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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-24417
AZTEC TECHNOLOGY PARTNERS, INC.
(Exact name of registrant as specified in charter)
Delaware 04-3408450
(State of Incorporation) (I.R.S Employer Identification No.)
50 Braintree Hill Office Park, Suite 220, Braintree, Massachusetts 02184
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 849-1702
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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21,937,902 shares of the registrant's common shares, par value $0.001, were
outstanding as of August 11, 1998.
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AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q
Table of Contents
June 30, 1998
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Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 1998 (unaudited) and
April 25, 1998 ...................................................... 3
Condensed Consolidated Statement of Income for the Nine Weeks Ended June 30,
1998 (unaudited) and the Thirteen Weeks Ended July 26, 1997
(unaudited) ......................................................... 4
Condensed Consolidated Statement of Cash Flows for the Nine Weeks Ended
June 30, 1998 (unaudited) and the Thirteen Weeks Ended July 26, 1997
(unaudited) ......................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) ............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 8
Risk Factors.................................................................... 10
Part II - Other Information
Item 1. Legal Proceedings ..................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................... 19
Item 5. Other Information ..................................................... 19
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits .................................................... 19
B. Reports on Form 8-K ......................................... 19
Signature ...................................................................... 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
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June 30, April 25,
1998 1998
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(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 1,435 $ 1,976
Accounts receivable, net 48,678 48,924
Inventories 10,096 9,443
Prepaid expenses and other current assets 10,975 10,741
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Total current assets 71,184 71,084
Property and equipment, net 6,152 5,957
Goodwill, net 63,554 63,828
Other assets 576 576
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Total assets $ 141,466 $ 141,445
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 282 $ 303
Payable to U.S. Office Products 3,086 4,388
Accounts payable 17,490 16,380
Accrued liabilities 15,456 13,721
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Total current liabilities 36,314 34,792
Long-term debt 278 309
Deferred income taxes 951 1,025
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Total liabilities 37,543 36,126
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Stockholders' equity:
Common stock - $0.001 par value; 150,000,000 shares authorized,
21,937,902 issued and outstanding 22
Additional paid-in-capital 94,411
Divisional equity 96,116
Retained earnings 9,490 9,203
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Total stockholders' equity 103,923 105,319
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Total liabilities and stockholders' equity $ 141,466 $ 141,445
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
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Nine Weeks from Thirteen Weeks from
April 26, 1998 to April 27, 1997 to
June 30, 1998 July 26, 1997
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Revenues $ 50,708 $ 42,730
Cost of revenues 38,341 33,683
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Gross profit 12,367 9,047
Selling, general and administrative expenses 8,347 6,298
Goodwill amortization expense 274 -
Strategic restructuring costs 3,196 -
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Operating income 550 2,749
Other (income) expense 38 (62)
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Income before provision for income taxes 512 2,811
Provision for income taxes 225 1,175
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Net income $ 287 $ 1,636
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Weighted-average shares outstanding:
Basic 25,238 21,264
Diluted 25,443 21,630
Per share amounts:
Basic $ 0.01 $ 0.08
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Diluted $ 0.01 $ 0.08
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See accompanying notes to condensed consolidated financial statements.
4
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
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Nine Weeks from Thirteen Weeks from
April 26, 1998 to April 27, 1997 to
June 30, 1998 July 26, 1997
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Cash flows from operating activities:
Net income $ 287 $ 1,636
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 545 160
Deferred income taxes 352 --
Stock option tender offer 1,774 --
Changes in current assets and liabilities 1,778 3,456
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Net cash provided by operating activities 4,736 5,252
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Cash flows from investing activities:
Additions to property and equipment (466) (434)
Payments of non-recurring acquisition costs -- (460)
Deposits -- 1,727
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Net cash provided by (used in) investing activities (466) 833
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 8 --
Payments of long-term debt (60) (129)
Payments of dividends at pooled companies -- (1,320)
Advances from (payments to) U.S. Office Products (1,302) (4,801)
Reduction of capital contribution by U.S. Office Products (3,457) --
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Net cash used in financing activities (4,811) (6,250)
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Net decrease in cash and cash equivalents (541) (165)
Cash and cash equivalents at beginning of period 1,976 1,106
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Cash and cash equivalents at end of period $ 1,435 $ 941
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See accompanying notes to condensed consolidated financial statements.
