit.
SECTION 7.07 Deductibles and Maximums.
(a) To the extent that there are deductible amounts
or retentions applicable to potential insurance recoveries for claims of the
Company or a Distributed Company that are not per-occurrence deductibles, the
Company or the relevant Distributed Company (as to any deductibles in relation
to the Transferred Policies) shall allocate such deductibles or retentions in
such manner as the Company or a Distributed Company, as applicable, determines,
in good faith, is fair and reasonable. For purposes of this Section 7.06, the
parties agree that it is fair and reasonable to allocate the deductibles, if
any, first to any claims based on recklessness, bad faith or wilful misconduct.
(b) To the extent that the Recoveries for any
particular group of claims of the Company or a Distributed Company may be
subject to overall policy limits, the Company or the relevant Distributed
Company (as to any policy maximums in relation to the Transferred Policies)
shall allocate Recoveries in such manner as the Company or Distributed Company,
as applicable, determines, in good faith, is fair and reasonable.
SECTION 7.08 Conflicts Between Article VII and the Company's
Insurance Program. Any provision of this Agreement that conflicts with any term
or provision of the Company's applicable insurance policies shall be void.
ARTICLE VIII
CONDITIONS
SECTION 8.01 Conditions to Obligations of the Company. The
obligation of the Company to consummate the Distributions hereunder shall be
subject to the satisfaction or waiver of each of the following conditions:
(a) All of the transactions contemplated by Article
II hereof to occur prior to the Distribution Time shall have been consummated.
(b) The Distribution Shares to be issued in the
Distributions shall have been approved for trading on the NASDAQ, subject only
to official notice of issuance.
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(c) All filings required to be made prior to the
Distribution Time with, and all consents, approvals and authorizations required
to be obtained prior to the Distribution Time from, any government or any court,
arbitral tribunal, administrative agency or commission or other regulatory
authority, agency or commission, governmental or otherwise, in connection with
the consummation of the Preliminary Transactions, the Distributions and any
other transaction contemplated hereby shall have been made or obtained, except
where the failure to make or obtain the same would not, individually or in the
aggregate, have a material adverse effect on the business, properties, results
of operations or financial condition of the Company, the Distributed Companies
or any of their respective Subsidiaries, or on the ability of any thereof to
consummate the transactions contemplated hereby, or to perform its obligations
under this Agreement or any of the Ancillary Agreements to which it is or will
be a party.
(d) Each of the Ancillary Agreements shall have
been executed and delivered by each of the parties thereto and shall be in full
force and effect in accordance with its terms.
(e) Each of the registration statements on Forms
S-1 under the Securities Act filed with the SEC by the Distributed Companies in
connection with the Distributions shall have become effective under the Exchange
Act, no stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated by the SEC; and
the Information Statements shall have been or shall be simultaneously mailed to
holders of Distribution Shares in accordance with the rules, regulations and
policies of the SEC.
(f) No statute, rule or regulation or temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
shall be in effect that prohibits consummation of the Preliminary Transactions
or the Distributions.
(g) All conditions to the Tender Offer shall have
been satisfied or waived by the Company, and the Tender Offer shall have been
consummated prior to or on the Distribution Date.
(h) The Company and each of the Distributed
Companies shall have received an opinion of Wilmer, Cutler & Pickering, counsel
to the Company, that for U.S. federal income tax purposes the Distributions will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e) of the Code. In rendering such opinion, such
counsel shall be entitled to rely on certain assumptions and representations
provided by the Company, the Distributed Companies and CDR-PC and certain other
information, data, documentation and other materials that Wilmer, Cutler &
Pickering deems necessary.
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ARTICLE IX
DISPUTE RESOLUTION
SECTION 9.01 Mediation and Binding Arbitration. Except as may
be expressly provided in any of the Ancillary Agreements or in any other
agreement between the parties entered into pursuant hereto, if a dispute,
controversy or claim (collectively, a "Dispute") between the Company and any of
the Distributed Companies or any of their respective Affiliates arises out of or
relates to this Agreement, any Ancillary Agreement, or any other agreement
entered into pursuant hereto or thereto, including, without limitation, the
breach, termination, enforceability, interpretation or validity of any such
agreement or any matter involving an Indemnifiable Loss, the Company and such
Distributed Company agree to use the following procedures, in lieu of either
party pursuing other available remedies and as the sole and exclusive remedy
(except as provided in Section 10.11 below), to resolve the Dispute.
SECTION 9.02 Initiation of Negotiation. A party seeking to
initiate the procedures shall provide written notice to the other party,
describing briefly the nature of the Dispute. A meeting shall be held between
the parties within 10 days of the receipt of such notice, attended by executives
who have decision-making authority regarding the Dispute, to attempt in good
faith to negotiate a resolution of the Dispute.
