<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998.
REGISTRATION NO. 333-47501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
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)
----------------------
<TABLE>
<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
FACSIMILE NO. (617) 623-5888
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C>
GEORGE P. STAMAS, ESQ. LELAND E. HUTCHINSON, ESQ.
WILMER, CUTLER & PICKERING JOHN L. MACCARTHY, ESQ.
2445 M STREET, N.W. WINSTON & STRAWN
WASHINGTON, D.C. 20037 35 W. WACKER DRIVE
TELEPHONE NO. (202) 663-6000 CHICAGO, ILLINOIS 60601
FACSIMILE NO. (202) 663-6363 TELEPHONE NO. (312) 558-5600
FACSIMILE NO. (312) 558-5700
</TABLE>
------------------
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, as amended (the "Securities Act"), 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>
PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE REGISTRATION FEE (1)
<S> <C> <C>
Common Stock, par value $0.001 per share............................................. $50,000,000 $14,750
</TABLE>
(1) 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 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 SOLD PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS 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>
[LOGO]
SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Aztec
Technology Partners, Inc. ("Aztec" or the "Company"). Prior to this Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating to the
method of determining the initial public offering price. The Company has applied
for quotation on the Nasdaq National Market under the symbol "AZTC".
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.................................................. $ $ $
Total (3).................................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
------------------
The Common Stock is offered by the Underwriters, as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1998.
<PAGE>
[Description of Inside Cover Art]
Picture of two women and one man conferring and looking at a report.
HEADING READS: AZTEC
CAPTION READS: CONSULTING AND ENGINEERING SERVICES
TEXT: THE SINGLE SOURCE FOR TECHNOLOGY SOLUTIONS.
Aztec is a single-source provider of a broad range of IT business solutions.
Aztec's operating companies offer complementary IT solutions, which allows Aztec
to be a "one-stop" IT solutions provider. 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.
COVERING FOLD-OUT PAGE FOR PROSPECTUS
Description of photographs:
1 Caption: Software Development and Implementation Services
Three men and one woman conferring over a conference table.
2 Caption: Systems and Network Design and Implementation Services
Hand holding fibers that are lit at ends.
3 Caption: Telephony Design, Information Technology Support and
Operational Services.
Man talking on portable phone with laptop computer on his
knees.
TEXT: THE SINGLE SOURCE
Aztec Technology Partners provides a broad range of information technology
business solutions.
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 7
The Spin-Offs From U.S. Office Products.................................................................... 14
Use of Proceeds............................................................................................ 20
Dividend Policy............................................................................................ 20
Capitalization............................................................................................. 21
Dilution................................................................................................... 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Business................................................................................................... 32
Management................................................................................................. 41
Certain Transactions....................................................................................... 50
Principal Stockholders..................................................................................... 51
Description of Aztec Capital Stock......................................................................... 52
Shares Eligible for Future Sale............................................................................ 54
Underwriting............................................................................................... 55
Legal Matters.............................................................................................. 56
Experts.................................................................................................... 56
Additional Information..................................................................................... 57
Index to Unaudited Pro Forma Condensed Consolidated Financial Information, Financial Statements and
Consolidated Financial Statements......................................................................... F-1
</TABLE>
------------------
The Company 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
3
<PAGE>
PROSPECTUS 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 CONDENSED CONSOLIDATED
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 PROSPECTUS. THIS 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
CONDITIONS AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES: (I) CONSUMMATION OF THE TRANSACTIONS
DESCRIBED UNDER "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS;" (II) AN INITIAL
PUBLIC OFFERING PRICE OF $ PER SHARE OF COMMON STOCK (REPRESENTING THE
MIDPOINT OF THE PRICE RANGE); (III) A DISTRIBUTION IN THE TECHNOLOGY
DISTRIBUTION (AS DEFINED HEREIN) OF ONE SHARE OF AZTEC COMMON STOCK FOR
EACH SHARES OF COMMON STOCK OF U.S. OFFICE PRODUCTS COMPANY ("U.S. OFFICE
PRODUCTS") AND (IV) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED. SEE "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS." AS USED IN THIS
PROSPECTUS, 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, pro forma revenues of $228.9 million, net income of
$6.7 million, and pro forma net income of $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 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.
4
<PAGE>
With the rapid evolution of technology, the market for IT solutions has
grown significantly. According to industry sources, 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.
THE TECHNOLOGY DISTRIBUTION
Prior to the completion of this Offering, shares of Aztec Common Stock will
be distributed to the stockholders of record on , 1998 of U.S. Office
Products (the "Technology Distribution"). U.S. Office Products is spinning off
Aztec as part of a strategic restructuring plan (the "Strategic Restructuring
Plan") in which U.S. Office Products is spinning off the shares of four
companies, including Aztec (the "Spin-Off Companies") that will conduct U.S.
Office Products' current print management, technology solutions, educational
supplies and corporate travel services businesses. (The spin-offs are
collectively referred to as the "Distributions.") See "The Spin-Offs From U.S.
Office Products."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by Aztec.......................... shares(1)
Common Stock to be Outstanding after this Offering..... shares(1)(2)
Use of Proceeds........................................ To fund future acquisitions, to
repay $4.4 million of inter-company
indebtedness to U.S. Office
Products, and for general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol.......................... "AZTC"
</TABLE>
- ------------------
(1) Excludes shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Excludes shares of Common Stock reserved for issuance upon exercise of
options. See "Management--Replacement of Outstanding U.S. Office Products
Options--1998 Stock Incentive Plan.".
5
<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 40,785 15,637 23,365
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
(3).......................... 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........................ $ 0.03 $ 0.08 $ 0.17 $ 0.14 $ 0.07 $ 0.09 $ 0.06 $ 0.06
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
Diluted...................... $ 0.03 $ 0.08 $ 0.17 $ 0.14 $ 0.07 $ 0.09 $ 0.06 $ 0.06
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
Weighted average shares
outstanding:
Basic........................ 44,260 44,260 45,562 67,545 90,026 109,895(4) 85,978 114,758
Diluted...................... 44,260 44,260 45,704 68,374 91.761 109,895(4) 87,824 117,185
OTHER DATA:
EBITDA (5)................... $ 2,288 $ 4,545 $ 8,653 $ 9,926 $ 10,891 $ 19,708 $ 8,062 $ 12,392
<CAPTION>
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 24,
1997 (2) 1998 (2) 1998(7)
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $ 172,518 $ 191,074 $
Cost of revenues............... 127,875 141,631
------------ ------------ ------------
Gross profit................... 44,643 49,443
Selling, general and
administrative expenses...... 30,115 32,474
Non-recurring acquisition
costs........................ 1,906
------------ ------------ ------------
Operating income............... 12,622 16,969
Interest expense............... 300 300
Interest income................
Other (income) expense......... (232) (252)
------------ ------------ ------------
Income before provision for
income taxes................. 12,554 16,921
Provision for income taxes
(3).......................... 5,524 7,445
------------ ------------ ------------
Net income..................... $ 7,030 $ 9,476 $
------------ ------------ ------------
------------ ------------ ------------
Per share amounts:
Basic........................ $ 0.06 $ 0.09 $
------------ ------------ ------------
------------ ------------ ------------
Diluted...................... $ 0.06 $ 0.09 $
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares
outstanding:
Basic........................ 109,895(4) 109,895(4)
Diluted...................... 109,895(4) 109,895(4)
OTHER DATA:
EBITDA (5)................... $ 14,730 $ 19,325
</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 (6) AS ADJUSTED (7)
-------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 23,869 $
Total assets................................................ 134,368
Long-term debt, less current portion........................ 4,696
Long-term payable to U.S. Office Products...................
Stockholder's equity........................................ 87,787
</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) 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.
(4) 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(g) of Notes to Pro Forma Combined
Financial Statements included herein.
(5) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, other income and expense, and extraordinary items. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is
not a measure of financial performance under GAAP and should not be
considered an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
(6) 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) Adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby at the assumed initial public offering price and the
anticipated application of the estimated net proceeds therefrom. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
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 will acquire 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.
A "when-issued" trading market in the Common Stock may develop immediately
upon the Distribution. Such trading could increase the volatility of, and
adversely affect the market price of, the Common Stock.
In addition, upon completion of this Offering and the Technology
Distribution, Aztec will have outstanding (i) shares of Aztec Common Stock
and (ii) immediately exerciseable options to acquire shares of Aztec
Common Stock (determined at the time of the Technology Distribution). The
executive officers and directors of Aztec who together 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 Prospectus (the "Lock-Up Agreements"). All the remaining shares will be
freely tradeable immediately upon completion of this 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 this Offering and 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 the Common Stock.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Aztec is the product of the consolidation by U.S. Office Products of ten
regional IT solutions companies. Aztec has not heretofore operated as an
independent entity. The operations of Aztec as a stand-alone, consolidated
entity may place significant demands on Aztec's management, operational, and
technical resources. Prior to the Technology Distribution, certain
administrative functions relating to Aztec's business (including some legal and
accounting services) were handled by U.S. Office Products. Aztec's future
performance will depend on its ability to function as a stand-alone entity and
on its ability to finance and manage expanding operations and to adapt its
information systems to changes in its business. Aztec's expenses may be higher
than when it was a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the operating
results and financial condition
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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. 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. In addition, 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 Issuances 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
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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 acquisition purposes (the "Proposed Credit Facility"). There can be no
assurance that Aztec will be able to satisfy the conditions to the funding of
the Proposed Credit Facility or obtain other financing if and when it is needed
or that any such other 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.