5
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AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Business
Aztec Technology Partners, Inc. ("Aztec" or the "Company") is a
provider of a broad range of information technology business solutions
principally to corporate customers. The Company provides 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.
The Company was a wholly-owned subsidiary of U.S. Office Products
("USOP") prior to the Company's spin-off from USOP on June 9, 1998. The
spin-off was effected through the distribution of shares of the Company
to USOP shareholders. The spin-off of Aztec as an independent publicly
owned company was part of USOP's comprehensive restructuring plan.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto for the fiscal
year ended April 25, 1998, included in the Company's Annual Report on
Form 10-K. The accompanying condensed consolidated financial statements
reflect all adjustments (consisting solely of normal, recurring
adjustments) which are, in the opinion of management, necessary for a
fair presentation of results for the interim period presented. The
results of operations for the nine weeks from April 26, 1998 to June
30, 1998 are not necessarily indicative of results expected for the
full fiscal period or any other future periods.
For periods prior to the spin-off from USOP on June 9, 1998, the
condensed consolidated financial statements reflect the assets,
liabilities, divisional equity, revenues and expenses that were
directly related to the Company as it was operated within USOP.
Upon the spin-off from USOP, divisional equity was reclassified to
common stock and additional paid-in-capital. In cases involving
assets and liabilities not specifically identifiable to any
particular business of USOP, only those assets and liabilities
expected to be transferred to the Company prior to the spin-off
were included in the Company's separate condensed consolidated
balance sheet. The Company's statement of income includes all of
the related costs of doing business including an allocation of
certain general corporate expenses of USOP which were not directly
related to these businesses. Management believes these allocations
were made on a reasonable basis.
3. Change in Fiscal Year
On June 30, 1998, the Board of Directors of the Company approved the
change of the Company's fiscal year end from the last Saturday in
April, to December 31. The condensed consolidated financial statements
are presented for the nine weeks from April 26, 1998 to June 30, 1998
and the thirteen weeks from April 27, 1997 to July 26, 1997.
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Consequently, the results for the nine weeks from April 26, 1998 to
June 30, 1998 are not directly comparable with the results for the
thirteen weeks from April 27, 1997 to July 26, 1997 and the current
periods' results are not necessarily indicative of results for full
quarterly periods. The Company will file a transition report on Form
10-K covering the period April 26, 1998 in December 31, 1998.
4. Net Income Per Share
Weighted-average shares outstanding used in the basic and diluted
earnings per share calculations for the nine weeks from April 26, 1998
to June 30, 1998 is calculated based upon the number of USOP common
shares outstanding from April 26, 1998 to June 9, 1998 and the number
of Aztec common shares outstanding from June 10, 1998 to June 30, 1998.
USOP completed a tender offer on June 1, 1998, reducing the number of
outstanding shares by 23%.
5. Subsequent Events
Line of Credit
On July 27, 1998, the Company closed on a $140 million credit and
acquisition facility with BankBoston, N.A. This facility matures five
years from the closing date, is secured by all material assets of the
Company, and is subject to terms and conditions customary for
facilities of this kind, including certain financial covenants.
Interest rate options are available depending on the satisfaction of
certain specified financial ratios.
Acquisition
On July 29, 1998, the Company acquired all of the outstanding capital
stock of PCM, Inc., a Chicago based provider of network and enterprise
design and implementation services, for $54 million in cash.
The acquisition will be accounted for as a purchase.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Aztec is a single-source provider of a broad range of information technology
business solutions. Aztec specializes in enterprise design and implementation;
software development and customization; voice and data design and integration;
and IT support, consulting and outsourcing. By focusing on four core
competencies, the Company provides complementary IT solutions making Aztec a
"one-stop" IT solutions provider with exceptional personalized service. Aztec's
primary focus is the mid-market sector, as well as Fortune 1000 companies, in a
wide range of industries including communications, health care, financial
services, government, manufacturing, pharmaceuticals, professional services and
technology. The Company has 18 offices in 11 states and employs nearly 1,200
professionals.