SECTION 9.03 Submission to Mediation. If, within 30 days after
such meeting, the parties have not succeeded in negotiating a resolution of the
Dispute, the parties agree to submit the Dispute at the earliest possible date
to mediation conducted in accordance with the Commercial Mediation Rules of the
AAA, and to bear equally the costs of the mediation. The parties agree to
participate in good faith in the mediation and negotiations related thereto for
a period of 30 days or such longer period as they may mutually agree following
the initial mediation session (the "Mediation Period").
SECTION 9.04 Selection of Mediator. The parties will jointly
appoint a mutually acceptable and neutral mediator. If they are unable to agree
upon such appointment within 20 days from the conclusion of the negotiation
period, a mediator shall be appointed by the AAA pursuant to the Commercial
Mediation Rules of the AAA.
SECTION 9.05 Treatment of Negotiation and Mediation. All
negotiations and mediations pursuant to this Article shall be treated as
compromise and settlement negotiations for purposes of Rule 408 of the Federal
Rules of Evidence and comparable state rules.
SECTION 9.06 Arbitration.
(a) Notwithstanding the foregoing provisions of
this Article IX, at the end of the Mediation Period any party may submit the
matter to binding arbitration
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conducted in accordance with the Commercial Arbitration Rules of the AAA, by one
or three arbitrators(s) selected in accordance with the provisions of Section
9.06(b). Any arbitration proceeding hereunder shall be held in the city of New
York, New York, and shall be governed by the Federal Arbitration Act, 9 U.S.C.
ss.ss. 1-16, and judgment upon the award rendered by the arbitrator(s) may be
entered by any court having jurisdiction thereof or having jurisdiction over the
relevant party or its assets. Any arbitral award hereunder shall be in writing,
state the reasons for the award and be final and binding on the parties.
(b) The parties shall seek to appoint jointly a
mutually acceptable sole arbitrator. If the parties cannot agree on an
acceptable sole arbitrator within 10 days after the commencement of the
arbitration, the Dispute shall be heard by a panel of three arbitrators, one
appointed by each of the parties within 20 days after commencement of the
arbitration, and the third arbitrator selected by the other two arbitrators
within 15 days of appointment of the first two arbitrators. If either side fails
to appoint an arbitrator within 20 days after the commencement of the
arbitration, then that arbitrator shall be appointed by the AAA, which shall
promptly notify the parties of such appointment. If the first two arbitrators
appointed fail to appoint a third arbitrator within the 15-day period prescribed
above, then the AAA shall appoint the third arbitrator and shall promptly notify
the parties of the appointment. References herein to the "Arbitrator" shall mean
the sole arbitrator or the three-arbitrator panel, as the case may be.
(c) In the event the Dispute involves (i) valuation
of a liability under (A) this Agreement, (B) any Ancillary Agreement or (C) any
other agreement entered into by the parties pursuant to this Agreement or any
Ancillary Agreement, (ii) an amount in controversy in a Dispute or (iii) the
amount of damages following a determination of liability, the arbitration shall
proceed in the following manner: Each party shall submit to the Arbitrator and
exchange with each other, on a schedule to be determined by the Arbitrator, a
proposed valuation, amount or damages, as the case may be, together with a
statement, including all supporting documents or other evidence upon which it
relies, setting forth such party's explanation as to why its proposal is
reasonable and appropriate. The Arbitrator, within 15 days of receiving such
proposals and supporting documents, shall choose between the two proposals and
shall be limited to awarding only one or the other of the two proposals
submitted.
(d) Cost of Arbitration. The costs of arbitration
shall be apportioned between the parties to the arbitration as determined by the
Arbitrator in such manner as the Arbitrator deems reasonable taking into account
the circumstances of the case, the conduct of the parties during the proceeding
and the result of the arbitration.
(e) Arbitration Period. Any arbitration proceeding
shall be concluded in a maximum of six (6) months from the commencement of the
arbitration. The parties involved in the proceeding may agree in writing to
extend the arbitration period if necessary to appropriately resolve the Dispute.
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SECTION 9.07 Confidentiality. All negotiation, mediation and
arbitration proceedings under this Article shall be treated as confidential
Information in accordance with the provisions of Section 6.06 hereof. Any
mediator or the Arbitrator shall be bound by an agreement containing
confidentiality provisions at least as restrictive as those contained in Section
6.06 hereof.
SECTION 9.08 Notices. All notices by one party to the other
party in connection with the dispute resolution provisions set forth in this
Article shall be in accordance with the provisions of Section 10.05 hereof.