Upon completion of the Technology Distribution, 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 issuance. 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 has employment agreements with
its Chairman and Chief Executive Officer and its operating company presidents
with initial terms ending in 1999-2000. Thereafter, such agreements are
generally terminable without cause on 30 days' notice by either Aztec or the
employee. Aztec also intends to enter into employment agreements with Mr. Cohen
and Mr. Johnson. In addition, Jonathan J. Ledecky will serve as a director and
employee of Aztec and is expected to provide services to Aztec after the
Technology Distribution pursuant to an agreement entered into between Mr.
Ledecky and U.S. Office Products that provides that Aztec and the other Spin-Off
Companies (as defined in "The Spin-Offs From U.S. Office Products") will succeed
to certain rights of, and obligations under, such agreement following the
Distributions (the "Ledecky Services Agreement") and an expected employment
agreement with Aztec. See "Management--Ledecky Services Agreement." Mr. Ledecky
will also serve as a director 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
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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 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."
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.
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."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Technology Distribution and this Offering, it is anticipated
that there may be no public market for the Common Stock, and there can be no
assurance, that an active public market will develop for the Common Stock, or
that the Common Stock will trade in the public market subsequent to the Offering
at or above the initial public offering price. The initial public offering price
of the Common Stock offered hereby will be determined through negotiations among
the Company and the Underwriters and may not be indicative of the market price
for the Common Stock after this Offering. See "Underwriting." The trading price
of the Common Stock could be subject to wide fluctuations in response to
variations in the Company's quarterly operating results, changes in earnings
estimates by analysts, conditions in the Company'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 emerging growth
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 Common Stock.
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POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Technology Distribution, Aztec will enter into a tax
allocation agreement with U.S. Office Products and the other Spin-Off Companies
(the "Tax Allocation Agreement"), 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 a tax indemnification
agreement (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 of any Distribution Taxes with respect to
not only the Technology Distribution but also any of the other Distributions.
See "The Spin-Offs From U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement" and "The Spin-Offs from U.S. Office Products--U.S.
Federal Income Tax Consequences of the Distributions" for a detailed discussion
of the Tax Allocation Agreement and Tax Indemnification Agreement and the U.S.
federal income tax consequences of the Distributions.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
U.S. Office Products and Aztec will represent to Wilmer, Cutler & Pickering,
for purposes of its tax opinion (the "Tax Opinion"), that the Aztec Common Stock
that will be issued in this Offering, together with all Aztec capital stock that
could be issued pursuant to the exercise of options and other agreements that
may be exercised within one year of the Technology Distribution, represents in
the aggregate less than 20% of the Aztec capital stock that would be outstanding
after this Offering and the exercise of all such options and other agreements.
U.S. Office Products and Aztec will also represent to Wilmer, Cutler & Pickering
that there are no written or oral agreements or understandings, in effect prior
to the Technology Distribution, under which Aztec may be required to issue Aztec
Common Stock after the Technology Distribution, other than agreements covering
the stock referenced in the previous sentence and agreements covering other
stock options granted as compensation for services. Aztec has accordingly not
been able, prior to the Technology Distribution, to enter into any acquisition
or other agreement or understanding requiring issuance of additional Aztec
Common Stock.
In addition, Section 355(e) of the Internal Revenue Code of 1986, as amended
(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 includes 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.
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Aztec has entered into the Tax Allocation Agreement and the 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."
These limitations could adversely affect the pace of Aztec's acquisitions
and its ability to issue Aztec Common Stock for other purposes, including equity
offerings.
MATERIAL AMOUNT OF GOODWILL
Approximately $63.9 million, or 47.5% of Aztec's pro forma total assets as
of January 24, 1998 represents goodwill. Goodwill represents the excess of cost
over the fair market value of net assets acquired in business combinations
accounted for under the purchase method of accounting. Aztec currently amortizes
goodwill on a straight line method over a period ranging from 25-40 years with
the amount amortized in a particular period constituting a non-cash expense that
reduces Aztec's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain future acquisitions,
may not be deductible for tax purposes. In addition, Aztec will be required to
periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Aztec would be required to write down
the carrying value of the goodwill and incur a related charge to its income. A
reduction in net income resulting from the amortization or write down of
goodwill could have a material and adverse impact upon the market price of Aztec
Common Stock.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations accounted for under the pooling-of-interests method. As a result of
Aztec being a wholly-owned subsidiary of U.S. Office Products prior to the
Technology Distribution, Aztec will be unable to satisfy this criterion for a
period of two years following the Technology Distribution. Therefore, Aztec will
be precluded from completing business combinations accounted for under the
pooling-of-interests method for a period of two years and any business
combinations completed by Aztec during such period will be accounted for under
the purchase method resulting in the recording of goodwill. The amortization of
the goodwill will reduce income reported by Aztec below that which would have
been reported if the pooling-of-interests method had been used by Aztec.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of Aztec's acquisitions have not been
established by independent appraisals, but generally have been determined
through arm's-length negotiations between Aztec's management and representatives
of such acquired companies. The consideration paid for each such company has
been and will continue to be based primarily on the value of such company as a
going concern and not on the value of the acquired assets. Valuations of
acquired companies determined solely by appraisals of the acquired assets
typically would have been less than the consideration paid for the companies. No
assurance can be given that the future performance of such companies will be
commensurate with the consideration paid. Aztec does not expect to value future
acquisitions on the basis of asset appraisals. Therefore, this risk will apply
to future acquisitions as well.
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
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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."
DILUTION
Purchasers of Common Stock in the Offering will sustain a substantial and
immediate dilution of $ per share, based on the assumed initial public
offering price. In addition, the exercise of outstanding stock options after
this Offering could have a further dilutive effect. See "Dilution."
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 SPIN-OFFS FROM U.S. OFFICE PRODUCTS
OVERVIEW
Prior to the Offering, Aztec has been a wholly-owned subsidiary of U.S.
Office Products. At the time of the Offering, Aztec will hold all of the
business and assets of, and will be responsible for substantially all of the
liabilities associated with, U.S. Office Products Technology Solutions Division.
Following the Offering, the shares of Aztec Common Stock owned by U.S. Office
Products will be distributed to the stockholders of U.S. Office Products of
record on , 1998. U.S. Office Products is spinning off Aztec as part of a
Strategic Restructuring Plan in which U.S. Office Products is spinning off the
shares of the Spin-Off Companies that will conduct U.S. Office Products' current
print management, technology solutions, educational supplies and corporate
travel services businesses. At the same time as the Distributions, U.S. Office
Products is repurchasing 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 of its issued and outstanding common stock in a tender offer and is
selling equity securities to an affiliate ("CD&R") of an investment fund managed
by Clayton, Dubilier & Rice, Inc., which will give the Investor a 24.9% equity
interest in U.S. Office Products (but no interest in the Spin-Off Companies).
Regardless of the number of shares of U.S. Office Products' common stock
outstanding on the date of the completion of the Distributions, CD&R has
contracted to purchase a 24.9% equity interest in U.S. Office Products,
including the shares issued to CD&R (the "Equity Investment"). 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 Equity Investment. CD&R will receive special warrants (the
"Special Warrants") that would allow CD&R to maintain its 24.9% ownership
interest in U.S. Office Products if (i) any of its 5 1/2% convertible
subordinated notes due 2001 that remain outstanding after the 2001 note exchange
offer (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 certain acquisitions completed by U.S. Office Products. CD&R will also
receive warrants for Common Stock (the "Common Stock Warrants"). The Common
Stock Warrants would allow CD&R to increase its ownership above 24.9%. The
Common Stock Warrants will be exercisable at any time after the second
anniversary of the Equity Investment until the 12th anniversary of that date.
Assuming (i) exercise of all currently exercisable outstanding options, and
(ii) all 2003 Notes of U.S. Office Products were converted in accordance with
their existing terms, in each case without any adjustment for the restructuring
transactions, 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 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 of U.S. Office Products
remaining after the 2001 Note Offer, and the tender offer by U.S. Office
Products for its 5 1/2% convertible subordinated notes due 2003 (the "2003
Notes"), for a purchase price of 94.5% of the principal amount plus accrued
interest (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,
CD&R could own approximately 39.9% of outstanding U.S. Office Products' common
stock after implementation of the Strategic Restructuring Plan (assuming that
all of the 2001 Notes are exchanged in the 2001 Note Offer and all of the 2003
Notes are tendered in the 2003 Note Tender).
In connection with the Technology Distribution, Aztec is entering into a
series of agreements with U.S. Office Products and the other Spin-Off Companies
to provide mechanisms for an orderly transition
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and to define certain relationships among Aztec, U.S. Office Products and the
other Spin-Off Companies after the Technology Distribution. These agreements
are: a distribution agreement (the "Distribution Agreement") among Aztec, U.S.
Office Products and the other Spin-Off Companies: a tax allocation agreement
(the "Tax Allocation Agreement") among Aztec, U.S. Office Products and the other
Spin-Off Companies; an employee benefits agreement (the "Employee Benefits
Agreement") among Aztec, U.S. Office Products and the other Spin-Off Companies;
and a tax indemnification agreement (the "Tax Indemnification Agreement") among
Aztec and the other Spin-Off Companies.
