<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998.
REGISTRATION NO. 333-46533
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
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 JUNE 3, 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" or the
"Company"). 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 5:00 p.m. EDT 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, the "Strategic 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.
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 to its stockholders annual reports containing
audited consolidated financial statements examined by its independent public
accountants and quarterly reports containing unaudited consolidated financial
statements for each of the first three quarters of each fiscal year.
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
<TABLE>
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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....................................................................................... 60
PRINCIPAL STOCKHOLDERS..................................................................................... 61
DESCRIPTION OF AZTEC CAPITAL STOCK......................................................................... 62
EXPERTS.................................................................................................... 64
LEGAL MATTERS.............................................................................................. 64
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") as of 5:00 p.m. EDT 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
offered 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 has undertaken or 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
has exchanged approximately $131 million principal
amount of its 2001 Notes for 8,100,741 shares of 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 reduced the
conversion price of the 2001 Notes from $19.00 to
$16.17 while the 2001 Note Offer was 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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<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....................... 5:00 p.m. EDT on June 9, 1998.
DISTRIBUTION DATE................. The effective time of the Distributions is expected to
be 11:59 p.m. EDT on June 9, 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, 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 conditions
9
<PAGE>
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
intends to enter into employment agreements with its Chairman and Chief
Executive Officer, its Executive Vice President and Chief Financial Officer, its
Chief Operating Officer and its operating company presidents. Such agreements
will be generally terminable without cause on 30 days' notice by either Aztec or
the employee. 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 engagements are, and may be in the
future, terminable by its clients without penalty. A termination of a
10
<PAGE>
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 for, among other
things, 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
amended, (the "Code"), and will not be taxable under Section 355(e) of the Code.
U.S. Office Products
11
<PAGE>
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 will enter 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
On a pro forma basis as of January 24, 1998, approximately $63.9 million, or
47.5% of Aztec's pro forma total assets and 72.8% of Aztec's stockholders'
equity 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
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charge to its income. A reduction in net income resulting from the amortization
or write down of goodwill could have a material and adverse impact upon the
market price of Aztec Common Stock. Aztec believes that anticipated cash flows
associated with intangible assets recognized in the acquisitions completed
during the nine months ended January 24, 1998 will continue over the period
during which the associated goodwill will be amortized, and there is no
persuasive evidence that any material portion will dissipate during such period.
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
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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.
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
5:00 p.m. EDT 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 has offered 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
has undertaken or 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 exchanged
approximately $131.0 million principal amount of its 2001 Notes for
8,100,741 shares of U.S. Office Products Common Stock at an exchange rate
of 61.483 shares per $1,000 principal amount, which effectively reduced
the conversion price on the 2001 Notes from $19.00 to $16.17 while the
offer was 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 offered 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 is subject to a number of
conditions. These conditions include: (i) U.S. Office Products having obtained
financing sufficient to fund the Tender Offer; (ii) all conditions to the
completion of the Equity Investment having been satisfied or waived, except for
completion of the Tender Offer and the Distributions; (iii) registration
statements relating to the Distributions having become effective; and (iv) 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.
The Tender Offer expired on June 1, 1998, and preliminary results indicated
that approximately 167.3 million shares of U.S. Office Products Common Stock and
shares of U.S. Office Products Common Stock underlying stock options were
tendered in accordance with the terms of the tender offer (including
approximately 42.6 million shares tendered through guaranteed delivery
procedures). According to the preliminary count, the number of shares tendered,
together with the number of shares subject to guaranteed delivery, exceeds the
total number of shares of U.S. Office Products Common Stock available for tender
(including shares underlying stock options). Based upon the number of shares of
U.S. Office Products Common Stock outstanding and the total number of shares
that may be issued upon exercise of options, U.S. Office Products has determined
that the proration factor should not be less than 22.5%. The preliminary count
is subject to verification, and U.S. Office Products expects to announce the
final results of the equity self-tender offer on June 8, 1998.
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 was for only
37,037,037 shares of U.S. Office
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Products Common Stock (including shares that may be issued on exercise of vested
and unvested options for U.S. Office Products Common Stock) and the number of
shares tendered exceeds that amount, only a portion of the shares tendered by
any U.S. Office Products stockholder will be accepted. U.S. Office Products
stockholders who tender their shares and do not otherwise dispose of shares that
are not accepted before the Distributions will 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 remained 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 Note 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 Note Tender, 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 were exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender).
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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.
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 that as 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;
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(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 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):
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<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.
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<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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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
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Tax Indemnification Agreement" for a detailed discussion of the Tax Allocation
Agreement and Tax Indemnification Agreement.
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
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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 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."
28
<PAGE>
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 been
determined 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 are not the result of arm's-length negotiations between independent
parties.
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 business that arise from information supplied to U.S.
Office Products (or that should have been supplied but was not) by Aztec, (v)
any liabilities of U.S. Office Products relating to earn-out or bonus payments
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 other Spin-Off Companies will be
similarly obligated to U.S.
29
<PAGE>
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 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
30
<PAGE>
Distribution but also any other Distribution. The liabilities of Aztec under the
Tax Allocation Agreement and the Tax Indemnification Agreement are not subject
to any limits.
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 stockholders' equity.......................................... 90,119 87,787 137,065
---------- ----------- --------------
Total capitalization.............................................. $ 100,462 $ 92,483 $ 137,451
---------- ----------- --------------
---------- ----------- --------------
</TABLE>
- ------------------
(1) Excludes options to acquire shares of Aztec Common Stock to be 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 U.S.
Office Products, 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 that 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 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. 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
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<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. Based on industry sources that Aztec believes are
reliable, Aztec believes that 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. Based on industry sources that
Aztec believes are reliable, Aztec believes that 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. 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.
50
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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*
Lawrence M. Howell(1)(2).............. 53 Director
Jonathan J. Ledecky................... 40 Director
Clifford Mitman, Jr.(1)(2)............ 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
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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.
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<PAGE>
LAWRENCE M. HOWELL has served as Director of Aztec since June 1998. Since
January 1996, Mr. Howell has been Managing Partner of Howell Capital, an
investment banking advisory firm. From January 1993 to January 1996, Mr. Howell
was employed by Morgan Stanley & Co. Incorporated, an investment banking firm,
where he served as Managing Director and most recently as Advisory Director.
From May 1970 to January 1993, he was employed in the investment banking
division of Goldman Sachs & Co., an investment banking firm. Mr. Howell holds a
Bachelor of Business Administration from the University of Texas and a Master of
Business Administration from Southern Methodist University. Mr. Howell is a
Director of ULTRADATA Corporation, a NASDAQ listed information management
software company serving the financial institution industry.