Recent Developments
On June 30, 1998, the Board of Directors of the Company approved the change
of the Company's fiscal year end from the last Saturday in April, to December
31. This change is effective beginning with the Company's fiscal quarter
ended June 30, 1998. The condensed consolidated financial statements are
presented for the nine week period ended June 30, 1998 and the thirteen week
period ended July 26, 1997. The Management's Discussion and Analysis of
Financial Condition and Results of Operations that follows compares the
results for the nine week period April 26, 1998 to June 30, 1998 to the
results for the thirteen week period April 27, 1997 to July 26, 1997. The
Company did not recast the data for the period April 27, 1997 to June 30,
1997 because the accounting systems in place at that time required a certain
level of procedural techniques in order for financial data to be prepared for
external reporting purposes. These procedures were implemented on a quarterly
basis only. Consequently, to recast this period would have been impractical
and would have required significant judgmental estimates. Therefore, the
results for the nine weeks ended June 30, 1998 are not directly comparable to
those of the thirteen weeks ended July 26, 1997 and the current period's
results are not necessarily indicative of results for full quarterly periods.
On July 27, 1998, the Company closed on a $140 million credit and acquisition
facility with BankBoston, N.A. This facility matures five years from the
closing date, is secured by all material assets of the Company, and is
subject to terms and conditions customary for facilities of this kind,
including certain financial covenants. Interest rate options are available
depending on the satisfaction of certain specified financial ratios.
On July 27, 1998, the Company acquired all of the outstanding capital stock
of PCM, Inc., a Chicago-based provider of network and enterprise design and
implementation services, for $54 million in cash. The acquisition will be
accounted for as a purchase.
8
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RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the nine week period ended June 30, 1998 and the thirteen week period ended July
26, 1997.
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Nine Weeks from Thirteen Weeks from
April 26, 1998 to April 27, 1997 to
June 30, 1998 July 26, 1997
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Revenues ................................................. 100.0 % 100.0 %
Cost of revenues ......................................... 75.6 78.8
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Gross profit ......................................... 24.4 21.2
Selling, general and administrative expenses ............. 16.5 14.7
Goodwill amortization expense ............................ 0.5
Strategic restructuring costs ............................ 6.3
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Operating income ..................................... 1.1 6.5
Other (income) expense ................................... 0.1 -0.1
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Income before provision for income taxes ................. 1.0 6.6
Provision for income taxes ............................... 0.4 2.8
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Net income ............................................... 0.6 % 3.8 %
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Nine Week Period Ended June 30, 1998 compared to Thirteen Week Period Ended July
26, 1997
Consolidated revenues increased 18.7%, from $42.7 million for the
thirteen week period ended July 26, 1997, to $50.7 million for the nine week
period ended June 30, 1998. This increase was primarily due to revenues of
companies acquired during fiscal 1998 and increased customers in the network
services and software customization sectors of the business.
Gross profit increased 36.7%, from $9.0 million, or 21.2% of
revenues, for the thirteen week period ended July 26, 1997 to $12.4 million,
or 24.4% of revenues, for the nine week period ended June 30, 1998. This
increase in gross profit as a percentage of revenues was due to a higher
concentration of business in the voice and data design and integration sector
of the business, which has a higher inherent gross margin.
Selling, general and administrative expenses increased 32.5%, from $6.3
million, or 14.7% of revenues, for the thirteen weeks ended July 26, 1997 to
$8.3 million, or 16.5% of revenues, for the nine weeks ended June 30, 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 and increased Aztec corporate overhead due to the
strategic restructuring costs incurred in connection with the spin-off from U.S.
Office Products.
Strategic restructuring costs of $3.2 million represent costs
incurred related to the Company's spin-off from USOP ($1.4 million) and
compensation related non-cash charges resulting from USOP's buyback of
certain employee options during its tender offer on June 1, 1998
($1.8 million).
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Other income and expense decreased $100,000, from net other income of
$62,000 in the thirteen weeks ended July 26, 1997, to net other expense of
$38,000 in the nine weeks ended June 30, 1998. The decrease was due primarily to
interest charged to the Company by USOP for advances made to the Company through
USOP's cash management system.
Provision for income taxes decreased from $1.2 million for the thirteen
weeks ended July 26, 1997 to $225,000 for the nine weeks ended June 30, 1998,
reflecting effective tax rates of 41.8% and 43.9%, respectively. The higher
effective tax rate for the nine weeks ended June 30, 1998 is the result of
non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, Aztec had cash of $1.4 million and working capital
of $34.9 million. Aztec's capitalization, defined as the sum of long-term
debt and stockholders' equity, at June 30, 1998 was approximately
$104.5 million.