SECTION 9.09 Consolidation. The Arbitrator may consolidate an
arbitration under this Agreement with any arbitration arising under or relating
to the Ancillary Agreements or any other agreement between the parties entered
into pursuant hereto, as the case may be, if the subject of the Disputes
thereunder arise out of or relate essentially to the same set of facts or
transactions. Such consolidated arbitration shall be determined by the
arbitrator appointed for the arbitration proceeding that was commenced first in
time.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Modification, Amendment or Termination. This
Agreement may not be modified, amended or terminated except by an agreement in
writing signed by each of the parties hereto and approved by the board of
directors of each of the parties hereto; provided, however, that any
modification or amendment to this Agreement that is adverse to the rights or
interests of CDR-PC, as determined by those directors of the Company that are
not employed by either the Company or CD&R, in their good faith reasonable
judgment, and any termination of this Agreement shall not be effective unless
such modification, amendment or termination was approved by an affirmative vote
of not less than three-fourths of the members of the board of directors of the
Company; provided further, however, that the preceding proviso shall apply only
for so long as CDR-PC has the right to designate at least two nominees to the
board of directors of the Company pursuant to Section 4.01(b) of the Investment
Agreement; provided further, however, that Article V shall not be terminated or
amended after the Distribution Time in respect of the third party beneficiaries
thereto without the consent of such persons.
SECTION 10.02 Waiver; Remedies. The conditions to the
Company's obligation to consummate the Distributions are for the sole benefit of
the Company and may be waived by the Company in whole or in part in its sole
discretion. No delay on the part of the Company or the Distributed Companies in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either the Company or the
Distributed Companies of any right, power or privilege hereunder operate as a
waiver of any other right, power or privilege hereunder, nor will any single or
partial
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exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the parties
may otherwise have at law or in equity.
SECTION 10.03 Counterparts. For the convenience of the
parties, this Agreement may be executed in any number of separate counterparts,
each such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
SECTION 10.04 Notices. Any notice, request, instruction or
other communication to be given hereunder by any party to another shall be in
writing and shall be deemed to have been duly given (i) on the date of delivery
if delivered personally, or by telefacsimile, upon confirmation of receipt, (ii)
on the first business day following the date of dispatch if delivered by Federal
Express or other nationally reputable next-day courier service with proof of
delivery, or (iii) on the fifth business day following the date of mailing if
delivered by registered or certified mail, return receipt requested, postage
prepaid. All notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice.
(a) If to Printco:
Workflow Management, Inc.
[contact information]
(b) If to Schoolco:
School Specialty, Inc.
[contact information]
(c) If to Techco:
Aztec Consulting, Inc.
[contact information]
(d) If to Travelco:
Navigant International, Inc.
[contact information]
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(e) If to the Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W., Suite 600 East
Washington, D.C. 20007-5490
Attention: Mark D. Director, Esq.
Kathleen Delaney, Esq.
Telefacsimile: (202) 339-6733
with copies to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
18th Floor
New York, NY 10152
Attention: Brian D. Finn
Telefacsimile: (212) 407-5200
SECTION 10.05 Entire Agreement. This Agreement and the
Ancillary Agreements (including Exhibits, Annexes and Schedules hereto and
thereto) constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties, both written and
oral, between the parties, with respect to the subject matter hereof and
thereof.
SECTION 10.06 Certain Obligations. Whenever any Ancillary
Agreement requires any of the Subsidiaries of any party to such Ancillary
Agreement to take any action, this Agreement will be deemed to include an
undertaking on the part of such party to cause such Subsidiary to take such
action.
SECTION 10.07 Assignment. This Agreement shall be assignable
in whole in connection with a merger or consolidation or the sale or transfer of
all or substantially all the Assets or stock of a party hereto so long as the
resulting, surviving or transferee entity assumes all the obligations of the
relevant party hereto by operation of law or pursuant to an agreement in form
and substance reasonably satisfactory to the other party. Otherwise, this
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Agreement
without such consent shall be void.
SECTION 10.08 Captions. The Article, Section and paragraph
captions herein are for convenience of reference only, do not constitute part of
this Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
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SECTION 10.09 Severability. If any provision of this Agreement
or any of the Ancillary Agreements or the application thereof to any person or
circumstance is determined to be invalid, void or unenforceable by a court of
competent jurisdiction or by one or more arbitrator(s), the remaining provisions
thereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated thereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith in
an effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
SECTION 10.10 Equitable Relief. No provision of this Agreement
shall preclude any party from seeking equitable relief to prevent any immediate,
irreparable harm to its interests, including multiple breaches of this Agreement
or the Ancillary Agreements by another party. Otherwise, the procedures set
forth in Article IX regarding dispute resolution are exclusive and shall be
fully exhausted prior to the initiation of litigation. Any party to this
Agreement may also seek specific enforcement of the Arbitrator's decision under
Article IX; the opposing party's only defense to such a request for specific
performance shall be fraud by or on the Arbitrator.