The terms of the Distribution Agreement, Tax Allocation Agreement, Tax
Indemnification Agreement, and Employee Benefits Agreement have not yet been
finally determined. Those terms will be agreed to while Aztec is a wholly-owned
subsidiary of U.S. Office Products. In addition, the agreement between U.S.
Office Products and CD&R relating to CD&R's investment in U.S. Office Products
(the "Investment Agreement") specifies certain terms of these agreements and
provides that they are subject to CD&R's reasonable approval. Therefore, they
will not be the result of arm's-length negotiations between independent parties.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not been
finally determined, Aztec currently expects that the terms will include those
described below. There can be no assurance that the terms of the Distribution
Agreement, Tax Allocation Agreement, Tax Indemnification Agreement, and Employee
Benefits Agreement will not be less favorable to the stockholders of Aztec than
the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement is expected
to provide 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 is also expected to provide
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 among U.S. Office Products, Aztec, and the
other Spin-Off Companies under a formula to be determined. In addition, to the
extent that Aztec Acquisition Indemnity Claims are secured by the pledge of
stock of U.S. Office Products, Aztec, and the other 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, Aztec, and the other Spin-Off Companies for
their respective damages and expenses in accordance with the relative allocation
of recovery rights, which will be determined prior to the Technology
Distribution.
DEBT. The Distribution Agreement is expected to provide that Aztec will
have, at the time of the Technology Distribution, $5.0 million of debt plus the
amount of any additional debt incurred after the date of the Investment
Agreement by U.S. Office Products or Aztec in connection with the acquisition of
entities that will become subsidiaries of Aztec in connection with the
Distributions.
ASSUMPTION OF LIABILITIES. The Distribution Agreement is expected to
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefits matters, which will be
governed by separate agreements) among U.S. Office Products, Aztec and the other
Spin-Off Companies. 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, Tax Indemnification Agreement
and related agreements, (iii) its liabilities for the debt described above, (iv)
certain securities liabilities, and (v) any liabilities of U.S. Office Products
relating to earn-out or bonus payments owed by U.S. Office Products in respect
of Aztec or its subsidiaries. In addition, the Distribution Agreement is
expected to provide for
15
<PAGE>
sharing of certain liabilities among some or all of the parties. Each of U.S.
Office Products, Aztec and the other Spin-Off Companies will bear a portion, on
a basis to be determined, of (i) any liabilities of U.S. Office Products under
the securities laws arising from events prior to the Distributions (other than
claims relating solely to a specific Spin-Off Company or relating specifically
to the continuing businesses of U.S. Office Products), (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), and (iii) a portion of
transactions 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 equal to $1.0 million in the
case of each Spin-Off Company. 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 fees and expenses), including the Distributions, will total
approximately $75.0 million.
The Distribution Agreement is expected to provide 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 is expected to 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 Distribution but also any of the other Distributions.
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
16
<PAGE>
benefits coverage between U.S. Office Products and the Spin-Off Companies.
Pursuant to this agreement, Aztec will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by Aztec, while U.S. Office Products and the other Spin-Off Companies
and their respective post-Distribution subsidiaries will retain or assume
responsibility for their respective current and previous employees. The proposed
Employee Benefits Agreement reflects U.S. Office Products' expectation that
Aztec and the other 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 the spinning off
of portions of the U.S. Office Products' cafeteria plan that relate to employees
of Aztec and the other Spin-Off Companies and having those spun-off plans assume
responsibilities for claims submitted on or after the Distributions.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
Pursuant to the Tax Allocation Agreement and Tax Indemnification Agreement,
see "Tax Allocation Agreement and Tax Indemnification Agreement," Aztec could be
liable for Distribution Taxes if any or all of the Distributions fail to qualify
as tax-free spin-offs under Section 355 of the Code or are taxable under Section
355(e) of the Code.
THE TAX OPINION. 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 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 Distributions 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 Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
U.S. Office Products as a result of the Distributions.
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. Prospective
investors 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 Distributions. 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 a 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 Distributions were motivated, in whole or substantial part, to 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 stages
of growth; to allow the Spin-Off Companies to pursue independent acquisition
programs with a more focused use of resources and, where stock is used as
consideration, to allow the Spin-Off Companies 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 the Spin-Off Companies 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.
17
<PAGE>
Office Products' development, based on the skills and experience of CD&R. 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 each Distribution satisfies the business purpose
requirement of Section 355. However, although similar rationales have been
accepted by the IRS in other circumstances as sufficient to meet the business
purpose requirement of Section 355, there can be no assurance that the IRS will
not assert that the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355, both the Spin-Off Company 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 Distribution,
taking into account only businesses that have been acquired in transactions in
which no gain or loss was recognized. In order for the distribution of the stock
of Navigant to qualify as a tax-free spin-off under Section 355, substantially
all of the assets of Navigant must consist of the stock of Professional Travel
Corporation ("Professional Travel"), and Professional Travel and U.S. Office
Products must meet the requirements described in the preceding sentence. 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 the Spin-Off Companies, Wilmer,
Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that each 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. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or the Spin-Off Company. 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 the Spin-Off Companies, Wilmer,
Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that none of the Distributions is a transaction used principally
as a device for the distribution of earnings and profits of either U.S. Office
Products or any of the Spin-Off Companies. 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 any or all of the Distributions are
transactions used principally as a device for the distribution of earnings and
profits.
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 if 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 a 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
is 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 a series of related transactions. Based on the representations of
U.S. Office Products, the Spin-Off Companies and CD&R, and the assumption that
no Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or
18
<PAGE>
indirectly 50% or more by vote or value of the capital stock of U.S. Office
Products or of any Spin-Off Company, Wilmer, Cutler & Pickering expects to
deliver an opinion at the time of the Distributions that the Distributions will
not be taxable under Section 355(e). However, there can be no assurance that the
IRS will not assert that any or all of the Distributions are taxable under
Section 355(e).
If a Distribution fails to qualify as a tax-free spin-off is taxable under
Section 355(e), U.S. Office Products will recognize gain equal to the difference
between the fair market value of the Common Stock of the Spin-Off Company and
U.S. Office Products' adjusted tax basis in the Common Stock of the Spin-Off
Company (on the Distribution Date). If U.S. Office Products were to recognize
gain on one or more of the Distributions, such gain would likely be substantial.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to Aztec from the sale of shares offered by the Company
hereby, based on an assumed initial public offering price of $ per share (after
deducting the estimated underwriting discount and offering expenses), are
estimated to be $ if the Underwriters' over-allotment option is exercised in
full.
Aztec intends to use such net proceeds to fund future acquisitions, to repay
$4.4 million of inter-company indebtedness to U.S. Office Products, and for
general corporate purposes. The inter-company indebtedness bears interest at
approximately 7% and matures upon completion of the Technology Distribution. See
"The Spin-Offs From U.S. Office Products." Aztec has from time to time acquired
businesses and is engaged in preliminary discussions with third parties
concerning possible acquisitions by Aztec. Aztec is not a party to any agreement
with respect to any acquisition and no acquisition is currently probable. There
can be no assurance that in the future Aztec will come to any agreement with
respect to any acquisition, as to the terms of any acquisition, or that any
acquisition would ultimately be consummated. Any acquisition might use a
significant portion of the net proceeds of this Offering. See "Risk
Factors--Dependence Upon Acquisitions for Future Growth."
DIVIDEND POLICY
Aztec does not anticipate declaring and paying cash dividends on the Common
Stock in the foreseeable future. The decision whether to apply any legally
available funds to the payment of dividends on the 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 will be restricted by the
Proposed Credit Facility.
20
<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 sale by the Company of the shares
of Common Stock offered hereby and after deduction of estimated offering
expenses and underwriting discounts and commissions and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." 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 Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
(In thousands)
Short-term debt............................................................. $ 304 $ 304
---------- ----------- -----------
---------- ----------- -----------
Long-term debt.............................................................. $ 386 $ 4,696
Long-term payable to U.S. Office Products................................... 9,957
Stockholder's equity:
Divisional equity....................................................... 80,818
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, shares pro forma, shares pro forma, as adjusted (1)....... 110
Additional paid-in capital.............................................. 80,708
Retained earnings....................................................... 9,301 6,969
---------- ----------- -----------
Total stockholders' equity............................................ 90,119 87,787
---------- ----------- -----------
Total capitalization................................................ $ 100,462 $ 92,483 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------
(1) Excludes shares of Common Stock reserved for issuance upon exercise
of options. See "Management--Replacement of Outstanding U.S. Office Products
Options--1998 Stock Incentive Plan."
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of , 1998
was approximately $ , or $ per share of Aztec Common Stock. Pro forma
net tangible book value per share is equal to the Company's total pro forma
tangible assets less its total pro forma liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds," the pro forma net
tangible book value of the Company at , 1998, would have been
approximately $ , or approximately $ per share. This represents an
immediate increase of $ per share in the pro forma net tangible book value
to existing stockholders and an immediate dilution of $ per share in pro
forma net tangible book value to new investors purchasing Common Stock in the
Offering. The following table illustrates the per share dilution to new
investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
Offering.................................................. $
Increase per share attributable to new investors..........
---------
Pro forma net tangible book value after the Offering........
---------
Dilution per share to new investors......................... $
---------
---------
</TABLE>
The foregoing computations assume no exercise of stock options to acquire
shares of Common Stock exercisable upon consummation of the Technology
Distribution. To the extent that shares of Common Stock are issued upon exercise
of these options, the effect would be to increase the dilution to new investors.