During the nine weeks ended June 30, 1998, net cash provided by
operating activities was $4.7 million. Net cash used in investing activities
was $466,000, which consisted of additions of property, plant, and equipment.
Net cash used in financing activities was $4.8 million, including a
$3.5 million reduction in the capital contributed by U.S. Office Products as
a result of the strategic restructuring, and $1.3 million that was paid to
U.S. Office Products as part of U.S. Office Products' centralized cash
management process.
During the thirteen weeks ended July 26, 1997, net cash provided by
operating activities was $5.3 million. Net cash provided by investing
activities was $833,000, which consisted primarily of the return of $1.7
million of deposits partially offset by $434,000 of additions to property and
equipment and $460,000 of payments of non-recurring acquisition costs. Net
cash used in financing activities of $6.3 million resulted from the $4.8
million paid to U.S. Office Products as part of U.S. Office Products'
centralized cash management process and $1.3 million of payments of dividends
by pooled companies.
As of June 30, 1998, Aztec did not have any material commitments for
capital expenditures.
The Distribution Agreement with U.S. Office Products called for the
allocation to Aztec of $5.0 million of debt by U.S. Office Products resulting in
a contribution to capital of $11.8 million at June 9, 1998, which has been
reflected in the financial statements as an increase in stockholders' equity.
On July 27, 1998, Aztec closed on a $140 million credit and
acquisition facility (the "Credit Facility"). The Credit Facility will mature
five years from the closing date; is secured by all material assets of Aztec;
and is subject to terms and conditions customary for facilities of this kind,
including certain financial covenants. Interest rate options are available to
Aztec depending on the satisfaction of certain specified financial ratios.
RISK FACTORS
Information provided by the Company from time to time, including
statements in this Form 10-Q, which are not historical facts, are so-called
forward-looking statements, and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and releases of the
Securities and Exchange Commission. In particular, statements contained in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are not historical facts (including, but not limited to,
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statements concerning anticipated expense levels and such expenses as a
percentage of revenues) may constitute forward looking statements. The
Company's actual future results may differ significantly from those stated in
any forward looking statements. Factors that may cause such differences
include, but are not limited to, the factors discussed below, and the other
risks discussed in the Company's Form 10-K for the fiscal year ended April
25, 1998 and from time to time in the Company's other filings with the
Securities and Exchange Commission.
Absence of History as a Stand-Alone Company
Aztec is the product of the consolidation of 11 regional IT
solutions companies. Prior to June 9, 1998, Aztec had not 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 spin-off from U.S. Office Products
("Distribution") , certain administrative functions relating to Aztec's
business (including some legal and accounting services) were handled by U.S.
Office Products. Aztec's future performance will depend on its ability to
function as a stand-alone entity, to finance and manage expanding operations,
and to adapt its information systems to changes in its business. Aztec's
expenses may be higher than when it was a part of U.S. Office Products.
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.
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
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are consistent with industry norms. It is possible that the spin-off of Aztec
from U.S. Office Products could cause more employees to leave Aztec. An
increase in turnover rates could have a material adverse effect on Aztec's
business, including its ability to secure and complete engagements and obtain
new business, which could have a material adverse effect on Aztec's operating
results and financial condition.
Dependence Upon Acquisitions for Future Growth
One of Aztec's strategies is to expand its revenues and the markets it
serves through the acquisition of additional businesses. As with all companies
using an acquisition strategy to expand revenues, there can be no assurance that
suitable candidates can be identified, or, if suitable acquisition candidates
are identified, that such acquisitions can be completed on acceptable terms. The
pace of Aztec's acquisition program may be adversely affected by these and other
market factors, and may also be affected by the absence of U.S. Office Products'
legal and accounting support for the acquisitions. Further, Aztec intends to use
Aztec Common Stock to pay for certain of its acquisitions. If the owners of
potential acquisition candidates are not willing to receive shares of Aztec
Common Stock in exchange for their businesses, Aztec's acquisition program could
be adversely affected. Further, Aztec is subject to limitations on the number of
shares it can issue without jeopardizing the tax-free treatment of the
Distribution.