SECTION 10.11 Third Party Beneficiaries. Except as provided in
Article V relating to Indemnitees and Sections 10.01 and 10.02 relating to
modification, amendment and termination, this Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates,
directors and officers, and should not be deemed to confer upon third parties
any remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
SECTION 10.12 Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses incurred after the Distribution Time.
SECTION 10.13 Exhibits and Schedules. The Exhibits and
Schedules to this Agreement shall be construed with and as an integral part of
this Agreement to the same extent as if the same had been set forth verbatim
herein.
SECTION 10.14 Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such state,
without regard to the conflicts of law principles of such state.
SECTION 10.15 Consent to Jurisdiction. Each of the parties
irrevocably submits to the exclusive jurisdiction of the state and federal
courts of Delaware for the purposes of any suit, action or other proceeding
arising out of this Agreement or any
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transaction contemplated hereby. Each of the parties agree that service of any
process, summons, notice or document by U.S. registered mail to such party's
respective address set forth above shall be effective service of process for any
action, suit or proceeding in Delaware with respect to any matters to which it
has submitted to jurisdiction in this Section 10.17. Each of the parties
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the state and federal courts of Delaware, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum. This consent to jurisdiction
provision does not, in any way, limit the force and effect of the requirements
set forth in Article IX regarding resolution of Disputes.
SECTION 10.16 Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 10.17 Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Time.
SECTION 10.18 Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement and
Plan of Distribution to be duly executed as of the day and year first above
written.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
44
<PAGE>
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
45
<PAGE>
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of , 1998, among
Workflow Management, Inc., a Delaware corporation ("Workflow Management"),
School Specialty, Inc., a Delaware corporation ("School Specialty"), Aztec
Technology Partners, Inc., a Delaware corporation ("Aztec") and Navigant
International, Inc., a Delaware corporation ("Navigant"). Workflow Graphics,
School Specialty, Aztec and Navigant are hereinafter jointly referred to as the
"Companies."
WITNESSETH
WHEREAS, U.S. Office Products Company, a Delaware Corporation ("USOP") and
the Companies entered into an agreement dated as of , 1998 (the "Tax
Allocation Agreement") to allocate the Tax burdens and benefits of transactions
which occurred on or prior to the Distribution Date, and to provide for certain
other tax matters, including the assignment of responsibility for the
preparation and filing of Tax returns and the prosecution and defense of any Tax
controversies; and
WHEREAS, pursuant to Section 10 of the Tax Allocation Agreement, the
Companies are jointly and severally liable for and will jointly and severally
indemnify, defend and hold USOP harmless from and against any Losses with
respect to Taxes that result from or arise in connection with an Adverse Tax Act
of any of the Companies or any of their respective Subsidiaries.
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the Companies (each on its own behalf and on behalf of each of its Subsidiaries)
hereby agree as follows:
SECTION 1
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meaning:
"Adverse Company" shall mean a Company that has or whose Subsidiary has
committed an Adverse Tax Act.
"Adverse Tax Act" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Agreement" shall mean this Tax Indemnification Agreement.
"Aztec" shall have the meaning assigned to such term in the preamble to this
Agreement.
"Companies" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Losses" shall have the meaning assigned to such term in the Tax Allocation
Agreement.
"Market Capitalization" shall have the meaning assigned to such term in the
Tax Allocation Agreement.
"Navigant" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Non-Adverse Company" shall mean a Company that has not and whose
Subsidiaries have not committed an Adverse Tax Act.
"School Specialty" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Subsidiary" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax" or "Taxes" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax Allocation Agreement" shall have the meaning assigned to such term in
the recitals to this Agreement.
"USOP" shall have the meaning assigned to such term in the recitals to this
Agreement.
1
<PAGE>
"Workflow Management" shall have the meaning assigned to such term in the
preamble to this Agreement.
SECTION 2
INDEMNIFICATION
(a) Workflow Management Indemnification. Workflow Management shall be liable
for and shall indemnify, defend and hold the Non-Adverse Companies harmless from
and against an amount equal to that which each of the Non-Adverse Companies pays
to USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of Workflow Management or its Subsidiaries.
(b) School Specialty Indemnification. School Specialty shall be liable for
and shall indemnify, defend and hold the Non-Adverse Companies harmless from and
against an amount equal to that which each of the Non-Adverse Companies pays to
USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of School Specialty or its Subsidiaries.
(c) Aztec Indemnification. Aztec shall be liable for and shall indemnify,
defend and hold the Non-Adverse Companies harmless from and against an amount
equal to that which each of the Non-Adverse Companies pays to USOP pursuant to
Section 10 of the Tax Allocation Agreement as a result of an Adverse Tax Act of
Aztec or its Subsidiaries.