See "Management--Replacement of Outstanding U.S. Office Products Options--1998
Stock Incentive Plan."
22
<PAGE>
SELECTED FINANCIAL DATA
The historical Selected Financial Data for the fiscal years ended March 31,
1995 and 1996 and April 26, 1997 (except pro forma amounts) have been derived
from Aztec's consolidated financial statements that have been audited and are
included elsewhere in this Information Statement/Prospectus. The historical
Selected Financial Data for the fiscal years ended March 31, 1993 and 1994 have
been derived from unaudited consolidated financial statements are not included
elsewhere in this Information Statement/Prospectus or incorporated herein by
reference. The Selected Financial Data for the six months ended October 26, 1996
and October 25, 1997 (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 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 February 13, 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.
23
<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 40,785 15,637 23,365
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 (3)... 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.......................... $ 0.03 $ 0.08 $ 0.17 $ 0.14 $ 0.07 $ 0.09 $ 0.06 $ 0.06
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Diluted........................ $ 0.03 $ 0.08 $ 0.17 $ 0.14 $ 0.07 $ 0.09 $ 0.06 $ 0.06
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Weighted average shares
outstanding:
Basic.......................... 44,260 44,260 45,562 67,545 90,026 109,895(4) 85,978 114,758
Diluted........................ 44,260 44,260 45,704 68,374 91,761 109,895(4) 87,824 117,185
OTHER DATA:
EBITDA (5)..................... $ 2,288 $ 4,545 $ 8,653 $ 9,926 $ 10,891 $ 19,708 $ 8,062 $ 12,392
<CAPTION>
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 24,
1997 (2) 1998 (2) 1998(7)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues......................... $ 172,518 $ 191,074 $
Cost of revenues................. 127,875 141,631
----------- ----------- -----------
Gross profit..................... 44,643 49,443
Selling, general and
administrative expenses........ 30,115 32,474
Non-recurring acquisition
costs.......................... 1,906
----------- ----------- -----------
Operating income................. 12,622 16,969
Interest expense................. 300 300
Interest income..................
Other (income) expense........... (232) (252)
----------- ----------- -----------
Income before provision for
income taxes................... 12,554 16,921
Provision for income taxes (3)... 5,524 7,445
----------- ----------- -----------
Net income....................... $ 7,030 $ 9,476 $
----------- ----------- -----------
----------- ----------- -----------
Per share amounts:
Basic.......................... $ 0.06 $ 0.09 $
----------- ----------- -----------
----------- ----------- -----------
Diluted........................ $ 0.06 $ 0.09 $
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares
outstanding:
Basic.......................... 109,895(4) 109,895(4)
Diluted........................ 109,895(4) 109,895(4)
OTHER DATA:
EBITDA (5)..................... $ 14,730 $ 19,325
</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
AS ADJUSTED
PRO FORMA (6) (7)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 23,869 $
Total assets................................................ 134,368
Long-term debt, less current portion........................ 4,696
Long-term payable to U.S. Office Products...................
Stockholder's equity........................................ 87,787
</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) 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.
(4) 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(g) 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.
(5) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, other income and expense, and extraordinary items. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is
not a measure of financial performance under GAAP and should not be
considered an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
(6) 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) Adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby at the assumed initial public offering price and the
anticipated application of the estimated net proceeds therefrom. See "Use of
Proceeds."
24
<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
25
<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 internal growth 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
26
<PAGE>
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
27
<PAGE>
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 internal growth 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.
28
<PAGE>
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.
29
<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
5 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."
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 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
30
<PAGE>
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>
QUARTER ENDED
------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996
--------- --------- --------- ---------
<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)
<CAPTION>
QUARTER ENDED
------------------------------------------
JULY 27, OCT. 26, JAN. 25, APRIL 26,
1996 1996 1997 1997
--------- --------- --------- ---------
<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
<CAPTION>
QUARTERS ENDED
------------------------------------------
JULY 26, OCT. 26, JAN. 25,
1997 1997 1998
--------- --------- ---------
<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
</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.
31
<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 the 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,
pro forma revenues of $228.9 million, net income of $6.7 million, and pro forma
net income of $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 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
32
<PAGE>
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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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. According to
industry sources, 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 developing complex business solutions in-house has
generally
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exceeded the internal resources of the business. In addition, the increased use
of outside IT solutions firms is being driven by competitive pressures requiring
rapid implementation of new systems and the adverse effects of selecting
inappropriate or outdated technology. Additionally, many companies have made a
strategic decision to focus on their core competencies, minimize their fixed
costs, and reduce their workforce, thereby preventing them from investing in
large IT staffs.
The business community increasingly demands multifunctional networks that
can simultaneously support any combination of voice, data, and video services
accessible from wireline and wireless terminal devices. For example,
telecommunications service providers are beginning to offer multifunctional
services, such as ISDN, which allows for the dynamic allocation of bandwidth
between any combination of voice, data, and video, and individual call routing.
Aztec believes that traditionally distinct telecommunications networks and data
networks increasingly will be built on the same technical platforms.
Data communication solutions have also become standard commodity solutions
where hubs and routers are now available to solve the complex problems of
enterprise-wide information flow. These products were developed by a multitude
of new small IT manufacturers. No longer do a few large computer manufacturers
have a stranglehold on data communication system configuration and deployment.
Today, an optimal IT business solution can be designed and implemented by small,
agile business solution providers who have the professional expertise to bring
together products and services from a multitude of vendors.
More recent technological developments have introduced applications that
capitalize on "cyberspace" and create additional opportunities for business
solution companies to provide: (i) programming and consulting services for
Web-enabled applications that allow them to be accessed by customers, employees,
and trading partners using low-cost Internet/intranet technology; (ii)
consulting and design services for Internet-specific products, such as
firewalls, Internet security systems, and network management; and (iii)
integrated voice and data systems that provide networks replacing existing
separate telephone systems and cable plants.
Demand for IT services has grown significantly and the nature of the IT
services industry has changed. According to Dataquest, the domestic market for
IT professional services (consulting, systems integration, applications
development, and outsourcing services) was approximately $73 billion in 1996 and
is estimated to grow to approximately $148 billion by the year 2001. Consulting,
development, and integration markets are experiencing record growth, with
revenue growth for the top 20 consulting, development and integration companies
averaging 25% between 1995 and 1996, according to Dataquest. Furthermore, the IT
service industry is highly-fragmented, with a small number of large national
service providers and a large number of small- and medium-sized providers,
typically regional in scope. Recently, the industry has experienced an increase
in consolidation activity that Aztec believes is driven in part by corporate
demands for single-source IT providers.
Aztec believes it is well positioned to capitalize on these developments by
providing focused IT expertise in a cost-effective manner to existing and
potential clients, and by identifying and acquiring complementary businesses in
this industry.
BUSINESS STRATEGY
Aztec's objective is to service its clients' strategic business needs by
becoming their sole IT solutions provider. By fostering a long-term relationship
with the customer and providing a superior level of service, Aztec will seek to
expand its current market presence and reputation. Aztec intends to grow through
a combination of targeted strategic acquisitions and internal growth.
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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.
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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
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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.
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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
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functions and achieve cost savings, if consistent with the client-service
objectives of the operating companies. As Aztec grows through acquisitions,
especially into other geographic regions, it may consider establishing regional
divisions to consolidate and improve administrative support functions.
SALES AND MARKETING. Aztec will focus its sales and marketing efforts on
companies with complex computing and communications requirements located
throughout the United States. To develop its clients, who will be principally
the chief information officers and chief financial officers of corporations,
Aztec will use a combination of sales engineering and consulting sales services,
including trade shows, professional seminars and radio advertisements. As of
December 31, 1997, Aztec employed 133 sales people across the country.
RETENTION OF SKILLED TECHNICAL AND SALES PROFESSIONALS. Aztec believes that
it must be able to attract and retain skilled technical and sales professionals
to achieve its business goals. To maximize the long-term retention of these
professionals, Aztec intends to put in place an aggressive performance-based
employee retention program. The program is expected to include: stock options; a
professional education policy; a progressive human resources program; and other
benefits designed to enhance long-term employee retention.
COMPETITION
The IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues than does the Company, and
have greater name recognition. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the price at
which others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future.
Aztec's principal competitors include Lucent Technologies Inc., Bell
Atlantic Corporation, Sapient Corporation, Cambridge Technology Partners
(Massachusetts), Inc., Digital Equipment Corporation, and International Business
Machines Corporation.
LEGAL PROCEEDINGS
Aztec is involved from time to time in legal proceedings arising in the
ordinary course of business. There are currently no material legal proceedings
pending to which Aztec is a party or to which any of its property is subject.
EMPLOYEES
As of January 1, 1998, Aztec employed 1,067 persons, of whom approximately
692 were technical professionals. Most of Aztec's employees work in professional
(including sales), admistrative, and technical positions. 297 of Aztec's
employees are represented by a labor union or subject to a collective bargaining
agreement. Aztec believes that its employee relations are generally good.
PROPERTIES
Aztec's headquarters are located in Boston, Massachusetts. In addition to
its headquarters, Aztec leases office and warehouse space in a number of
locations across the United States. Aztec does not believe that any of these
locations are material to its operations. The leases expire at various times
between 1998 and 2004.