JONATHAN J. LEDECKY has served as a Director of Aztec since June 1998 and
will serve as 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 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. has served as a Director of Aztec since June 1998. 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 has served as a Director of Aztec since June 1998. 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.
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<PAGE>
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.
DIRECTORS AND EXECUTIVE OFFICERS; COMMITTEES OF THE BOARD
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 has an Audit Committee. The Audit Committee is charged with
reviewing Aztec's annual audit and meeting with Aztec's independent accountants
to review Aztec's internal control and financial management practices. Messrs.
Howell and Mitman are members of the Audit Committee.
The Aztec Board has a Compensation Committee. The Compensation Committee is
charged with making recommendations to the Aztec Board regarding compensation of
Aztec's executive officers and administering any stock option plan Aztec may
adopt. Messrs. Howell and Mitman are members of the Compensation Committee.
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.
53
<PAGE>
(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
$175,000 during his first year with Aztec.
(5) As of the end of fiscal year 1998, Ms. Claypoole was no longer an executive
officer of Aztec. Ms. Claypoole is currently employed by Aztec in a
non-executive officer capacity.
(6) Options to purchase U.S. Office Products Common Stock.
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire Aztec Common Stock in connection with the
Technology Distribution. See "The Spin-Offs From U.S. Office Products."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM(4)
OPTIONS GRANTED IN EXERCISE EXPIRATION -----------------------
NAME GRANTED (#)(1)(2) FISCAL YEAR(3) PRICE ($/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
54
<PAGE>
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>
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:
Xlcv8]Option Shares (New)=Option Shares (Old) ] 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
55
<PAGE>
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 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,
net of taxes at an assumed 40% rate. 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.
56
<PAGE>
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into an agreement (the "Ledecky Services
Agreement") with U.S. Office Products on January 13, 1998, effective on the
Distribution Date and contingent on the consummation of the Distributions, which
agreement is expected to be amended as of June 3, 1998. 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, are 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 demonstrably and
materially injurious to U.S. Office Products or (ii) his violation of the
noncompetition provision 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, effective as of June 10, 1998 that 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.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the end of a specified
restricted period, which, for Aztec, means the later of June 10, 2000 or the
date one year after Mr. Ledecky leaves Aztec's employ. 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 the relevant U.S. Office Products Company regularly maintains an
office. (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
acquired by Consolidation Capital Corporation that are directly competitive with
Aztec if those businesses (A) relate to computer installation and servicing, (B)
information technology, or (C) telecommunications, and if, when acquired, the
businesses met certain revenue limits and had their principal place of business
in the same metropolitan area as that of the acquiring electrical contracting
and services 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; (v) UniCapital Corporation's leasing businesses (which
include equipment leasing); or (vi) U.S. Marketing Services shelf-stocking and
merchandising and point-of-purchase display creation businesses. 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
57
<PAGE>
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, net of taxes at an assumed 40% rate.
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 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.
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,
58
<PAGE>
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
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.
59
<PAGE>
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."
60
<PAGE>
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) *
Douglas R. Johnson........................................
Ira Cohen.................................................
Lawrence M. Howell........................................
Clifford Mitman, Jr.......................................
Benjamin Tandowski........................................
All current executive officers and directors as a group 3,574,660 2.7%
(seven 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.
61
<PAGE>
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
62
<PAGE>
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
63
<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.
64
<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 registration statement on to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on June 3, 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
Each person whose signature appears below hereby appoints James E. Claypoole
and Douglas R. Johnson, and both of them, either of whom may act without the
joinder of the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and any registration
statements for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to perform each and every
act and thing appropriate or necessary to be done, as full and for all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ JAMES E. CLAYPOOLE Chairman of the Board of
- ----------------------------------- Directors and Chief
James E. Claypoole Executive Officer June 3, 1998
(Principal Executive
Officer)
/s/ DOUGLAS R. JOHNSON Chief Financial Officer
- ----------------------------------- (Principal Financial
Douglas R. Johnson Officer and Principal June 3, 1998
Accounting Officer)
/s/ LAWRENCE M. HOWELL
- ----------------------------------- Director June 3, 1998
Lawrence M. Howell
- ----------------------------------- Director
Jonathan J. Ledecky
/s/ CLIFFORD MITMAN, JR.
- ----------------------------------- Director June 3, 1998
Clifford Mitman, Jr.
/s/ BENJAMIN TANDOWSKI
- ----------------------------------- Director June 3, 1998
Benjamin Tandowski
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 *** Certificate of Amendment of Certificate of Incorporation
3.5 ** Bylaws
3.6 *** Amended By Laws
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, as amended
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 *** Form of 1998 Stock Incentive Plan
10.9 *** Form of Executive Employment Agreement
10.10*** Form of Employment Agreement between Aztec and Jonathan Ledecky
10.11*** Form of Employment Agreement between Aztec and James Claypoole
10.12*** Form of Employment Agreement between Aztec and Douglas Johnson
10.13*** Form of Employment Agreement between Aztec and Ira Cohen
10.14*** BankBoston, N.A. Commitment Letter and Promissory Note
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
23.10* Consent of Lawrence M. Howell to be named as director
24.1 * Power of Attorney (included in signature page in Part II)
27 ** Financial data schedule
</TABLE>
- ------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
<PAGE>
Exhibit 10.2
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT, dated as of June __, 1998
("Agreement"), among U.S. Office Products Company, a Delaware corporation
("USOP"), 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"). USOP, Workflow Management, School Specialty, Aztec and
Navigant are hereinafter jointly referred to as the "Companies." Workflow
Management, School Specialty, Aztec and Navigant are hereinafter jointly
referred to as the "Spin-Off Companies."