(d) Navigant Indemnification. Navigant shall be liable for and shall
indemnify, defend and hold the Non-Adverse Companies harmless from and against
an amount equal to that which each of the Non-Adverse Companies pays to USOP
pursuant to Section 10 of the Tax Allocation Agreement as a result of an Adverse
Tax Act of Navigant or its Subsidiaries.
(e) Right of Contribution. With respect to any Adverse Tax Act, the
Non-Adverse Companies shall have rights and obligations of contribution among
themselves to the extent necessary to cause the payments by each Non-Adverse
Company to USOP pursuant to Section 10 of the Tax Allocation Agreement as of any
date, adjusted for payments received from the Adverse Company under Section 2(a)
through 2(d) hereof and for payments made to, or received from, any other
Non-Adverse Company under this Section 2(e), to be in proportion to the
Non-Adverse Companies' respective Market Capitalizations.
SECTION 3
DISPUTE RESOLUTION
Any dispute, controversy or claim between the Companies or any of their
respective Subsidiaries arising out of or relating to this Agreement shall be
resolved (and costs shall be apportioned) pursuant to the procedures set forth
in Article IX of the Distribution Agreement.
SECTION 4
CHOICE OF LAW; SUCCESSORS AND ASSIGNS
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Delaware applicable to contracts made and to be
performed entirely within such state, without regard to the conflicts of law
principles of such state.
The provisions of this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the Companies and their respective successors and
permitted assigns.
2
<PAGE>
SECTION 5
ENTIRE AGREEMENT AND MODIFICATIONS
This Agreement contains the entire agreement among the Companies with
respect to the subject matter hereof and supersedes all prior written Tax
Indemnification agreements, memoranda, negotiations and oral understandings, if
any, and may not be amended, supplemented or discharged except by performance or
by an instrument in writing signed by all of the Companies.
SECTION 6
COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the Companies have duly executed this Agreement as of
the date first above written.
<TABLE>
<S> <C>
WORKFLOW MANAGEMENT, INC.
By
Name:
Title:
Seal
Attest:
SCHOOL SPECIALTY, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
AZTEC TECHNOLOGY PARTNERS, INC.
By
Name:
Title:
Seal
Attest:
NAVIGANT INTERNATIONAL, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
4
<PAGE>
EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT
This EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT dated as
of ___________, 1998 (the "Benefits Agreement"), between U.S. OFFICE PRODUCTS
COMPANY, a Delaware corporation (the "Company"), WORKFLOW MANAGEMENT, INC., a
Delaware corporation and wholly owned subsidiary of the Company ("Printco"),
SCHOOL SPECIALTY, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS, INC., a Delaware
corporation and wholly owned subsidiary of the Company ("Techco"), and
NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly owned
subsidiary of the Company ("Travelco") pursuant to the agreement and plan of
distribution dated as of ____________, 1998 (the "Distribution Agreement")
among Company, Printco, Schoolco, Techco, and Travelco.
WHEREAS, the Board of Directors of the Company has determined that it
is appropriate and desirable to enter into the Benefits Agreement as an
Ancillary Agreement under the Distribution Agreement; and
WHEREAS, each of the Company, Printco, Schoolco, Techco, and Travelco
has determined that it is necessary and desirable to allocate and assign
responsibility for certain employee benefit liabilities in respect of the
activities of the businesses of such entities on and following the Distribution
Date.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company, Printco, Schoolco, Techco, and Travelco agree as
follows:
1. PURPOSE AND DEFINITIONS
a. Purpose. The purpose of this Benefits Agreement is to set
forth the agreement of the Company, Printco, Schoolco, Techco, and Travelco
regarding the allocation and assignment of the respective rights and obligations
of each before and after the Distributions with respect to their current and
former employees and with respect to benefits and compensation matters.
b. Definitions. In addition to the terms defined elsewhere in
the text or in the Distribution Agreement, as used in this Benefits Agreement,
the following terms have the following meanings:
"Distributed Company Employees" shall mean the Printco
Employees, Schoolco Employees, Techco Employees, and Travelco Employees,
collectively.
<PAGE>
"Employee" shall mean, as to the Company and each
Distributed Company, an individual who is employed (including an individual who
is not actively employed because of an approved disability, lay-off with right
of recall or an authorized leave of absence (or who is receiving salary
continuation severance payments)) by the Company or the specified Distributed
Company or any of their respective Subsidiaries (other than, for the Company,
any Distributed Company or its Subsidiaries) immediately before the
Distribution.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
"Former Employee" shall mean a former employee of the
Company or the specified Distributed Company or any of their respective
Subsidiaries (other than, for the Company, any Distributed Company or its
Subsidiaries) whose employment terminated before the Distribution.
"Individual" shall mean each Employee and Former Employee.