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MANAGEMENT
DIRECTORS, OFFICERS, AND KEY EMPLOYEES
Following the Offering, it is anticipated that the directors, officers, and
key employees of Aztec will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James E. Claypoole................................... 64 Chairman and Chief Executive Officer*
Ira Cohen............................................ 44 Chief Operating Officer*
Douglas R. Johnson................................... 45 Executive Vice President and Chief Financial Officer*
Jonathan J. Ledecky.................................. 40 Director**
Phillip Arturi....................................... 40 President of Professional Network Services
Larry Glaser......................................... 38 President of Fortran
Kelby Knoedler....................................... 47 President of Entra
James Mahon.......................................... 50 President of Mahon
Darren Metz.......................................... 35 President of Office Equipment Service
Jack Meehan.......................................... 48 President of Aztec International
Robert McClory....................................... 53 President of Compel
Benjamin Tandowski................................... 50 President of Professional Computer Solutions
</TABLE>
- ------------------
* Executive Officer
** Mr. Ledecky is expected to join the Aztec Board promptly following the
consummation of this Offering.
JAMES E. CLAYPOOLE has served as Chief Executive Officer, Director and
President 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 2,
1998. 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 the 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 Technologies Corporation. From 1981
to 1990, Mr. Johnson held various positions at the Marriott Corporation, serving
finally as Vice President of Finance in that company's services group. Mr.
Johnson is a Certified Public Accountant.
JONATHAN J. LEDECKY will serve as a Director and an employee of Aztec and
the other Spin-Off Companies as of the Distribution Date. Mr. Ledecky founded
U.S. Office Products in October 1994, will
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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 Non-Executive Chairman of the
Board 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., the nation's largest manufacturer of office
furniture products. 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.
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.
LARRY GLASER, PRESIDENT OF FORTRAN, established Fortran in the late 1970's
as a service and repair organization for tele communications equipment. He has
been President of Fortran since that date.
KELBY KNOEDLER, PRESIDENT OF ENTRA, established Entra in 1984 after selling
his ownership-interest in CADO Business Systems of Ohio, which he founded in
1978. Since 1984, he has been the General Manager and President of Entra. He was
previously employed with Burroughs Corporation.
JAMES MAHON, PRESIDENT OF MAHON, has over 26 years of diverse experience in
the communications industry. Mr. Mahon was a founder and past president of
Computer Telephone Corporation, which went public in 1985. Mr. Mahon, who has
also held corporate-level positions at Rolm and Executone, founded Mahon in 1989
and has been President of Mahon since that date.
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.
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.
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.
BENJAMIN TANDOWSKI, PRESIDENT OF PROFESSIONAL COMPUTER SOLUTIONS, 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.
ADDITIONAL DIRECTORS; COMMITTEES
Prior to the Offering, Aztec expects to elect three additional directors, at
least two of whom will be independent directors. Directors are elected for one
year terms and hold office until their successors have been elected and
qualified or until such director's earlier resignation or removal, though the
Aztec Board may adopt a classified board before the Offering. Executive officers
are elected annually and hold office until the next meeting of stockholders or
until such executive officer's earlier resignation or removal.
The Aztec Board is expected to create an Audit Committee effective as of the
Offering. The Audit Committee will be charged with reviewing Aztec's annual
audit and meeting with Aztec's independent accountants to review Aztec's
internal control and financial management practices.
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The Aztec Board is expected to create a Compensation Committee effective as
of the Offering Date. The Compensation Committee will be charged with making
recommendations to the Aztec Board regarding compensation of Aztec's executive
officers and administering any stock option plan Aztec may adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by Aztec for services rendered during the year ended April 25, 1998 to the
Chief Executive Officer and the other highly compensated executive officers of
Aztec (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
--------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------------------------------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
James E. Claypoole....................................... $ 307,500(1) $ 30,000 $ 54,360(2)
Chairman and Chief Executive Officer
Ira Cohen................................................ (3)
Chief Operating Officer
Douglas R. Johnson....................................... (4)
Executive Vice President and Chief Financial Officer
Elizabeth M. Claypoole................................... $ 160,000(5) 7,500(6 )
Vice President, Treasurer, and Secretary
</TABLE>
- ------------------
(1) Mr. Claypoole's salary was increased from $300,000 to $315,000 in November
1997.
(2) Includes life insurance premiums of $42,360 paid by Bay State on life
insurance policies for which Mr. Claypoole's estate is the beneficiary and
payment of automobile expenses of $12,000.
(3) Mr. Cohen was hired by Aztec on March 2, 1998. His salary is expected to be
$200,000 during his first year with Aztec.
(4) Mr. Johnson was hired on March 31, 1998. His salary is expected to be
$175,000 during his first year with Aztec.
(5) As of the end of fiscal year 1998, Ms. Claypoole was no longer an executive
officer of Aztec.
(6) Options to purchase U.S. Office Products Common Stock.
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire Aztec Common Stock in connection with the
Technology Distribution. See "The Spin-Offs From U.S. Office Products." Upon
consummation of the Technology Distribution, the number of stock options granted
to officers, directors, and employees of Aztec in respect
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of U.S. Office Products options and their exercise price will be determined
according to the formula set by U.S. Office Products.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS EXERCISE OPTION TERM(4)
OPTIONS GRANTED IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1)(2) FISCAL YEAR(3) ($/SH)(2) DATE 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 option exercise price will be adjusted by applying the following
formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of Common Stock in the Offering
Trading Price of U.S. Office Products Common
Stock Pre-Technology Distribution
The number of 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 not be adjusted
as a result of the Tender Offer, but instead are adjusted solely for the
Distributions. The intrinsic value of the adjusted options will be no
greater than the intrinsic value of the 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.
44
<PAGE>
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 25, 1998. As described
above, all options were granted by U.S. Office Products as options to acquire
U.S. Office Products Common Stock and are expected to be replaced with options
to acquire shares of Aztec Common Stock in connection with the Technology
Distribution. See "The Spin-Offs From U.S. Office Products." Upon consummation
of the Technology Distribution, the number of stock options granted to officers,
directors, and employees of Aztec in respect of U.S. Office Products options and
their exercise price will be determined according to the formula set by U.S.
Office Products.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
IN THE MONEY OPTIONS MONEY(3) OPTIONS AT FISCAL YEAR
SHARES ACQUIRED AT APRIL 25, 1998(4) END($)(1)(5)
ON EXERCISE VALUE -------------------------- ----------------------------------
NAME (#)(2) REALIZED($)(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 option exercise price 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 option 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 not be
adjusted as a result of the Tender Offer, but instead are adjusted solely
for the Distributions. The intrinsic value of the adjusted options will be
no greater than the intrinsic value of the 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 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.
45
<PAGE>
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 855,184
options to acquire shares of U.S. Office Products' common stock will be held by
employees of Aztec. The number of 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 options
exercisable for shares of Aztec Common Stock into which the U.S. Office Products
options will convert is not yet determinable. The option exercise price 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 option 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 exercise price
and number of options will not be adjusted as a result of the Tender Offer, but
instead are adjusted solely for the Distributions. The intrinsic value of the
adjusted options will be no greater than the intrinsic value of the 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% of the outstanding Aztec Common Stock
following the Technology Distribution and this 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 Aztec and its subsidiaries, as well as non-employee directors of
Aztec, 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 Aztec 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 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 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
Distribution Date. Mr. Ledecky's option from Aztec will be exercisable
immediately if Mr. Ledecky dies before the option expires or, if and to the
extent that, Aztec
46
<PAGE>
accelerates the exercise schedule of options for substantially all 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.
Aztec expects that James E. Claypoole will also receive an option
("Claypoole Option") pursuant to the Plan for 3.75% of the outstanding Common
Stock as of the Distribution Date. The Claypoole Option is anticipated to have
the same terms as Mr. Ledecky's option, including an exercise price equal to the
price of the first trade on the day the Aztec Common Stock is first publicly
traded (the "First Trade Date"). In addition, management currently expects to
recommend option grants to certain key personnel of Aztec for approximately %
of Aztec Common Stock following the Offering and the Technology Distribution,
also at an exercise price equal to the price of the first trade on the First
Trade Date.
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into an agreement ("the Ledecky Services
Agreement") with U.S. Office Products on January 13, 1998, as amended, to become
effective on the Distribution Date and contingent on the consummation of the
Distributions. The Ledecky Services Agreement will expire on September 30, 1998
if none of the Distributions has occurred by that date. If the Ledecky Services
Agreement becomes effective, it will replace his November 4, 1997 employment
agreement with U.S. Office Products. The principal terms of this agreement, as
it is expected to be amended, 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. U.S. Office Products can terminate Mr. Ledecky's
employment only for "cause" where cause consists of (i) his conviction of or
guilty or nolo contendere plea to a felony, (ii) his engaging, despite notice,
in conduct demonstrably and materially injurious to U.S. Office Products, or
(iii) his violation of the noncompetition agreement as it relates to U.S. Office
Products. If Mr. Ledecky resigns or is terminated, he will cease to vest in his
U.S. Office Products stock options and will have 90 days to exercise any vested
options.
It is expected that Aztec will enter into an employment agreement with Mr.
Ledecky to implement its assigned portion of the Ledecky Services Agreement.
Under the employment agreement, Mr. Ledecky will report to the Board of
Directors and senior management of Aztec. In such capacity, Mr. Ledecky will
provide high-level acquisition negotiation services and strategic business
advice. Aztec can require Mr. Ledecky's performance of such services, consistent
with his other contractual obligations to Consolidation Capital Corporation,
U.S. Office Products and the other Spin-Off Companies. As an employee, Mr.