Risks Related to Integration of Acquisitions
Integration of acquisitions may involve a number of special risks that
could have a material adverse effect on Aztec's operating results and financial
condition, including: adverse short-term effects on its reported operating
results (including restructuring charges associated with the acquisitions and
other expenses associated with a change of control, non-recurring acquisition
costs including accounting and legal fees, investment banking fees, amortization
of acquired intangible assets, recognition of transaction-related obligations,
and various other acquisition-related costs); diversion of management's
attention; difficulties with retention, hiring and training of key personnel;
and risks associated with unanticipated problems or legal liabilities. Although
Aztec will conduct due diligence and generally require representations,
warranties and indemnifications from the former owners of acquired companies,
there can be no assurance that such owners will have accurately represented the
financial and operating conditions of their companies. If an acquired company's
financial or operating results were misrepresented, or the acquired company
otherwise fails to perform as anticipated, the acquisition could have a material
adverse effect on the operating results and financial condition of Aztec.
Risks Related to Acquisition Financing, Additional Dilution
Aztec currently intends to finance its future acquisitions by using
shares of Aztec Common Stock, cash, borrowed funds, or a combination thereof.
If Aztec Common Stock does not maintain a sufficient market value, if the
price of Aztec Common Stock is highly volatile, or if potential acquisition
candidates are otherwise unwilling to accept Aztec Common Stock as part of
the consideration for the sale of their businesses, Aztec may be required to
use more of its cash resources or more borrowed funds in order to initiate
and maintain its acquisition program. If Aztec does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. Prior to the Distribution, Aztec
was not responsible for obtaining external sources of funding. On July 27,
1998, Aztec entered into a $140 million Credit Facility with BankBoston,
N.A., up to $15 million of which may be used for working capital and other
general corporate purposes and up to $125 million may be used to fund
permitted acquisitions. The Credit Facility will mature five years from
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the closing date; is secured by all assets of Aztec; and is subject to terms
and conditions customary for facilities of this kind, including certain
financial covenants. The obligations of Aztec under the Credit Facility are
guaranteed by all of Aztec's subsidiaries, which subsidiaries have secured
such guarantees by all of their assets. Interest rate options are available
to Aztec depending on the satisfaction of certain specified financial ratios.
The Company filed a Registration Statement with the SEC for the
issuance of Common Stock in an underwritten public offering that was expected
to close prior to or concurrent with the Distribution. However, the Company
elected not to raise additional capital through an underwritten offering at
that time. The Company anticipates that its working capital from its Credit
Facility and cash flow from operations will be sufficient to meet the
Company's liquidity requirements for its operations through the end of 1999.
However, the Company intends to pursue acquisitions which are expected to be
funded through a combination of cash and shares of Common Stock. Because of
the Company's acquisition plans, there can be no assurance that additional
sources of financing will not be required prior to the end of 1999.
If Aztec does not have sufficient cash resources, its growth could
be limited unless it is able to obtain additional capital through debt or
equity offerings. However, the use of equity offerings are subject to certain
limitations on the number of shares that Aztec can issue without jeopardizing
the tax-free treatment of the Distribution.
Aztec has 150 million authorized shares of Common Stock, a portion
of which could be available (subject to the rules and regulations of federal
and state securities laws, applicable limits under U.S. Federal income tax
laws and rules, and rules of the NASDAQ Stock Market) to finance acquisitions
without obtaining stockholder approval for such issuances. The issuance of
additional shares of Aztec Common Stock may have a negative impact on
earnings per share and may negatively impact the market price of Aztec Common
Stock.
Reliance on Key Personnel
Aztec's operations depend on the continued efforts of James E.
Claypoole, its Chairman and Chief Executive Officer, Ira Cohen, its Chief
Operating Officer, Douglas R. Johnson, its Executive Vice President and Chief
Financial Officer, its operating company presidents, and the senior management
of certain of its operating companies. Furthermore, Aztec's operations will
likely depend on the senior management of certain of the companies that it may
acquire in the future. If any of these people becomes unable to continue in his
or her present role, or if Aztec is unable to attract and retain other skilled
professionals, its business could be adversely affected. Aztec does not
currently maintain key man life insurance policies for any of its officers or
other personnel. Aztec has entered into an employment agreement with its
Chairman and Chief Executive Officer and intends to enter into employment
agreements with its Executive Vice President and Chief Financial Officer, its
Chief Operating Officer and its operating company presidents. Such agreements
will be generally terminable without cause on 30 days' notice by either Aztec or
the employee.