Solely for purposes of Section 3(b), "Individual" shall also include
unsuccessful applicants for employment.
"Stand-Alone Plan" shall mean each benefit or compensation
plan, program, policy, or arrangement currently or formerly maintained for the
exclusive benefit of all or some Individuals with respect to the Company or the
applicable Distributed Company.
2. EMPLOYEES. Effective as of the Distribution Date and unless
otherwise provided by the Distribution Agreement, each Company Employee, Printco
Employee, Schoolco Employee, Travelco Employee, and Techco Employee will remain
an employee of his or her respective employer. Nothing contained in this Section
2 confers on any such person any right to continued employment, whether before
or after the Distribution Date, nor does it detract from or otherwise amend any
employment agreement currently in force, except as specifically noted.
3. GENERAL PRINCIPLES. Except as otherwise provided in this Benefits
Agreement, as of the Distribution Date:
a. Each party will remain or become responsible for its
respective Stand-Alone Plans.
b. The Company, Printco, Schoolco, Techco, and Travelco each
will be allocated Liability for employment-related claims regardless of when
filed (including, but not limited to, harassment and discrimination) based upon
whether the claimant was at the time the claim arose, respectively, a Company
Individual, Printco Individual, Schoolco Individual, Techco Individual, or
Travelco Individual.
c. Except as specifically provided herein, as of and after the
Distribution Date, all Liabilities with respect to employee benefit plans,
programs, or arrangements relating to
2
<PAGE>
(i) Company Former Employees that presently are Company liabilities will be
retained by the Company, (ii) Printco Former Employees that presently are
Company or Printco liabilities will be retained or assumed by Printco, as
applicable, (iii) Schoolco Former Employees that presently are Company or
Schoolco liabilities will be retained or assumed by Schoolco, as applicable,
(iv) Techco Former Employees that presently are Company or Techco liabilities
will be retained or assumed by Techco, as applicable, and (v) Travelco Former
Employees that presently are Company or Travelco liabilities will be retained or
assumed by Travelco, as applicable.
d. Except to the extent recognition of past service credit
would result in a duplication of benefits, the Company, Printco, Schoolco,
Techco, and Travelco each will give past service credit under its applicable
benefit plans, programs, policies and arrangements to participants therein to
the extent their past service credit was recognized under the comparable benefit
plan, program, policy, or arrangement of the Company or its Subsidiaries in
which the Employee participated immediately before the Distribution Date.
e. No provision of this Benefits Agreement requires any of the
parties to continue any plan, program, policy, or arrangement for any period of
time after the Distributions.
f. Each party will amend its respective plans, programs,
policies, and arrangements (whether newly established, assumed, or retained) to
the extent necessary to reflect the provisions of this Benefits Agreement.
g. Any Company Employee, Printco Employee, Schoolco Employee,
Techco Employee, or Travelco Employee who continues in employment with the
Company, Printco, Schoolco, Techco, or Travelco or any related Subsidiaries
following the Distribution Date will not be deemed to have terminated employment
solely as a result of the Distribution for purposes of any benefit or
compensation plan, program, policy, or arrangement maintained by the Company,
Printco, Schoolco, Techco, or Travelco.
h. The Company will release any third party beneficiary rights
it may have to enforce employment agreements assumed or retained by the
Distributed Companies (other than with respect to the Company's "Information,"
as defined in those agreements).
4. 401(k) PLAN
a. The Company will retain sponsorship of the U.S. Office
Products 401(k) Retirement Plan (the "Company 401(k) Plan").
b. Effective as of or as soon as practicable after the
Distribution, the Distributed Companies will each establish new qualified 401(k)
plans covering each Distributed Company and all or substantially all of its
Subsidiaries in the United States. Distributed Company Employees will cease
participation in the Company 401(k) Plan effective as close in time before the
Distribution Date as is reasonably practicable. Distributed Company Employees
who have outstanding participant loans under the Company 401(k) Plan will be
permitted to
3
<PAGE>
continue making loan payments to the Company 401(k) Plan until such time as the
loans are transferred to the Distributed Company's 401(k) Plan.
c. Upon receipt by the Company and each of the Distributed
Companies of favorable determination letters from the Internal Revenue Service
to the effect that a newly established plan meets the requirements for
qualification under Section 401(a) of the Code (or as the parties otherwise
mutually agree), the Company will cause to be transferred to the trusts
established under the newly-established 401(k) plans, the respective account
balances (including any related loans and qualified domestic relations orders)
and related assets of that employer's Employees. Upon such transfer, Printco,
Schoolco, Techco, and Travelco will assume the related liabilities.