Ledecky will also be subject to the generally applicable personnel policies of
Aztec and will be eligible for such benefit plans in accordance with their
terms. Aztec will pay Mr. Ledecky an annual salary of $48,000 for up to two
years. Aztec may terminate Mr. Ledecky's employment with or without "cause",
where cause is defined as in the Ledecky Services Agreement as modified to refer
to Aztec. If without cause, the termination would entitle Mr. Ledecky to
severance equal to his salary for the lesser of 12 months or the remainder of
the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the Technology
Distribution has been completed. These provisions generally restrict Mr. Ledecky
from, among other things, investing in or working for or on behalf of any
business selling any products or services in direct competition with U.S. Office
Products, or the other Spin-Off Companies (collectively, the "U.S. Office
Products Companies"), within 100 miles of any location where any of the U.S.
Office Products Companies conducts business. (For this purpose, "products or
services" are those that U.S. Office Products offered on January 13, 1998.) The
Ledecky Services Agreement prohibits Mr. Ledecky from trying to hire away
managerial employees of Aztec and the other Spin-Off Companies
47
<PAGE>
or from calling upon customers of Aztec and the other Spin-Off Companies to
solicit or sell products or services in direct competition with Aztec and the
other Spin-Off Companies. Mr. Ledecky also may not hire away for Consolidation
Capital Corporation any person then or in the preceding one year employed Aztec,
or the other Spin-Off Companies. U.S. Office Products is permitted to (and will)
assign to Aztec, the ability to enforce the non-competition provisions described
above, which will then constitute part of his employment agreement with Aztec.
Mr. Ledecky will receive a stock option for Aztec Common Stock from Aztec as
of the Distribution Date. The option is intended to compensate Mr. Ledecky for
his services to Aztec as an employee. That option will be granted under the
Plan. The option will cover up to 7.5% of the outstanding Aztec Common Stock
determined as of the Distribution Date, without regard to the Offering. The
option will have a per share exercise price equal to the initial public offering
price of the Aztec Common Stock.
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.
In October 1996, Bay State entered into an employment agreement with
Elizabeth M. Claypoole, its then Vice President and Chief Financial Officer. The
employment agreement provides for an initial three-year term and successive
one-year extensions at the option of Bay State. Pursuant to this agreement, Ms.
Claypoole is entitled to receive a minimum annual salary of $140,000, incentive
bonuses as determined by the President of Bay State and all perquisites and
benefits customarily provided by Bay State to its employees. In the event that
Ms. Claypoole's employment is terminated for any reason other than cause, Ms.
Claypoole's employment agreement provides that Ms. Claypoole is entitled to
receive her base salary and benefits for the longer of (i) three months from the
date of termination, or (ii) the remaining time under the initial term of the
employment agreement. The employment agreement also prohibits Ms. Claypoole from
engaging in certain activities deemed competitive with Bay State or its
affiliates during the duration of her employment with Bay State and for the
longer of (i) a period of two years thereafter, or (ii) as long as Ms. Claypoole
continues to receive severance payments from Bay State.
On March 2, 1998, Aztec hired Ira Cohen as its Chief Operating Officer.
Aztec expects to enter into an employment agreement with Mr. Cohen prior to the
Offering.
48
<PAGE>
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 Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Aztec Board intends to create a Compensation Committee effective prior
to the Distribution Date. The Compensation Committee will be charged with
determining or making recommendations to the Aztec Board regarding the
compensation of executive officers of Aztec and administering any stock option
plan Aztec may adopt.
Until a Compensation Committee of the Aztec Board is created, decisions
regarding the compensation of executive officers of Aztec will be made by the
Aztec Board. No member of the Aztec Board has ever been an officer of Aztec or
any of its subsidiaries, except that Mr. Ledecky was the Chief Executive Officer
of U.S. Office Products until November 5, 1997 and will be Chairman of U.S.
Office Products until the Distribution Date, and Mr. Claypoole has been Chairman
of U.S. Office Products' Technology Solutions division.
49
<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--Ledecky Services Agreement."
50
<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 1,
1998 and as adjusted to reflect the Offering and the Technology Distribution
(assuming no exercise of the Underwriters' over-allotment option, no shares are
tendered in the Tender Offer, application of the Distribution Ratio and no
options are exercisable) 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
NUMBER OF OF U.S. OFFICE NUMBER OF
SHARES OF PRODUCTS SHARES OF PERCENT OF
U.S. OFFICE COMMON STOCK AZTEC AZTEC
PRODUCTS PRIOR TO COMMON STOCK, COMMON STOCK,
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK OFFERING AS ADJUSTED(1) AS ADJUSTED
- -------------------------------------------------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
James E. Claypoole (2)(5)......................... *
Jonathan J. Ledecky (5)...........................
Elizabeth M. Claypoole (3)(5)..................... *
All current executive officers and directors as a
group (five persons) (5)........................
5% STOCKHOLDERS:
FMR Corp (4)......................................
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company (3)......
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 shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering.
(3) Includes shares which may be acquired upon exercise of options
exercisable within 60 days following the Offering.
(4) Based upon a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") with respect to U.S. Office Products Common Stock.
(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.
51
<PAGE>
DESCRIPTION OF AZTEC CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, Aztec's authorized capital stock is expected to
consist of 150 million shares of Common Stock, par value $.001 per share, and 1
million shares of preferred stock, par value $.001 per share (the "Preferred
Stock"). At the time of the Offering, Aztec is expected to have outstanding
approximately shares of Common Stock and no shares of Preferred Stock. Set
forth below is a summary of the terms of Aztec's authorized capital stock.
COMMON STOCK
The holders of 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 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 Common Stock have no preemptive rights to purchase
shares of stock of Aztec. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of
Aztec. All of the shares of Common Stock to be sold pursuant to the Offering
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 Common Stock. For
example, Preferred Stock issued by Aztec may rank prior to Common Stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of shares of Preferred Stock may discourage bids for Common Stock or
may otherwise adversely affect the market price of Common Stock.
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
52
<PAGE>
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 (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 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 AND INDEMNIFICATION
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. The Company's by-laws
provide that the Company 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 the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Common Stock will be American Stock
Transfer & Trust Company.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
following this Offering and the Technology Distribution could have an adverse
effect on the market price of the Common Stock. Upon completion of this Offering
and the Technology Distribution, Aztec will have shares of Common Stock
outstanding. The shares of Common Stock offered by the Company hereby (and
any shares sold pursuant to the exercise of the Underwriters' over-allotment
option) will be freely tradeable without restriction. shares of Common Stock
of the Company issued upon consummation of the Technology Distribution will be
freely tradeable after the Technology Distribution and shares of Common Stock
issued upon consummation of the Technology Distribution will be "restricted
securities" subject to Rule 144 promulgated under the Securities Act. Beginning
180 days after the date of this Prospectus, additional shares of Common Stock
will become eligible for sale upon expiration of the Lock-Up Agreements with the
Representatives of the Underwriters.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least one year, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the outstanding Common
Stock (approximately shares of Common Stock immediately after this
Offering or shares if the Underwriters' over-allotment option is exercised
in full) or (ii) the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements, and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is not
an affiliate of the Company for at least 90 days prior to a sale and who has
beneficially owned "restricted securities" for at least two years is entitled to
sell such shares under Rule 144 without regard to the limitations described
above.
The Company intends to register the shares of Common Stock reserved for
issuance pursuant to its stock incentive plan as soon as practicable following
the date of this Prospectus. Options to acquire shares of Common Stock will
be exercisable upon consummation of the Technology Distribution. Following this
Offering and the Technology Distribution, in view of the large number of shares
freely-tradeable and available for immediate sale, the market for the Company's
Common Stock could be highly volatile, which could adversely affect the trading
price of the Common Stock.
54
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives. BancAmerica Robertson Stephens, Volpe Brown Whelan & Company,
LLC and Friedman, Billings, Ramsey & Co., Inc. (the "Representatives"), have
severally agreed, subject to the terms and conditions of an underwriting
agreement among the Company and the Underwriters (the "Underwriting Agreement"),
to purchase the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens...................................................
Volpe Brown Whelan & Company, LLC................................................
Friedman, Billings, Ramsey & Co., Inc............................................
----------
Total......................................................................
----------
----------
</TABLE>
The Representatives have advised the Company that they propose to offer the
shares of Common Stock to the public at the offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the initial public Offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall affect the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option exercisable during the
30-day period after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the same prices per share as the Company
will receive for the shares that the Underwriters have agreed to purchase
from the Company. To the extent that the Underwriters exercise such option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a percentage
of the shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the shares
are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Pursuant to the terms of the Lock-Up Agreements, the directors and executive
officers of Aztec, who hold approximately shares of the Common Stock, have
agreed with the Representatives that for a period of 180 days after the date of
this Prospectus (the "Lock-Up Period"), that, subject to certain limited
exceptions, they will not sell or otherwise dispose of shares of Common Stock,
including shares issuable under options or warrants exercisable during the
Lock-Up Period, any options or warrants to purchase shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock owned
directly by such holders or with respect to which they have the power of
disposition without the prior written consent of BancAmerica Robertson Stephens.