In addition, Jonathan J. Ledecky serves as a director and employee
of Aztec and provides services to Aztec pursuant to an employment agreement
entered into between Mr. Ledecky and Aztec. U.S. Office Products has assigned
to Aztec certain rights of, and obligations under, U.S. Office Products
services agreement, as amended, with Mr. Ledecky dated January 13, 1998 (the
"Ledecky Services Agreement"). Mr. Ledecky also serves as a director and
employee of each of the other companies spun-off by USOP, and is a director
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or an officer of two other public companies. Mr. Ledecky may be unable to
devote substantial time to the activities of Aztec.
Potential Conflicts of Interest in the Distributions
Aztec, U.S. Office Products, and the other companies spun-off by U.S.
Office Products on June 9, 1998 (together with Aztec, the "Spin-Off Companies")
entered into the Distribution Agreement, Tax Allocation Agreement, and Employee
Benefits Agreement. The Spin-Off Companies entered into the Tax Indemnification
Agreement. These agreements provide for, among other things, U.S. Office
Products and Aztec to indemnify each other from tax and other liabilities
relating to their respective businesses prior to and following the Distribution.
Certain indemnification obligations of Aztec and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations to
U.S. Office Products when such a loss occurs, Aztec may be required to reimburse
U.S. Office Products for all or a portion of the losses that otherwise would
have been allocated to such other Spin-Off Company. In addition, the agreements
allocate certain liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically related to the specific
businesses to be conducted by the Spin-Off Companies and post-Distribution U.S.
Office Products among U.S. Office Products and each of the Spin-Off Companies.
Adverse developments involving U.S. Office Products or the other Spin-Off
Companies, or material disputes with U.S. Office Products following the
Distribution, could have a material adverse effect on Aztec.
The terms of the agreements that govern the relationships among Aztec,
U.S. Office Products and the other Spin-Off Companies were established by U.S.
Office Products in consultation with management of Aztec and the other Spin-Off
Companies prior to the Distributions and while Aztec and the other Spin-Off
Companies were wholly-owned subsidiaries of U.S. Office Products. The terms of
these agreements, including the allocation of general corporate and securities
liabilities among U.S. Office Products, Aztec, and the other Spin-Off Companies,
may not be the same as they would be if the agreements were the result of
arms'-length negotiations. Accordingly, there can be no assurance that the terms
and conditions of the agreements are not more or less favorable to Aztec than
those that might have been obtained from unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S.
Office Products Board of Directors , received options for shares of each of the
Spin-Off Companies exercisable for 7.5% of the common stock of each Spin-Off
Company. As a result, Mr. Ledecky has interests in the Distributions that differ
in certain respects from, and may conflict with, the interests of other
stockholders of U.S. Office Products and Aztec.
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.
14
<PAGE>
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.
Potential Liability for Taxes Related to the Distributions
In connection with the Distributions, Aztec entered into the Tax
Allocation Agreement with U.S. Office Products and the other Spin-Off Companies,
which provides 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 also
entered into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible for the Adverse Tax Act
will indemnify the other Spin-Off Companies for any liability to indemnify U.S.
Office Products under the Tax Allocation Agreement. As a consequence, Aztec will
be liable for any Distribution Taxes resulting from any Adverse Tax Act by Aztec
and will be liable (subject to indemnification by the other Spin-Off Companies)
for any Distribution Taxes resulting from an Adverse Tax Act by the other
Spin-Off Companies. If there is a final determination that any or all of the
Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
U.S. Office Products and each of the Spin-Off Companies will be liable for its
pro rata portion of the Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, Aztec could become liable for
a pro rata portion for Distribution Taxes with respect to not only the
Distribution but any of the other Distributions.