5. MEDICAL PLANS
a. Effective as of the Distribution Date, each of the
Distributed Companies will assume or retain sponsorship of their respective
Stand-Alone Plans that are medical (including dental) plans and arrangements and
will assume or retain responsibility for continuation health coverage under
ERISA Section 601 et seq. with respect to their respective Individuals.
b. To the extent permitted under any applicable indemnity,
health maintenance organization or stop-loss contracts, any newly established
health plans will waive waiting periods, pre-existing conditions to the extent
waived or satisfied under the applicable Stand-Alone Plan, and credit
deductible/copayments satisfied by Employees, if any, who are transferring among
the respective employers in connection with the Distributions. The Company will
use its best efforts to assist the Distributed Companies in their negotiations
with any third parties to accomplish the waiver of such waiting periods and
pre-existing conditions and the crediting of such deductibles and co-payments.
6. CAFETERIA PLAN
a. The Company will amend the U.S. Office Products Cafeteria
Compensation Plan (the "Company Cafeteria Plan") to provide for spinning off to
each Distributed Company the portions of the Cafeteria Plan's obligations and
credits that apply to that Distributed Company.
b. Effective as of the Distribution Date, each Distributed
Company will adopt a cafeteria plan substantially identical to the Cafeteria
Plan to receive and implement the obligations and credits spun off from the
Cafeteria Plan.
c. Each Distributed Company will treat as remaining in effect
any elections the Distributed Company Employees made before the Distribution
with respect to the Health Care Reimbursement Plan Benefit, the Dependent Care
Assistance Program Benefit, the Health Insurance Benefit, and, to the extent
offered by the Distributed Company after the Distribution,
4
<PAGE>
the Dental Insurance Benefit (each "Benefit" having the meaning provided in the
Company Cafeteria Plan).
d. After the spinoffs described in this Section, Distributed
Company Employees will submit any claims for the plan year ending December 31,
1998 to their respective Distributed Company's plan and not to the Company
Cafeteria Plan.
7. SEVERANCE
Effective as of the Distribution Date, the Company, Printco, Schoolco,
Techco, and Travelco each will be liable for any severance pay and benefits
(including salary continuation) owing, as of or after the Distribution Date, to
Company Individuals, Printco Individuals, Schoolco Individuals, Techco
Individuals, and Travelco Individuals, respectively.
8. STOCK OPTIONS
a. The Company will retain the 1994 Amended and Restated USOP
Long-Term Incentive Plan (the "Company Stock Plan") and the obligations under
that plan with respect to stock options granted thereunder that are held by or
in respect of Company Employees.
b. The Distributed Companies will establish stock option plans
under which they will provide options to their respective Employees to replace
any options those employees hold under the Company Stock Plan and under which
they may offer additional options.
c. Any option granted by a Distributed Company in replacement
for an option under the Company Stock Plan will expressly provide that it is
being granted in full satisfaction of, and in substitution for, any and all
Company stock options with respect to which it relates.
9. FOREIGN PLANS
Subject to applicable local law requirements and to the extent
practicable, the respective rights and obligations of the Company, Printco,
Schoolco, Techco, and Travelco (and their respective Subsidiaries) with respect
to plans maintained by the Company and its Subsidiaries immediately before the
Distribution Date outside of the United States will be treated in a manner
consistent with the general principles described in Section 2 of this Benefits
Agreement; provided, however, that nothing herein shall be construed so as to
(A) modify the terms and conditions of employment of any Company Employee,
Printco Employee, Schoolco Employee, Techco Employee, or Travelco Employee who
is employed outside of the United States (a "Foreign Employee") or (B)
constitute an actual or constructive termination of any Foreign Employee's
employment with the Company, Printco, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable.
5
<PAGE>
10. COOPERATION
a. The Company and the Distributed Companies will cooperate in
providing each other and other necessary parties with such data as may be
necessary to administer their respective benefit plans in accordance with the
terms of this Agreement. To that end, each will share, and will cause their
affiliates to share, with each other and their respective agents and vendors
(without obtaining releases) all participant, plan design, and other information
necessary for the efficient and accurate administration of, compliance with laws
and regulations applicable to, and response to governmental authorities
regarding, their respective benefit plans, programs, and arrangements after the
Distribution. Each party to this agreement and their respective authorized
agents will, subject to applicable laws on confidentiality, be given reasonable
and timely access to, and may make copies of, all information relating to the
subjects of this Agreement in the custody of another party, to the extent
necessary for such administration.
b. The Company and the Distributed Companies agree to
cooperate in completing all necessary filings with the Internal Revenue Service,
Department of Labor, and Pension Benefit Guaranty Corporation with respect to
the matters provided herein and will apprise the other parties hereto of any
written or oral communication to or from any such agency with respect thereto
that may bear on such other parties' interests hereunder. The Company will make
all necessary Internal Revenue Service filings for the 1997 plan year and, if
applicable, any "short year" filings for the 1998 plan year, with respect to the
plans (other than Stand-Alone Plans) in which Distributed Company Employees
participated before the Distribution Date.