However, BancAmerica Robertson Stephens may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. There are no agreements between the Representatives and any
of the Company's stockholders providing consent by the Representatives to the
sale of shares prior to the expiration of the Lock-Up Period. The Company has
agreed that during the Lock-Up Period, the Company will not, subject to certain
exceptions, without the prior written consent of BancAmerica Robertson Stephens,
(i) consent to the disposition of any shares held by stockholders prior to the
expiration of the Lock-Up Period or (ii) issue, sell, contract to sell or
otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, other than the
Company's sale of shares in this Offering, the issuance of
55
<PAGE>
Common Stock upon the exercise of outstanding options and warrants and the
Company's issuance of options and stock under the existing stock option and
stock purchase plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations between the Company and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions, certain financial information of the
Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
Certain persons participating in this Offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilmer, Cutler & Pickering, Washington, D.C. Certain legal matters in
connection with the Common Stock will be passed upon for the Underwriters by
Winston & Strawn, Chicago, Illinois.
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 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 Koehmstedt 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.
56
<PAGE>
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.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement on Form
S-1 pursuant to the Securities Act with respect to the Common Stock offered
hereby (the "Registration Statement"). This prospectus (the "Prospectus") does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus concerning the provisions of any document filed with the Registration
Statement as exhibits 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 as an exhibit to the Registration Statement. For
further information about the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and to the financial statements,
schedules and exhibits filed as a part thereof.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof and the reports and other information filed by
the Company with the Commission in accordance with the Exchange Act may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
its Chicago Regional Officer, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the public
reference section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, and the
address of such site is http://www.sec.gov.
57
<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-20
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-21
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-22
Statement of Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited) F-23
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-24
Notes to Financial Statements F-25
COMPEL CORPORATION
Report of Price Waterhouse LLP, Independent Accountants F-28
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997 (unaudited) F-29
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-30
Statement of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997 (unaudited) F-31
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-32
Notes to Financial Statements F-33
AZTEC TECHNOLOGY PARTNERS, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Pro Forma Financial Information F-40
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited) F-41
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998
(unaudited) F-42
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997
(unaudited) F-43
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited) F-44
Notes to Pro Forma Combined Financial Statements F-45
</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
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>
APRIL 30, APRIL 26, JANUARY 24,
ASSETS 1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(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
Inventories.................................................. 4,451 3,904 12,578
Receivable from U.S. Office Products......................... 1,216 7,862
Unbilled percentage of completion revenues................... 725 2,871 1,452
Prepaid expenses and other current assets.................... 562 1,704 4,252
--------- --------- -----------
Total current assets..................................... 31,313 33,143 72,876
Property and equipment, net.................................... 1,755 2,163 5,074
Goodwill, net.................................................. 63,891
Other assets................................................... 877 2,005 506
--------- --------- -----------
Total assets............................................. $ 33,945 $ 37,311 $ 142,347
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Short-term debt.............................................. $ 5,580 $ 76 $ 304
Accounts payable............................................. 10,805 11,803 23,329
Accrued compensation......................................... 1,857 1,651 3,898
Deffered revenue............................................. 2,536 2,499 5,402
Income taxes payable......................................... 389 679 4,652
Accrued subchapter S corporation distributions............... 1,320
Other accrued liabilities.................................... 1,482 1,847 3,443
--------- --------- -----------
Total current liabilities................................ 22,649 19,875 41,028
Long-term debt................................................. 799 167 386
Long-term payable to U.S. Office Products...................... 4,786 9,957
Deferred income taxes.......................................... 857 857
--------- --------- -----------
Total liabilities........................................ 23,448 25,685 52,228
--------- --------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity............................................ 148 8,897 80,818
Retained earnings............................................ 10,349 2,729 9,301
--------- --------- -----------
Total stockholder's equity............................... 10,497 11,626 90,119
--------- --------- -----------
Total liabilities and stockholder's equity............... $ 33,945 $ 37,311 $ 142,347
--------- --------- -----------
--------- --------- -----------
</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 23,365
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............................................. $0.17 $0.14 $0.07 $0.06 $0.06
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Diluted........................................... $0.17 $0.14 $0.07 $0.06 $0.06
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Unaudited pro forma net income (see Note 8)......... $ 4,592 $ 4,033 $ 6,572
---------- ----------- -----------
---------- ----------- -----------
Unaudited pro forma income per share:
Basic............................................. $0.05 $0.05 $0.06
---------- ----------- -----------
---------- ----------- -----------
Diluted........................................... $0.05 $0.05 $0.06
---------- ----------- -----------
---------- ----------- -----------
</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 at Pooled Companies.................... (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 stockholders 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
April 25, 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.
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. With the exception of interest
expense, 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 liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and
F-9
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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)
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
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......................................... $ 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.
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. The Company has entered into
a commitment letter with Bank Boston, N.A. for a $200,000 proposed Credit
Facility which will be used for working capital and acquisition purposes. The
Company expects that the Proposed Credit Facility will include customary
covenants including maintenance of financial ratios and limitation on dividend
payments.
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
F-18
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
accrued at April 30, 1996 or April 26, 1997 related to these agreements, as no
change of control has occurred.
DISTRIBUTION
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility are expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
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. STOCKHOLDERS' 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
F-19
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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. 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 first trade on the day the
Company's Common Stock is first publicly traded.
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
Pro forma income (see Note 8)............................. 3,550 1,961 737 193 6,441
</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>
<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
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 $71.9
million. The
F-20
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars In Thousands)
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.
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................... (261) (174) (489) 327
Other assets................................................ (30) (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
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 March 5,
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) $ $ $
Accounts receivable, net........... 46,615 46,615
Inventories........................ 12,578 12,578
Receivable from U.S. Office
Products......................... 7,862 (7,862)(a)
Unbilled percentage of completion
revenues......................... 1,452 1,452
Prepaid and other current assets... 4,252 4,252
------------- ----------- ---------- ----------- ----------
Total current assets........... 72,876 (7,979) 64,897
Property and equipment, net.......... 5,074 5,074
Goodwill, net........................ 63,891 63,891
Other assets......................... 506 506
------------- ----------- ---------- ----------- ----------
Total assets................... $ 142,347 $ (7,979) $ 134,368 $ $
------------- ----------- ---------- ----------- ----------
------------- ----------- ---------- ----------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt.................... $ 304 $ $ 304 $ $
Accounts payable................... 23,329 23,329
Accrued compensation............... 3,898 3,898
Deferred revenue................... 5,402 5,402
Income taxes payable............... 4,652 4,652
Other accrued liabilities.......... 3,443 3,443
------------- ----------- ---------- ----------- ----------
Total current liabilities...... 41,028 41,028
Long-term debt....................... 386 4,310(a) 4,696
Long-term payable to U.S. Office
Products........................... 9,957 (9,957)(a)
Deferred income taxes................ 857 857
------------- ----------- ---------- ----------- ----------
Total liabilities.............. 52,228 (5,647) 46,581
------------- ----------- ---------- ----------- ----------
Stockholder's equity:
Divisional equity.................. 80,818 80,818
Retained earnings.................. 9,301 (2,332)(a) 6,969
------------- ----------- ---------- ----------- ----------
Total stockholder's equity..... 90,119 (2,332) 87,787
------------- ----------- ---------- ----------- ----------
Total liabilities and
stockholder's equity......... $ 142,347 $ (7,979) $ 134,368 $ $
------------- ----------- ---------- ----------- ----------
------------- ----------- ---------- ----------- ----------
</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>
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............ $ 142,512 $ 9,808 $ 20,545 $ 18,209 $ $ 191,074 $ $
Cost of revenues.... 107,895 6,056 14,452 13,228 141,631
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Gross
profit...... 34,617 3,752 6,093 4,981 49,443
Selling, general and
administrative
expenses.......... 22,951 2,407 2,914 3,275 (312)(b) 31,235
Amortization
expense........... 414 12 813(d) 1,239
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Operating
income...... 11,252 1,333 3,179 1,706 (501) 16,969
Other (income)
expense:
Interest
expense......... 169 87 71 127 (154)(e) 300
Interest income... (167) (39) (20) 226(e)
Other............. (14) (117) (30) (91) (252)
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Income before
provision for
income taxes...... 11,264 1,402 3,158 1,670 (573) 16,921
Provision for income
taxes............. 4,692 55 49 339 2,310(f) 7,445
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Net income.......... $ 6,572 $ 1,347 $ 3,109 $ 1,331 $ (2,883) $ 9,476 $ $
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Weighted average
shares
outstanding:
Basic............. 114,758 109,895(g)
Diluted........... 117,185 109,895(g)
Net income per
share:
Basic............. $ 0.06 $ 0.09 $
------------- ---------- -----------
------------- ---------- -----------
Diluted........... $ 0.06 $ 0.09 $
------------- ---------- -----------
------------- ---------- -----------
</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 $ $
Cost of revenues...... 76,049 12,319 19,754 19,753 127,875
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Gross profit.... 25,246 5,970 6,119 7,308 44,643
Selling, general and
administrative
expenses............ 15,637 4,729 3,533 6,161 (1,823)(b) 28,876
639(c)
Amortization
expense............. 16 1,223(d) 1,239
Non-recurring
acquisition costs... 1,906 1,906
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Operating
income........ 7,703 1,225 2,586 1,147 (39) 12,622
Other (income)
expense:
Interest expense.... 310 127 104 151 (392)(e) 300
Interest income..... (169) (89) (18) (1) 277(e)
Other............... 234 (291) (64) (111) (232)
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Income before
provision for income
taxes............... 7,328 1,478 2,564 1,108 76 12,554
Provision for income
taxes............... 1,771 64 30 338 3,321(f) 5,524
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Net income............ $ 5,557 $ 1,414 $ 2,534 $ 770 $ (3,245) $ 7,030 $ $
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Weighted average
shares outstanding:
Basic............... 85,978 109,895(g)
Diluted............. 87,824 109,895(g)
Net income per share:
Basic............... $ 0.06 $ 0.06 $
------------- ---------- -----------
------------- ---------- -----------
Diluted............. $ 0.06 $ 0.06 $
------------- ---------- -----------
------------- ---------- -----------
</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 PRO
PARTNERS, AZTEC COMPEL INSIGNIFICANT PRO FORMA PRO FORMA OFFERING 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 $ $
Cost of revenues....... 102,129 15,553 25,407 26,061 169,150
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Gross profit..... 34,149 8,073 8,223 9,317 59,762
Selling, general and
administrative
expenses............. 21,525 6,063 4,961 8,028 (2,172)(b) 39,134
729(c)
Amortization expense... 22 1,629(d) 1,651
Non-recurring
acquisition costs.... 2,274 2,274
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Operating
income......... 10,350 1,988 3,262 1,289 (186) 16,703
Other (income) expense:
Interest expense..... 324 174 124 210 (432)(e) 400
Interest income...... (168) (111) (27) (3) 309(e)
Other.................. (53) (323) (67) (136) (579)
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Income before provision
for income taxes..... 10,247 2,248 3,232 1,218 (63) 16,882
Provision for income
taxes................ 3,524 112 39 245 3,508(f) 7,428
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Net income............. $ 6,723 $ 2,136 $ 3,193 $ 973 $ (3,571) $ 9,454 $ $
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
------------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Weighted average shares
outstanding:
Basic................ 90,026 109,895(g)
Diluted.............. 91,761 109,895(g)
Net income per share:
Basic................ $ 0.07 $ 0.09 $
------------- ---------- -----------
------------- ---------- -----------
Diluted.............. $ 0.07 $ 0.09 $
------------- ---------- -----------
------------- ---------- -----------
</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 credit facility entered into concurrently with the
Distribution.