Risks Related to Allocation for Certain Liabilities
Under the Distribution Agreement, Aztec is liable for (i) any
liabilities arising out of or in connection with the business conducted by it or
its subsidiaries, (ii) its liabilities under the Employee Benefits Agreement,
Tax Allocation Agreement and related agreements, (iii) the U.S. Office Products
debt that has been allocated to the Company, (iv) liabilities under the
securities laws relating to the Prospectus related to the Offering and portions
of the Information Statement/Prospectus, as well as other securities law
liabilities related to the Aztec business that arise from information supplied
to U.S. Office Products (or that should have been supplied, but was not) by
Aztec, (v)U.S. Office Products' liabilities for earn-outs from acquisitions in
respect of Aztec and its subsidiaries, (vi) Aztec's costs and expenses related
to a planned public offering that did not occur and its bank credit facility,
and (vii) $1.0 million of the transaction costs (including legal, accounting,
investment banking and financial advisory) and other fees incurred by U.S.
15
<PAGE>
Office Products in connection with its Strategic Restructuring Plan. Each of the
other Spin-Off Companies will be similarly obligated to U.S. Office Products.
Aztec and the other Spin-Off Companies have also agreed to bear a pro rata
portion of (i) U.S. Office Products' liabilities under the securities laws
(other than claims relating solely to a specific Spin-Off Company or relating
specifically to the continuing businesses of U.S. Office Products) and (ii) U.S.
Office Products' general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the conduct of a particular
distributed or retained subsidiary's business) (the "Shared Liabilities"). If
one of the other Spin-Off Companies defaults on an obligation owed to U.S.
Office Products, the other non-defaulting Spin-Off Companies will be obligated
on a pro rata basis to pay such obligation ("Default Liability"). As a result of
the Shared Liabilities and Default Liability, Aztec could be obligated to U.S.
Office Products in respect of obligations and liabilities not related to its
business or operations and over which neither it nor its management has or has
had any control or responsibility. The aggregate of the Shared Liabilities and
Default Liability for which any Spin-Off Company may be liable is, however,
limited to $1.75 million.
Possible Limitations on Issuances of Common Stock
Section 355(e) of the Internal Revenue Code of 1986, as amended,
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
federal income tax liability if 50% or more, by vote or value, of the capital
stock of either the company making the distribution or the spun-off
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition occurring two years before
or after the spin-off is pursuant to a plan that includes the spin-off.
However, the presumption may be rebutted by establishing that the spin-off
and such acquisition are not part of a plan or series of related
transactions. As a result of the provisions of Section 355(e), there can be
no assurance that issuances of stock by Aztec, including issuances in
connection with an acquisition of another business by Aztec, will not create
a tax liability for U.S. Office Products.
Aztec entered into a Tax Allocation Agreement and a Tax Indemnification
Agreement pursuant to which Aztec will be liable to U.S. Office Products and the
other Spin-Off Companies if its actions or omissions materially contribute to a
final determination that the Distribution is taxable. This limitation could
adversely affect the pace of Aztec's acquisitions and its ability to issue Aztec
Common Stock for other purposes, including equity offerings.
Material Amount of Goodwill
As of June 30, 1998, approximately $63.6 million, or 44.9% of Aztec's
total assets and 61.2% of Aztec's stockholders' equity represents goodwill.
Goodwill represents the excess of cost over the fair market value of net assets
acquired in business combinations accounted for under the purchase method of
accounting. Aztec currently amortizes goodwill on a straight line method over a
period ranging from 25-40 years with the amount amortized in a particular period
constituting a non-cash expense that reduces Aztec's net income. Amortization of
goodwill resulting from certain past acquisitions, and additional goodwill
recorded in certain future acquisitions, may not be deductible for tax purposes.
In addition, Aztec will be required to periodically evaluate the recoverability
of goodwill by reviewing the anticipated undiscounted future cash flows from the
operations of the acquired companies and comparing such cash flows to the
carrying value of the associated goodwill. If goodwill becomes impaired, Aztec
would be required to write down the carrying value of the goodwill and incur a
related charge to its income.
16
<PAGE>
A reduction in net income resulting from the amortization or write down of
goodwill could have a material and adverse impact upon the market price of Aztec
Common Stock. Aztec believes that anticipated cash flows associated with
intangible assets recognized in the acquisitions completed to date will continue
over the period during which the associated goodwill will be amortized, and
there is no persuasive evidence that any material portion will dissipate during
such period.