WITNESSETH
WHEREAS, USOP is the common parent of an affiliated group of
domestic corporations, including the Spin-Off Companies, which has elected to
file consolidated federal income Tax returns;
WHEREAS, USOP and the Spin-Off Companies entered into an agreement,
dated as of June __, 1998 (the "Distribution Agreement"), to, among other
things, provide for the distribution by USOP of all of the issued and
outstanding shares of common stock of the Spin-Off Companies to the holders
of record of shares of common stock of USOP (other than shares held in the
treasury of USOP); divest USOP of all businesses, operations and liabilities
relating to the businesses to be conducted by the Spin-Off Companies after
the Distributions; and allocate and assign responsibility for certain
liabilities among USOP, the Spin-Off Companies and their respective
Subsidiaries;
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Workflow Subsidiaries to be merged into Workflow Management or into a
Workflow Subsidiary; (ii) USOP will contribute to Workflow Management (x) all
its right, title and interest in and to all the shares of capital stock (or
other ownership interests) that it owns, directly or indirectly, of the
Workflow Subsidiaries other than shares of stock (or other ownership
interests) of the Workflow Subsidiaries that are already owned, directly or
indirectly, by Workflow Management or that are to be merged into Workflow
Management or into a Workflow Subsidiary and (y) certain other assets; and
(iii) Workflow Management will assume certain liabilities so that the
Workflow Group is consolidated under Workflow Management prior to the
Workflow Distribution (such mergers, contributions and assumptions of
liabilities, the "Workflow Contribution");
<PAGE>
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain School Specialty Subsidiaries to be merged into School Specialty or
into a School Specialty Subsidiary; (ii) USOP will contribute to School
Specialty (x) all its right, title and interest in and to all the shares of
capital stock (or other ownership interests) that it owns, directly or
indirectly, of the School Specialty Subsidiaries other than shares of stock
(or other ownership interests) of the School Specialty Subsidiaries that are
already owned, directly or indirectly, by School Specialty or that are to be
merged into School Specialty or into a School Specialty Subsidiary and (y)
certain other assets and (iii) School Specialty will assume certain
liabilities so that the School Specialty Group is consolidated under School
Specialty prior to the School Specialty Distribution defined herein (such
mergers, contributions and assumptions of liabilities, the "School Specialty
Contribution");
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Aztec Subsidiaries to be merged into Aztec or into an Aztec
Subsidiary; (ii) USOP will contribute to Aztec (x) all its right, title and
interest in and to all the shares of capital stock (or other ownership
interests) that it owns, directly or indirectly, of the Aztec Subsidiaries
other than shares of stock (or other ownership interests) of the Aztec
Subsidiaries that are already owned, directly or indirectly, by Aztec or that
are to be merged into Aztec or into an Aztec Subsidiary and (y) certain other
assets; and (iii) Aztec will assume certain liabilities so that the
Technology Group is consolidated under Aztec prior to the Technology
Distribution defined herein (such mergers, contributions and assumptions of
liabilities, the "Technology Contribution");
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Navigant Subsidiaries to be merged into a Navigant Subsidiary; (ii)
USOP will contribute to Navigant (x) all its right, title and interest in and
to all the shares of capital stock (or other ownership interests) that it
owns, directly or indirectly, of the Navigant Subsidiaries other than shares
of stock (or other ownership interests) of the Navigant Subsidiaries that are
already owned, directly or indirectly, by Navigant or that are to be merged
into Navigant or into a Navigant Subsidiary and (y) certain other assets; and
(iii) Navigant will assume certain liabilities so that the Travel Group is
consolidated under Navigant prior to the Travel Distribution defined herein
(such mergers, contributions and assumptions of liabilities, the "Travel
Contribution");
WHEREAS, pursuant to the Distribution Agreement, USOP will
distribute all the shares of stock that it owns in each of Workflow
Management (the "Workflow Distribution"), School Specialty (the "School
Specialty Distribution"), Aztec (the "Technology Distribution") and Navigant
(the "Travel Distribution") to its shareholders (collectively, the
"Distributions") and, as a result of the Distributions, the Spin-Off
Companies and their Subsidiaries will not be included in the consolidated
federal income Tax return of USOP for the portion of the year following the
Distributions or in future years; and
2
<PAGE>
WHEREAS, the Companies desire 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;
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 Tax Act" shall mean, for any Person, (i) any action or
actions of such Person, or any omission or omissions by such Person of an
action or actions reasonably available to it, after the Distribution Date, or
(ii) a knowing or willful inaccuracy or inaccuracies of any representation
made by any Company by or on behalf of any member of such Company's Group to
USOP's outside tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions as of the Distribution Date, if such action(s) or
inaccuracy(ies) materially contribute to a Final Determination that any of
the Contributions or Distributions results in the recognition of gain to USOP
by virtue of any of the Contributions or Distributions failing to qualify
under sections 355 or 368 of the Code, including without limitation, by
reason of any stock or securities of any of the Spin-Off Companies failing to
qualify as "qualified property" within the meaning of section 355(c)(2) of
the Code, or otherwise.
"Agreement" shall mean this Tax Allocation Agreement.
"Allocable Federal Income Tax Liability" shall mean, for any Group,
the Separate Consolidated Federal Income Tax Liability of such Group, as
adjusted to reflect (i) any AMT (but only if there is a consolidated AMT),
(ii) any Taxes for which USOP is obligated to indemnify such Groups pursuant
to Section 10(b) of this Agreement, and (iii) any Taxes for which such
Group's Spin-Off Company is obligated to indemnify USOP pursuant to Section
3(d) of this Agreement.
"AMT" shall mean the alternative minimum tax imposed by Section 55
of the Code.
3
<PAGE>
"Aztec" shall have the meaning assigned to such term in the preamble
to this Agreement.
"Aztec Subsidiary" shall mean those entities that immediately after
the completion of the Distributions will be Subsidiaries of Aztec.
"Closing Date" shall have the meaning assigned to such term in the
Investment Agreement.
"Companies" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
any successor statute.
"Consolidated Returns" shall mean (i) the consolidated U.S. federal
income Tax return of USOP for the period ending on April 25, 1998 and (ii)
the consolidated U.S. federal income Tax return of USOP for the period
commencing on April 26, 1998 and including the Spin-Off Company Groups
through and including the Distribution Date and including the USOP Group
through and including April 24, 1999.
"Contributions" shall have the meaning assigned to such term in the
recitals to this Agreement.
"Controlled Return" shall mean (a) the Consolidated Returns, (b) any
Prior Period Consolidated Return and (c) any combined, affiliated or unitary
income Tax returns for any taxable period beginning on or prior to the
Distribution Date that includes USOP or any Retained Subsidiary.
"Distributing Tax Payor" shall have the meaning assigned to such
term in Section 10(a)(iii) of this Agreement.
"Distribution Agreement" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Distribution Date" shall mean the date on which the Distributions
are effective for U.S. federal income Tax purposes.
"Distributions" shall have the meaning assigned to such term in the
recitals to this Agreement.
4
<PAGE>
"Final Determination" shall mean the final resolution of liability
for any Tax for any taxable period, including any related interest or
penalties, by or as a result of: (i) a final and unappealable decision,
judgment, decree or other order of a court of competent jurisdiction; (ii) a
closing agreement or accepted offer in compromise under Section 7121 or 7122
of the Code, or comparable agreement under the laws of other jurisdictions,
which resolves the entire Tax liability for such Tax for such taxable period;
(iii) any allowance of a refund or credit in respect of an overpayment of
Tax, but only after the expiration of all periods during which such refund
may be recovered (including by way of offset) by the applicable Taxing
jurisdiction; or (iv) any other final disposition, including by reason of the
expiration of the applicable statute of limitations.
"FTC" shall mean the foreign tax credit pursuant to Section 27 of
the Code.
"Group" shall mean the USOP Group, Workflow Group, School Specialty
Group, Technology Group and/or Travel Group, as the context may require.