2. STATEMENT OF INCOME
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) The weighted average shares outstanding used to calculate pro forma earnings
per share is based upon 109,895 shares of common stock outstanding for the
periods. This is based upon the most current number of shares of common
stock of U.S. Office Products outstanding of 133,042 plus 5,000 shares
expected to be tendered by U.S. Office Products option holders, plus 8,890
shares related to the conversion of U.S. Office Products debt less 37,037
shares expected to be repurchased by U.S. Office Products in the Tender
Offer, and assumes a distribution ratio of one share of Aztec Common Stock
for each share of U.S. Office Products Common Stock. The actual distribution
ratio will be determined prior to effectiveness of the Registration
Statement of which this Prospectus is a part, and is expected to be less
than one share of Aztec Common Stock for every one share of U.S. Office
Products Common Stock.
F-46
<PAGE>
[LOGO]
<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................................................... $ 14,750
Nasdaq Listing Fee................................................. $ *
NASD Filing Fee.................................................... $ 5,500
Blue Sky Fees and Expenses......................................... $ 5,000
Legal Fees and Expenses............................................ $ *
Accounting Fees and Expenses....................................... $ *
Printing Fees and Expenses......................................... $ *
Miscellaneous...................................................... $ *
Total.......................................................... $ *
</TABLE>
- ------------------
* To be supplied by amendment
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 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,
II-1
<PAGE>
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 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 AND FINANCIAL STATEMENT SCHEDULES
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 shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the District of
Columbia on May , 1998.
AZTEC TECHNOLOGY PARTNERS, INC.
By: /s/ JAMES E. CLAYPOOLE
-----------------------------------
Name: James E. Claypoole
Title: Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ----------------------------------- ------------------------- ----------------
/s/ JAMES E. CLAYPOOLE Chairman of the Board of
- ----------------------------------- Directors and Chief
James E. Claypoole Executive Officer May 1, 1998
(Principal Executive
Officer)
/s/ DOUGLAS R. JOHNSON Executive Vice President
- ----------------------------------- Chief Financial Officer
Douglas R. Johnson (Principal Financial and May 1, 1998
Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation
3.2* Bylaws
4.1 Form of certificate representing shares of Common Stock
5* Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8* Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec Technology
Partners, Inc., TDOP, Inc., and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec Technology
Partners, Inc., TDOP, Inc., and School Specialty, Inc.
10.3** Employment Agreement, dated October 15, 1996, between Bay State Computer Group and James E. Claypoole.
10.4* Ledecky Services Agreement
10.5** Employment Agreement, dated October 15, 1996, between Bay State Computer Group and Elizabeth M.
Claypoole
10.6* Form of Tax Indemnification Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec
Technology Partners, Inc., TDOP, Inc., and School Specialty, Inc.
10.7* Form of Employee Benefits Agreement among U.S. Office Products, Workflow Graphics, Inc., Aztec
Technology Partners, Inc., TDOP, Inc., and School Specialty, Inc.
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 Rubin, Koehmstedt and Nadler
23.3 Consent of B.N. Kozin Company
23.4 Consent of Price Waterhouse LLP
23.5** Consent of Jonathan Ledecky to be named as a director
23.6** Consent of James E. Claypoole to be named as director
27 Financial data schedule
</TABLE>
- ------------------
* To be supplied by amendment.
** Previously filed and incorporated by reference to the Registrant's
Registration Statement on Form S-1, File No. 333-46533.
<PAGE>
SCHEDULE 2
AZTEC TECHNOLOGY PARTNERS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED MARCH 31, 1995 AND 1996, APRIL 27, 1997, AND
THE NINE MONTHS ENDED JANUARY 24, 1998
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE PERIOD
- ------------------------- -------------- ----------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... March 31, 1994 $ 117,000 $ 165,000 )(b) $(176,000)(a) March 31, 1995 $ 106,000
March 31, 1995 106,000 22,000 (5,000 (22,000)(a) April 30, 1996 123,000
April 30, 1996 123,000 250,000 April 27, 1997 351,000
</TABLE>
(a) Represents write-offs of uncollectible accounts receivable
(b) Represents a $5,000 adjustment to conform the year-ends of certain Pooled
Companies
S-1
<PAGE>
ATP Exhibit 4.1
AZTEC TECHNOLOGY PARTNERS, INC. CUSIP 05480L 10 1
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE OF
AZTEC TECHNOLOGY PARTNERS, INC.
(the Corporation ) transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon the surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all of the terms and conditions contained in the
Certificate of Incorporation of the Corporation and all amendments thereto.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
AZTEC TECHNOLOGY PARTNERS, INC.
CORPORATE
SEAL
1998
DELAWARE
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent and Registrar
By
Authorized Signature
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215)657-3480
SALES: J. NAPOLITANO: 212-557-9100
/NET/BANKNOTE/HOME49/AZTECH556217
PRODUCTION COORDINATOR: BELINDA BAECK: 215-830-2198
PROOF OF APRIL 29, 1998
AZTEC CONSULTING, INC.
H56217 face
OPERATOR: lr/mt/KOSHY
rev 2
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT -- as tenants by the entireties ----- ----
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
--------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated
---------------------
------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215)657-3480
SALES: J. NAPOLITANO: 212-557-9100
/NET/BANKNOTE/HOME49/AZTEC H56217
PRODUCTION COORDINATOR: BELINDA BAECK: 215-830-2198
PROOF OF APRIL 13, 1998
AZTEC CONSULTING, INC.
H56217back
OPERATOR: new
<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 June 7, 1996, except for
Note 9, as to which the date is October 24, 1996, relating to the financial
statements of Fortran Corporation, which report appears in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
May 1, 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 of our report dated June 22, 1997, relating
to the combined financial statements of Aztec East Inc. and Affiliates, which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts".
B.N. KOZIN COMPANY
Melville, New York
May 1, 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 January 30, 1998,
relating to the financial statements of Compel Corporation which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 1, 1998
<PAGE>
EXHIBIT 23.5
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 initial public offering by the Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ JONATHAN J. LEDECKY
Dated: March 6, 1998 -------------------------------------------
Jonathan J. Ledecky
</TABLE>
<PAGE>
EXHIBIT 23.6
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 initial public offering by the Company of shares of common
stock, par value $.001, of the Company.
<TABLE>
<S> <C>
/s/ JAMES E. CLAYPOOLE
Dated: March 4, 1998 -------------------------------------------
James E. Claypoole
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
REGISTRATION STATEMENT ON FOR S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-26-1997
<CASH> 1,106
<SECURITIES> 0
<RECEIVABLES> 22,693
<ALLOWANCES> (351)
<INVENTORY> 3,904
<CURRENT-ASSETS> 33,143
<PP&E> 4,380
<DEPRECIATION> (2,217)
<TOTAL-ASSETS> 37,311
<CURRENT-LIABILITIES> 19,875
<BONDS> 4,953
0
0
<COMMON> 0
<OTHER-SE> 11,626
<TOTAL-LIABILITY-AND-EQUITY> 37,311
<SALES> 97,253
<TOTAL-REVENUES> 136,278
<CGS> 91,148
<TOTAL-COSTS> 102,129
<OTHER-EXPENSES> 23,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 10,247
<INCOME-TAX> 3,524
<INCOME-CONTINUING> 6,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,723
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