Inability to use Pooling-of-Interests Accounting
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete
business combinations accounted for under the pooling-of-interests method. As
a result of Aztec being a wholly-owned subsidiary of U.S. Office Products
prior to the Distribution, Aztec will be precluded from completing business
combinations accounted for under the pooling-of-interests method for a period
of two years and any business combinations completed by Aztec during such
period will be accounted for under the purchase method resulting in the
recording of goodwill. The amortization of the goodwill will reduce income
reported by Aztec below that which would have been reported if the
pooling-of-interests method had been used by Aztec.
Consideration for Operating Companies Exceeds Asset Value
To date, the purchase prices of Aztec's acquisitions have not been
established by independent appraisals, but generally have been determined
through arm's-length negotiations between Aztec's management and representatives
of such acquired companies. The consideration paid for each such company has
been and will continue to be based primarily on the value of such company as a
going concern and not on the value of the acquired assets. Valuations of
acquired companies determined solely by appraisals of the acquired assets
typically would have been less than the consideration paid for the companies. No
assurance can be given that the future performance of such companies will be
commensurate with the consideration paid. Aztec does not expect to value future
acquisitions on the basis of asset appraisals. Therefore, this risk will apply
to future acquisitions as well.
Effect of Anti-Takeover Provisions
The Aztec Board has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by Aztec stockholders. The
rights of the holders of Aztec Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of preferred stock. While Aztec
has no present intention to issue shares of preferred stock, such issuance,
while providing desired flexibility in connection with possible acquisitions or
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Aztec and entrenching current management. In
addition, such preferred stock may have other rights, including economic rights
senior to those of the Aztec Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Aztec
Common Stock.
A number of provisions of Aztec's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws and the Delaware General
Corporation Law and regulations relating to matters of corporate governance,
certain rights of directors and the issuance of preferred stock without
stockholder approval, may be deemed to have and may have the effect of making
more difficult, and thereby discourage, a merger, tender offer, proxy contest or
assumption of control and change of incumbent management, even when stockholders
other than Aztec's principal stockholders consider such a transaction to be in
their best interest.
17
<PAGE>
In addition, the Aztec Board of Directors is evaluating the adoption of
a shareholder rights plan (a "Rights Plan") pursuant to which stockholders would
receive the right to acquire a fractional share of preferred stock upon certain
events, including the acquisition of more than 15% of the shares of outstanding
Aztec Common Stock, or the commencement of a tender offer for the purchase of
more than 15% of the outstanding Aztec Common Stock. The effect of such a Rights
Plan would be to defer takeover attempts for Aztec that were not approved in
advance by the Aztec Board of Directors.
Intellectual Property Rights
The success of certain operating companies within Aztec is dependent in
part on certain methodologies these companies use in designing, installing, and
integrating computer software and systems and other proprietary intellectual
property rights. These operating companies rely on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties, enter into confidentiality agreements with their key
employees, and limit distribution of proprietary information. There can be no
assurance that the steps taken by these operating companies in this regard will
be adequate to deter misappropriation of proprietary information or that these
operating companies will be able to detect unauthorized use and take appropriate
steps to enforce their intellectual property rights.
Although Aztec believes that its services do not infringe the intellectual
property rights of others and that it has all rights necessary to utilize the
intellectual property employed in its business, Aztec is subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require Aztec to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property, or acquire licenses to
the intellectual property that is the subject of an asserted infringement claim.
No Dividends
The Company has never paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. Aztec's
ability to pay dividends will be restricted by the Proposed Credit Facility.
Inflation
Aztec does not believe that inflation has had a material impact on its
results of operations during the nine weeks ended June 30, 1998 or the thirteen
weeks ended July 26, 1997.
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.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes since the Company's annual report on Form 10-K for
the year ended April 25, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
NONE
B. Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on August 12, 1998
reporting that the Registrant acquired all the issued and outstanding
capital stock of PCM, Inc. ("PCM"), which provides enterprise design
and implementation services. The Registrant paid approximately $54
million in cash.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZTEC TECHNOLOGY PARTNERS, INC.
BY: /s/ Douglas R. Johnson
------------------------
Douglas R. Johnson
Executive Vice President
And Chief Financial Officer
20
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AZTEC
TECHNOLOGY PARTNERS, INC. BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
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