"Investment Agreement" shall mean the Investment Agreement dated as
of January 12, 1998 by and between USOP and CDR-PC Acquisition, L.L.C., a
Delaware limited liability company, as amended by Amendment No. 1 thereto,
dated as of February 3, 1998.
"IPO" shall mean, as to any Spin-Off 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.
"IRS" shall mean the Internal Revenue Service of the United States.
"Losses" shall mean any and all claims, demands, liabilities,
obligations, losses, costs, expenses, fines or damages (whether absolute,
accrued, conditional or otherwise, and whether or not resulting from third
party claims), including interest and penalties with respect thereto and
out-of-pocket expenses and reasonable attorneys' and accountants' fees and
expenses incurred in the investigation or defense of any of the same or in
asserting, preserving or enforcing any rights related thereto.
"Market Capitalization" shall mean, for any entity, the market
capitalization of such entity determined on the basis of the average closing
price for the common stock of such entity for the five-day period ending on
the tenth day after the Distribution Date.
"Navigant" shall have the meaning assigned to such term in the
preamble to this Agreement.
5
<PAGE>
"Navigant Subsidiary" shall mean those entities that immediately
after the completion of the Distributions will be Subsidiaries of Navigant.
"Person" shall mean any individual, partnership, joint venture,
corporation, limited liability company, trust, unincorporated organization,
government or department or agency of a government.
"Prime Rate" shall mean the 'prime rate' charged by Citibank, N.A.,
New York, New York, as such rate shall be changed from time to time,
compounded daily on the basis of a year of 365/366 days and actual days
elapsed.
"Prior Period Consolidated Return" shall mean any U.S. federal
consolidated income Tax return of USOP filed, or to be filed, for taxable
periods commencing prior to April 27, 1997.
"Retained Subsidiaries" shall mean all of the Subsidiaries of USOP
other than the Spin-Off Companies and the Spin-Off Company Subsidiaries.
"Restricted Transaction" shall mean for any Spin-Off Company (i) any
issuance of capital stock (including, without limitation, in connection with
any public offering or any acquisition by such Spin-Off Company, or in
connection with any merger or consolidation of another Person into such
Spin-Off Company or any Subsidiary of such Spin-Off Company, and including
any delivery of capital stock from the treasury of such Spin-Off Company),
other than an IPO or in connection with the exercise of any employee stock
option granted on or prior to the Distribution Date; (ii) any issuance of
securities convertible into, or exercisable or exchangeable for, capital
stock of such Spin-Off Company; or (iii) any merger or consolidation or other
business combination of such Spin-Off Company into another Person or any sale
or transfer of all or substantially all of such Spin-Off Company's assets to
another Person.
"School Specialty" shall have the meaning assigned to such term in
the preamble to this Agreement.
"School Specialty Contribution" shall have the meaning assigned to
such term in the recitals to this Agreement.
"School Specialty Distribution" shall have the meaning assigned to
such term in the recitals to this Agreement.
"School Specialty Group" shall mean School Specialty and each School
Specialty Subsidiary.
6
<PAGE>
"School Specialty Subsidiary" shall mean those entities that
immediately after the completion of the Distributions will be Subsidiaries of
School Specialty.
"Separate Consolidated Federal Income Tax Liability" shall mean, for
any Group and any taxable year or portion thereof during which it is included
in the Consolidated Returns or any Prior Period Consolidated Return, the U.S.
federal income Tax liability which such Group would have incurred if such
Group, on a stand-alone basis, had been an affiliated group eligible to file
a consolidated return for such taxable year or any portion thereof and had
filed such a return for such period, computed without regard to AMT.
"Spin-Off Companies" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Spin-Off Company Groups" shall mean the Workflow Group, the School
Specialty Group, the Technology Group and the Travel Group.
"Spin-Off Company Subsidiaries" shall mean the Workflow
Subsidiaries, the School Specialty Subsidiaries, the Aztec Subsidiaries and
the Navigant Subsidiaries.
"Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture or other entity (i) in which another Person
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 Person is a general partner or an entity performing
similar functions (e.g., a trustee or managing member).
"Tax" or "Taxes" shall mean all forms of taxation, whenever created
or imposed, and whether of the United States or elsewhere, and whether
imposed by a local, municipal, governmental, state, foreign, federal or other
body, and without limiting the generality of the foregoing, shall include
income, sales, use, ad valorem, gross receipts, license, value added,
franchise, transfer, recording, withholding, payroll, wage withholding,
employment, excise, occupation, unemployment insurance, social security,
business license, business organization stamp, environmental, premium and
property taxes, together with any related interest, penalties and additions
to any such tax, or additional amounts imposed by any Taxing Authority.
"Tax Administrator" shall mean Don Platt, the Chief Financial
Officer of USOP, or such other person as USOP shall appoint with the consent
of each of the Spin-Off Companies, which consent shall not be unreasonably
withheld or delayed.
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"Taxing Authority" shall mean any governmental or quasi-governmental
body, domestic or foreign, exercising any Taxing authority or Tax regulatory
authority.
"Tax Credits" shall include all credits against Tax pursuant to
Subtitle A, Chapter 1, Subchapter A, Part IV of the Code.
"Tax Item" shall mean any net operating loss, net capital loss,
deduction or credit (including, but not limited to, any FTC).
"Technology Contribution" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Technology Distribution" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Technology Group" shall mean Aztec and each Aztec Subsidiary.
"Travel Contribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Travel Distribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Travel Group" shall mean Navigant and each Navigant Subsidiary.
"USOP" shall have the meaning assigned to such term in the preamble
to this Agreement.
"USOP Group" shall mean USOP and each Retained Subsidiary.
"USOP Stock Plan" shall mean any of the 1994 Amended and Restated
Long-Term Incentive Plan, the 1996 Non-Employee Directors' Stock Plan, the
1997A Stock Option Plan for Employees of Mail Boxes Etc., the 1997B Stock
Option Plan for Employees of Mail Boxes Etc. and the 1997 Stock Option Plan
for former Non-Employee Directors of Mail Boxes Etc. (and any underlying
original or predecessor plans).
"Workflow Contribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
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"Workflow Distribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Workflow Group" shall mean Workflow Management and each Workflow
Subsidiary.
"Workflow Management" shall have the meaning assigned to such term
in the preamble to this Agreement.
"Workflow Subsidiary" shall mean those entities that immediately
after the completion of the Distributions will be Subsidiaries of Workflow
Management.
SECTION 2
Tax Returns to be Filed
(a) Consolidated Returns and Prior Period Consolidated Returns.