11. NO THIRD PARTY BENEFICIARIES.
Notwithstanding anything to the contrary herein, this Benefits
Agreement is solely for the benefit of the Company and the Distributed
Companies. There shall be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Company Individual, Printco
Individual, Schoolco Individual, Techco Individual, or Travelco Individual.
12. INCORPORATION BY REFERENCE.
This Benefits Agreement is part of the Distribution Agreement, and
shall be incorporated by reference into the Distribution Agreement as if set
forth fully therein. Without limiting the generality of the foregoing, the
parties acknowledge and agree that all provisions of the Distribution Agreement
relating to Indemnification, Dispute Resolution, Notices, and the other
provisions labeled "Miscellaneous" in the Distribution Agreement shall apply
with respect to the matters described herein as if such terms were incorporated
herein and a part hereof.
13. TAX DEDUCTIONS
Except as otherwise provided in Section 5 of the Tax Allocation
Agreement dated __________, 1998 between the Company, Printco, Schoolco, Techco
and Travelco, the parties intend that the party that actually bears the cost
(whether directly or indirectly) of making a
6
<PAGE>
payment with respect to, or (except as provided below) whose stock is used to
satisfy, a liability governed by this Agreement will be entitled to any and all
tax benefits associated therewith, including the benefit of taking an income tax
deduction with respect to such payment or satisfaction, and will be obligated to
satisfy all tax withholding obligations with respect there, and the parties
agree to take no action inconsistent with such intention. Notwithstanding that
intent, the parties recognize that it is possible that the Internal Revenue
Service or another taxing authority will take a different position. Therefore,
the parties agree that
if any of them is notified by the IRS or another taxing authority that
it is taking or proposes to take a different position, the party
receiving such notice will notify any others affected by the notice;
and
if, when, and to the extent that one party or its Subsidiary receives a
tax benefit as a result of a payment made by another party to satisfy a
liability governed by this Agreement, the benefiting party will pay or
cause its Subsidiary to pay the other party an amount equal to the "net
tax benefit" (as defined below) realized by the benefiting party, as
and when realized.
For this purpose, the "net tax benefit" to either party resulting from payment
or satisfaction of a liability will be deemed to equal the excess of (a) the
taxes that would have been paid by such party if such party had not paid or
satisfied such liability over (b) the taxes that the party actually pays.
14. MISCELLANEOUS
a. Complete Agreement; Construction. This Benefits Agreement, including
all Exhibits attached hereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all previous
negotiations, commitments, and writings with respect to such subject matter.
b. Supersession. In the event of any conflict between any of the terms
of this Benefits Agreement and the terms of either Distribution Agreement, the
terms of this Benefits Agreement will govern.
15. OTHER ACTIONS. The parties hereto shall take such other and further
actions as may be necessary or appropriate to carry out this Benefits Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Benefits Agreement to
be executed by their duly authorized officers as of the day and year first
written above.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
8
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF AZTEC TECHNOLOGY PARTNERS, INC.
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Aztec International, Inc................................ Delaware
Bay State Computer Group, Inc........................... Massachusetts
Compel Corp............................................. California
Digital Network Associates, Inc......................... New York
Entra Computer Corp..................................... Ohio
Fortran Corp............................................ Maryland
Mahon Communications Corporation........................ Massachusetts
Office Equipment Service Co., Inc....................... Tennessee
Professional Computer Solutions, Inc.................... New York
Professional Network Services, Inc...................... Connecticut
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 4, 1998,
relating to the financial statements of Aztec Technology Partners, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 14, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1, as amended, of our report dated June 7,
1996, except for Note 9, as to which the date is October 24, 1996, relating to
the financial statements of Fortran Corp. which report appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
May 14, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 22, 1997, relating
to the combined financial statements of Aztec East Inc. and Affiliates, which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts".
B.N. KOZIN COMPANY
Melville, New York
May 14, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 30, 1998,
relating to the financial statements of Compel Corporation which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 14, 1998
<PAGE>
EXHIBIT 23.8
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of Aztec
Technology Partners, Inc. (the "Company") in the registration statement on Form
S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the distribution by U.S. Office Products Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ CLIFFORD MITMAN, JR.
Dated: May 15, 1998 -------------------------------------------
Clifford Mitman, Jr.
</TABLE>
<PAGE>
EXHIBIT 23.9
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of Aztec
Technology Partners, Inc. (the "Company") in the registration statement on Form
S-1 to be filed by the Company with the Securities and Exchange Commission
relating to the distribution by U.S. Office Products Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ BENJAMIN TANDOWSKI
Dated: May 15, 1998 -------------------------------------------
Benjamin Tandowski
</TABLE>