(i) Each of the Companies will join, and will cause each of
their respective Subsidiaries to join, in the Consolidated Returns to the
extent each is eligible to join in such return under the provisions of the
Code and the regulations thereunder. The Tax Administrator will cause the
Consolidated Returns to be timely prepared and filed, and will timely prepare
and file any consents and requests for extension of time within which to file
the Consolidated Returns or any related information or similar returns. The
Tax Administrator shall make the Consolidated Returns available to the Chief
Financial Officers of the Spin-Off Companies for their review prior to filing
and shall furnish them a copy of the return promptly after it is filed.
(ii) Each of the Spin-Off Companies agrees that it will cause
its respective Chief Financial Officer to furnish to the Tax Administrator on
a timely basis such information, schedules, analyses and any other items as
may be reasonably required to prepare the Consolidated Returns. Such
information, schedules, analyses and other items will be prepared in a manner
consistent with existing practice and in accordance with the work plan and
schedule to be agreed upon among the Tax Administrator and the Chief
Financial Officer of each of the Spin-Off Companies, acting reasonably, as
soon as practicable after the Distribution Date.
(iii) The Companies hereby agree to execute and deliver all
documentation reasonably required (including powers of attorney, if
requested) to enable the Tax Administrator to timely file, and to take all
actions necessary or incidental to the filing of, the Consolidated Returns
(including, without limitation, the execution of Treasury Form 1122), or
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any amendment of the Consolidated Returns or any Prior Period Consolidated
Return. The Tax Administrator shall decide in his sole discretion whether to
file an amended return, and no consent of any Company shall be required for
the filing of any such amended return.
(iv) Taxes with respect to the Consolidated Returns or any
Prior Period Consolidated Return shall be paid or caused to be paid by USOP,
which shall act as agent of the Spin-Off Companies and their includable
Subsidiaries in all Tax matters having to do with the Consolidated Returns or
any Prior Period Consolidated Return.
(b) Other Controlled Returns. The Tax Administrator shall cause
any other Controlled Returns and any amendment of any such Controlled Returns
to be timely prepared, filed and paid, utilizing procedures substantially
similar to those provided in Section 2(a) of this Agreement with respect to
the Consolidated Returns and Prior Period Consolidated Returns.
(c) Other Tax Returns. The Companies shall, and shall cause their
respective Subsidiaries to, timely prepare and file Tax returns for any
taxable period beginning prior to the Distribution Date (other than
Controlled Returns) in those jurisdictions in which they are required to do
so in a manner consistent with past practice. Taxes shown as payable on any
Tax return filed by one of the Companies pursuant to this Section 2(c) shall
be paid or caused to be paid by the Company responsible under this Section
2(c) for filing such return or causing such return to be filed. The Tax
Administrator shall have the right to approve any Tax returns filed pursuant
to this Section 2(c) prior to such filing if USOP could be liable for Taxes
due with respect to any such Tax returns under principles analogous to
Treasury regulation section 1.1502-6.
SECTION 3
Consolidated Returns Computations of Tax and Payments
(a) Computations of Tax and Payments for the Consolidated Return
year ending on April 25, 1998:
(i) On or before July 14, 1998, an interim Tax settlement
payment shall be made to or by USOP by or to each of the Spin-Off Companies,
as the case may be, equal to the difference between their respective Group's
Separate Consolidated Federal Income Tax Liability (as reasonably determined
by the Tax Administrator) and the net amounts previously paid with respect to
estimated Taxes by such Group for the Consolidated Return year ending on
April 25, 1998.
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(ii) Based on computations to be prepared by the affected
Spin-Off Company and approved by the Tax Administrator, an adjusting payment
equal to the difference between its Group's Allocable Federal Income Tax
Liability and the net amounts previously paid with respect to estimated Taxes
by such Group for the Consolidated Return year ending on April 25, 1998,
including payments pursuant to Sections 3(a)(i) of this Agreement, shall be
made to or by USOP by or to such Spin-Off Company, as the case may be, on or
before February 15, 1999 based on the Consolidated Return for the year ending
April 25, 1998 as filed.
(b) Computations of Tax and Payments for the Consolidated Return
year ending on April 24, 1999:
(i) On or before April 14, 1999, each of the Spin-Off
Companies agrees to make payments to USOP equal to the excess, if any, of its
Group's estimated Separate Consolidated Federal Income Tax Liability for the
Consolidated Return year ending on April 24, 1999 (as reasonably determined
by the Tax Administrator) over such Group's prior payments, including any
payments with respect to estimated Taxes for such Consolidated Return year,
and USOP agrees to make payments to each of the Spin-Off Companies equal to
the excess, if any, of their respective Group's prior payments with respect
to estimated Taxes for the Consolidated Return year ending on April 24, 1999
over such Group's estimated Separate Consolidated Federal Income Tax
Liability (as reasonably determined by the Tax Administrator) for the
Consolidated Return year ending on April 24, 1999.
(ii) On or before July 14, 1999, an interim Tax settlement
payment shall be made to or by USOP by or to each of the Spin-Off Companies,
as the case may be, equal to the difference between their respective Group's
Separate Consolidated Federal Income Tax Liability (as reasonably determined
by the Tax Administrator) and the net amounts previously paid with respect to
estimated Taxes by such Group for the Consolidated Return year ending on
April 24, 1999.
(iii) Based on computations to be prepared by the affected
Spin-Off Company and approved by the Tax Administrator, an adjusting payment
equal to the difference between its Group's Allocable Federal Income Tax
Liability and the net amounts previously paid by such Group with respect to
estimated Taxes for the Consolidated Return year ending on April 24, 1999,
including payments pursuant to Sections 3(b)(i) and 3(b)(ii) of this
Agreement, shall be made to or by USOP by or to such Spin-Off Company, as the
case may be, on or before February 15, 2000 based on the Consolidated Return
for the year ending April 24, 1999 as filed. Each of the Spin-Off Companies
shall increase or decrease, as the case may be, its Group's liability for
such adjusting payment by the amount of any AMT credit carryforward allocated
to its Group under the consolidated return regulations which exceeds or is
less than, as the case may be, the AMT calculated on a separate consolidated
basis.
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(c) Computations of Tax and Payments for Controlled Returns Other
than Consolidated Returns. Tax Payments shall be made to or by USOP by or to
each of the Spin-Off Companies, as the case may be, utilizing procedures
substantially similar to, and determining the amount payable by or to each
Group using, to the extent possible, methods substantially similar to, those
provided in Sections 3(a) and 3(b) of this Agreement with respect to any
Controlled Return other than a Consolidated Return for any period beginning
prior to the Distribution Date and ending on or after April 25, 1998.
(d) Intercompany Transactions. Each of the Spin-Off Companies
shall be liable for and shall indemnify, defend and hold USOP harmless from
and against any Losses with respect to Taxes attributable to any
"intercompany transaction" to the extent such Loss is attributable to any
"intercompany item" that such Spin-Off Company or any of its Subsidiaries is
required to take into account immediately prior to the Distributions pursuant
to Treasury Regulations section 1.1502-13.
SECTION 4
Special Rules
(a) If the Tax liability (including any interest relating thereto)
for either Consolidated Return exceeds or is less than the total of the five
Groups' Allocable Federal Income Tax Liability (including any interest
relating thereto), a payment shall be made to or by USOP by or to each of the
Spin-Off Companies equal to each of the Spin-Off Companies pro rata portion
of such excess or shortfall based on their respective Group's relative
Allocable Federal Income Tax Liability (including any interest relating
thereto) for such Consolidated Return; provided, that AMT in an amount equal
to any AMT credit carryforward from the Consolidated Returns allocated to a
Group shall be charged to and paid by such Group.
(b) A payment shall be made to or by USOP by or to each of the
Spin-Off Companies utilizing procedures substantially similar to those
provided in Sections 4(a) of this Agreement with respect to any Controlled
Return other than a Consolidated Return for any period beginning prior to the
Distribution Date and ending on or after April 25, 1998.
(c) Each of the Companies agrees that, unless it obtains consent
of the Tax Administrator, all members of its Group will waive the carryback
of any net operating loss from a Tax period beginning on or after the
Distribution Date to the Consolidated Returns or Prior Period Consolidated
Return.
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SECTION 5
Deductions Related to Exercise of Options
Notwithstanding anything to the contrary in Section 3 of this
Agreement, any Tax saving or other benefit attributable to any compensation
deduction arising from or in connection with the exercise by any employee of
any Company, or of any such Company's Subsidiaries (determined immediately
after the Distributions), of any option granted under any of the USOP Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising
from or in connection with any such exercise on or prior to the Closing Date
by any employee of any Company or of any such Company's Subsidiaries
(determined immediately after the Closing Date) shall be apportioned to such
Company.
SECTION 6
Dispute Resolution
In the event of a disagreement between the Tax Administrator and any
or all of the Spin-Off Companies, all computations or recomputations of
federal or state and local income and franchise Tax liability, and all
computations or recomputations of any amount or any payment (including, but
not limited to, computations of the amount of the Tax liability, any loss or
credit or deduction, federal statutory Tax rate change for a year,
utilization of carryback items, interest, penalties, and adjustments) and all
determinations of the amount of payments or repayments, or determinations of
any other nature necessary to carry out the terms of this Agreement will be
reviewed by the national office of Ernst & Young, LLP (unless the disputing
parties unanimously agree on another accounting firm of national reputation),
with the costs of such review being shared equally by such disputing parties.
If any disagreement remains after any such review, including any
disagreement as to the construction, applicability or binding nature of this
Agreement, that disagreement shall be resolved by an arbitrator with the cost
of such arbitration being shared equally by such disputing parties; provided
that such arbitrator shall be a retired or former judge of the United States
Tax Court or such other qualified person as the relevant parties may agree to
designate; provided further, that, in the event that the relevant parties
agree to designate a qualified person (other than a retired or former judge
of the United States Tax Court), such other qualified person shall have had
substantial experience with regard to settling complex Tax disputes. The
decision of the arbitrator shall be binding on the parties.
If the procedures for resolving a dispute, controversy or claim
between the Companies or any of their respective Subsidiaries arising out of
or relating to this Agreement are not controlled by this Agreement, such
dispute, controversy or claim shall be resolved (and costs
13
<PAGE>
shall be apportioned) pursuant to the procedures set forth in Article IX of
the Distribution Agreement.
SECTION 7
Survival of Terms
The provisions of this Agreement shall survive the Distribution Date
and remain in full force until all periods of limitations, including any
extension or waiver periods, as well as the ten-year statute of limitations
with respect to FTC redeterminations, for the Controlled Return taxable
periods, have expired and no further carrybacks to such periods are possible
and for 30 days thereafter; provided that the provisions of this Agreement
shall remain in full force and effect with respect to any pending claim under
this Agreement until the final resolution of such claim.
SECTION 8
Parties to Cooperate
Each of the Companies shall, and shall cause their respective
Subsidiaries to, cooperate fully and to the extent reasonably requested by
any other Company in connection with the preparation and filing of any return
or the conduct of any audit, dispute, proceeding, suit or action concerning
any issues or any other matter contemplated hereunder. Such cooperation shall
include, without limitation, (i) the retention and provision on demand of
books, records, documentation or other information relating to any Tax matter
until the later of (x) the expiration of the applicable statute of limitation
(giving effect to any extension, waiver, or mitigation thereof) and (y) in
the event any claim has been made under this Agreement for which such
information is relevant, until a Final Determination with respect to such
claim, (ii) the provision of additional information with respect to, and
explanations of, Tax practices (including elections, accounting methods,
conventions and principles of taxation) and the provision of material
described in clause (i) of this Section 8; (iii) the execution of any
document that may be necessary or reasonably helpful in connection with the
filing of any Tax return by any member of one of the Groups, or in connection
with any audit, proceeding, suit or action addressed in the preceding
sentence; and (iv) the use by each of the Companies of its reasonable efforts
to obtain any documentation from a governmental authority or a third party
that may be necessary or helpful in connection with the foregoing. Each of
the Companies shall make its employees and facilities available on a mutually
convenient basis to facilitate such cooperation and shall retain as permanent
records all documentation necessary to enable it to determine any obligation
under this Agreement. The records described above will be made available to
representatives of any of the Companies within a reasonable time upon request
and may be photocopied on an as needed basis. The requesting Company shall
pay the reasonable out of pocket costs incurred by any
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<PAGE>
Company, or Subsidiary thereof, in cooperating with the requesting Company
pursuant to this Section 8.
SECTION 9
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 Workflow Management:
Workflow Management, Inc.
240 Royal Palm Way
Palm Beach, Florida 33480
Attention: Thomas B. D'Agostino
Telefacsimile: (561) 659-7793
(b) If to School Specialty:
School Specialty, Inc.
1000 North Bluemound Drive
Appleton, Wisconsin 54914
Attention: Daniel P. Spalding
Telefacsimile: (920) 734-6276
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(c) If to Aztec:
Aztec Technology Partners, Inc.
52 Roland Street
Boston, Massachusetts 02129
Attention: James E. Claypoole
Telefacsimile: (617) 623-58888
(d) If to Navigant:
Navigant International, Inc.
84 Inverness Circle East
Englewood, Colorado 80112-5314
Attention: Edward S. Adams
Telefacsimile: (303) 706-0770
(e) If to USOP:
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
Eighteenth Floor
New York, NY 10152
Attention: Donald J. Gogel
Telefacsimile: (212) 407-5200
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SECTION 10
Indemnification
(a) Pre-Distribution & Distribution Taxes.
(i) USOP Indemnification. USOP shall be liable for and
shall indemnify, defend and hold the Spin-Off Companies harmless from and
against any Losses with respect to Taxes that result from, or arise in
connection with, an Adverse Tax Act of USOP or any of the Retained
Subsidiaries.
(ii) Spin-Off Companies Indemnification. The Spin-Off
Companies shall be jointly and severally liable for and shall 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 Spin-Off Companies or any of their
respective Subsidiaries.
(iii) Multiple Adverse Tax Acts. If any Losses with respect
to Taxes result from, or arise in connection with, (a) an Adverse Tax Act of
USOP or any of the Retained Subsidiaries and (b) an Adverse Tax Act of any or
all of the Spin-Off Companies or any of their respective Subsidiaries (each
Spin-Off Company that is responsible or whose Subsidiary is responsible for
an Adverse Tax Act a "Distributing Tax Payor"), then the Spin-Off Companies
shall be jointly and severally liable for and shall jointly and severally
indemnify, defend and hold USOP harmless from and against a percentage of
such Losses with respect to Taxes equal to the percentage determined by
dividing (x) the aggregate Market Capitalizations of the Distributing Tax
Payors by (y) the aggregate Market Capitalizations of the Distributing Tax
Payors and USOP.
(iv) No Adverse Tax Acts. If USOP incurs any Losses with
respect to Taxes resulting from the Contributions or Distributions, as a
result of the failure of the Contributions or Distributions to qualify under
Section 355 or 368 of the Code or otherwise, including, without limitation,
by reason of any stock or securities of any of the Spin-Off Companies failing
to qualify as "qualified property" within the meaning of Section 355(c)(2) of
the Code, except to the extent such Losses result from an Adverse Tax Act by
any of the Companies or any of their respective Subsidiaries, then each of
the Spin-Off Companies shall be liable for and shall indemnify, defend and
hold USOP harmless from the portion of such Losses that bears the same ratio
to the aggregate amount of such Losses as the Market Capitalization of such
Spin-Off Company bears to the aggregate Market Capitalization of all of the
Companies.
(b) Treasury Regulations Sections 1.1502-6 and 1.1502-77. USOP
shall be liable for and shall indemnify, defend and hold each of the Spin-Off
Companies harmless from
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and against any federal or state income or franchise Taxes for the
Consolidated Return or any Prior Period Consolidated Return for which any of
the Spin-Off Company Groups may be liable solely as a result of the operation
of Treasury Regulation Sections 1.1502-6 and 1.1502-77 or any state
counterpart statute or regulation.
SECTION 11
Tax Deficiencies and Claims
(a) Except as otherwise provided in Section 11(b), the Tax
Administrator shall control all audits, examinations and proceedings with
respect to Taxes with respect to any Controlled Returns. The Tax
Administrator shall have overall responsibility for obtaining and
coordinating all responses in connection with any such proceedings with
respect to any Controlled Returns. To the extent that any such audit affects
one of the Groups, such Group shall prepare and submit such responses in a
manner consistent with prior practice; provided, however that the Tax
Administrator shall have the right to approve all such responses prior to
their submission. Adjustments affecting solely the taxable income, gain,
loss or deductions of, or Tax Credits generated by, any Group may be agreed
upon or settled only upon approval of that Group, which approval shall not be
unreasonably withheld or delayed.
(b) Spin-Off Company Claims. Any proposed or actual income Tax
deficiencies or refund claims with respect to Controlled Returns which arise
from the business activities of one of the Spin-Off Company Groups, and do
not otherwise affect any Controlled Return or the Tax treatment of the
Contributions or Distributions, may be defended or prosecuted by such Group
at its own cost and expense and with counsel and accountants of its own
selection; provided that in an action for an income Tax deficiency such Group
shall have theretofore acknowledged in writing its liability for such Taxes,
if any. The Tax Administrator may participate in any such prosecution or
defense at USOP's cost and expense (in either event such cost or expense is
not to include the amount of any payment of any Tax claim, interest or
penalties, or of any compromise settlement or other disposition thereof).
Notwithstanding the foregoing, none of the Spin-Off Company Groups shall have
a right to an extension of the statute of limitations beyond the time
reasonably necessary to complete review at the Appeals Division of the IRS or
to any waiver of any other procedural safeguard without the prior written
consent of the Tax Administrator, which consent shall not be unreasonably
withheld. The limitation expressed in the preceding sentence applies, but is
not limited to, the filing of a petition with the United States Tax Court. If
one of the Spin-Off Groups defends or prosecutes an action, it shall keep the
Tax Administrator informed of matters relating to such defense or prosecution.
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(c) Cost of Advisors. In connection with the defense of any audit
of any Controlled Return, except with regard to claims described in Section
11(b) of this Agreement, the Tax Administrator may retain advisors and charge
the reasonable cost of their services to the appropriate Group or Groups.
SECTION 12
Payment of Deficiencies and Refunds
(a) The Allocable Federal Income Tax Liability and any other Tax
liability of the Spin-Off Company Groups with respect to any Controlled
Returns shall be adjusted in computations to be prepared by the relevant
Spin-Off Company Group and approved by the Tax Administrator with respect to
changes in the taxable income, loss, deduction or Tax credits of the relevant
Spin-Off Company Group:
(i) in each instance when payments are to be made to, or
refunds are received from, the relevant Taxing authority;
(ii) when no payment is to be made or refund is to be
received due to offsetting adjustments, upon filing of an amended return,
completion of an audit and an appellate review by the relevant Taxing
authority; and
(iii) to reflect the results of any Final Determination.
Each of the Spin-Off Companies agree to pay to USOP additional
amounts (plus penalties and additions to Tax, if any) equal to any increases
in the Allocable Federal Income Tax Liability (or any other Tax liability
with respect to a Controlled Return) of such Spin-Off Company's Group
resulting from any such changes, and USOP agrees to pay to each of the
Spin-Off Companies amounts equal to any decreases in the Allocable Federal
Income Tax Liability (or any other Tax liability with respect to a Controlled
Return) of each such Spin-Off Company's Group resulting from any such
changes, in each case together with any interest relating thereto. For
purposes of this Agreement, unless specifically provided otherwise, interest
shall be computed at the federal statutory rate used, pursuant to Section
6621(a) of the Code, by the IRS in computing the interest payable to or by it
on the net balance due to or from the IRS. Any interest under Section 6621(c)
of the Code shall be charged to the Group whose separate deficiency gave rise
to such interest. If the separate deficiencies of more than one Group gave
rise to such interest, then such interest shall be allocated between or among
such Groups. Penalties levied in respect of any Controlled Return shall be
charged to the Group whose separate computations gave rise to such penalty.
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(b) Amounts payable to or from USOP from or to any of the Spin-Off
Companies under Section 12(a) of this Agreement shall be paid upon written
request therefor approved by the Tax Administrator, together with interest
thereon from the original due date or such other date as may be appropriate
under the circumstances. Any amounts due to or from USOP from or to any of
the Spin-Off Companies under Section 12(a) of this Agreement as a result of a
payment to a Taxing authority or the receipt of a refund shall be paid within
five working days after such payment or receipt, together with appropriate
interest thereon. If no payment is to be made or refund is to be received
due to offsetting items among the various Groups, then Tax and interest
(computed at the IRS overpayment rates) shall be paid within 30 calendar days
after the completion of each of the audit and appellate review of the Tax
period in question and a Final Determination. After expiration of the five
day period (or, if applicable, 30 day period) any amounts unpaid shall bear
interest computed from the date of payment or receipt (or, if applicable,
completion or Final Determination) at the Prime Rate.
(c) No payment relating to a change in Allocable Federal Income
Tax Liability (or any other Tax liability with respect to a Controlled
Return) shall be made by or to any Group with respect to the IRS audit of any
Controlled Return until the audit has been completed with respect to all
Groups, unless such advance payment has been approved by the Tax
Administrator.
SECTION 13
Certain Post-Distribution Actions
(a) USOP.
(i) USOP shall comply with and otherwise not take any action
inconsistent with any representation or statement made, or to be made, by or
on behalf of any member of the USOP Group in connection with this Agreement
or to USOP's outside Tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions.
(ii) Until two years after the Distribution Date, USOP will
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Code.
(b) Workflow Management.
(i) Workflow Management shall comply with and otherwise not
take action inconsistent with each representation and statement made, or to
be made, by or on behalf
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of any member of the Workflow Group in connection with this Agreement or to
USOP's outside Tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions.
(ii) Until two years after the Distribution Date, Workflow
Management will maintain its status as a company engaged in the active
conduct of a trade or business, as defined in Section 355(b) of the Code.
(c) School Specialty.
(i) School Specialty shall comply with and otherwise not
take action inconsistent with each representation and statement made, or to
be made, by or on behalf of any member of the School Specialty Group in
connection with this Agreement or to USOP's outside Tax counsel in connection
with such firm's rendering an opinion to the Companies as to certain Tax
aspects of the Contributions and Distributions.
(ii) Until two years after the Distribution Date, School
Specialty will maintain its status as a company engaged in the active conduct
of a trade or business, as defined in Section 355(b) of the Code.
(d) Aztec.
(i) Aztec shall comply with and otherwise not take action
inconsistent with each representation and statement made, or to be made, by
or on behalf of any member of the Technology Group in connection with this
Agreement or to USOP's outside Tax counsel in connection with such firm's
rendering an opinion to the Companies as to certain Tax aspects of the
Contributions and Distributions.
(ii) Until two years after the Distribution Date, Aztec will
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Code.
(e) Navigant.
(i) Navigant shall comply with and otherwise not take action
inconsistent with each representation and statement made, or to be made, by
or on behalf of any member of the Travel Group in connection with this
Agreement or to USOP's outside Tax counsel in connection with such firm's
rendering an opinion to the Companies as to certain Tax aspects of the
Contributions and Distributions.
21
<PAGE>
(ii) Until two years after the Distribution Date, Navigant
will maintain its status as a company engaged in the active conduct of a
trade or business, as defined in Section 355(b) of the Code.
(f) During the two-year period following the Distribution Date,
none of the Spin-Off Companies shall effect, or agree to effect, any
Restricted Transaction unless and until the following conditions have been
satisfied or waived, in writing, by USOP with respect to such Restricted
Transaction:
(i) Such Company shall have given USOP at least 10 business
days' written notice prior to effecting such Restricted Transaction, which
notice shall describe the Restricted Transaction in detail reasonably
sufficient to permit analysis of the potential effect of the Restricted
Transaction on the U.S. federal income tax treatment of the Contributions and
the Distributions; provided, that such Company will not be required to
disclose the name of any other party participating in the Restricted
Transaction unless such disclosure is necessary to permit such analysis; and
provided further, that USOP will keep confidential all information relating
to the Restricted Transaction;
(ii) Such Company shall have afforded USOP and its
representatives 10 business days (which may overlap with the notice period in
Section 13(f)(i) of this Agreement) to discuss with the Spin-Off Company and
its representatives the terms of such Restricted Transaction, subject to the
provisos in Section 13(f)(i); and
(iii) At USOP's request, such Company shall have provided to
USOP, an opinion of outside counsel, reasonably satisfactory to USOP, in form
and substance reasonably satisfactory to USOP, to the effect that such
transaction will not adversely affect the U.S. federal income tax treatment
of the Contributions and/or the Distributions as transactions described in
Sections 355 and 368 of the Code.
SECTION 14
Entire Agreement and Termination of Existing Tax Allocation Agreements
This Agreement contains the entire agreement among the Companies
with respect to the subject matter hereof. Any and all existing tax
allocation agreements, written or unwritten, exclusively between any member
of the USOP Group and any member of any of the Spin-Off Company Groups other
than this Agreement shall be terminated immediately prior to the Distribution
Date. Nothing in this Section 14 shall affect any provision of the
Distribution Agreement or of this Agreement relating to Taxes.
22
<PAGE>
SECTION 15
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.
SECTION 16
Modifications
This Agreement may not be amended, supplemented or discharged except
by performance or by an instrument in writing signed by all of the Companies.
SECTION 17
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.
23
<PAGE>
IN WITNESS WHEREOF, the Companies have duly executed this Agreement
as of the date first above written.
U.S. OFFICE PRODUCTS COMPANY
By
Name:
Title:
Seal
Attest:
WORKFLOW MANAGEMENT, INC.
By
Name:
Title:
Seal
Attest:
SCHOOL SPECIALTY, INC.
By
Name:
Title:
Seal
Attest:
24
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
By
Name:
Title:
Seal
Attest:
NAVIGANT INTERNATIONAL, INC.
By
Name:
Title:
Seal
Attest:
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF AZTEC TECHNOLOGY PARTNERS, INC.
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Aztec LLC............................................... Delaware
Bay State LLC........................................... Delaware
Compel LLC.............................................. Delaware
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 (except
for Note 1 and the last paragraph of Note 3, which are as of May 14, 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
June 3, 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
June 3, 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
June 3, 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
June 3, 1998
<PAGE>
Exhibit 23.10
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, the
sole shareholder of the Company, of shares of common stock, par value $.001,
of the Company.
Dated: June 1, 1998 /s/ Lawrence M. Howell
------------------------
Lawrence M. Howell
