<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
------------------
21,965,879 shares of the registrant's common shares, par value $0.001, were
outstanding as of November 10, 1998.
EXPLANATORY NOTE
On May 17, 1999, the registrant announced that it had restated its consolidated
financial statements for the thirty-five week period ended December 31, 1998,
including the thirteen and twenty-two week periods ended September 30, 1998, to
recognize compensation expense related to certain employment incentive
agreements, which were signed with key personnel prior to the spin-off from U.S.
Office Products. This amended Quarterly Report on Form 10-Q/A contains restated
financial information and disclosures for the thirteen and twenty-two week
periods ended September 30, 1998 (See Note 4 to the condensed consolidated
financial statements).
Unless otherwise stated, information in the originally filed Form 10-Q for the
thirteen and twenty-two week periods ended September 30, 1998 is presented as of
the original filing date, and has not been updated in this amended filing.
Financial statement information and related disclosures included in this amended
filing reflect, where appropriate, changes as a result of the restatement.
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q/A
Table of Contents
September 30, 1998
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1998 (restated) and April 25, 1998 3
Condensed Consolidated Statement of Income for the Thirteen Weeks Ended September 30,
1998 (restated), the Thirteen Weeks Ended October 25, 1997, the Twenty Two Weeks
Ended September 30, 1998 (restated), and the Twenty Six Weeks Ended
October 25, 1997 ............................................................... 4
Condensed Consolidated Statement of Cash Flows for the Twenty Two Weeks Ended
September 30, 1998 (restated) and the Twenty Six Weeks Ended
October 25, 1997 ............................................................... 5
Notes to Condensed Consolidated Financial Statements .................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ..................................................................... 10
Year 2000 Readiness Disclosure Statements ............................................... 13
Risk Factors ............................................................................ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ............................. 24
Item 5. Other Information ............................................................... 25
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits ..................................................................... 25
B. Reports on Form 8-K .......................................................... 25
Signature ............................................................................... 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
September 30, April 25,
1998 1998
------------- ---------
(unaudited)
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,886 $ 1,976
Accounts receivable, net 57,755 48,924
Inventories 10,648 9,443
Prepaid expenses and other current assets 14,025 10,741
-------- --------
Total current assets 88,314 71,084
Property and equipment, net 6,974 5,957
Intangibles, net 129,645 63,828
Other assets 2,004 576
-------- --------
Total assets $226,937 $141,445
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 5,641 $ 303
Payable to U.S. Office Products 3,914 4,388
Accounts payable 22,702 16,380
Accrued liabilities 18,379 13,721
-------- --------
Total current liabilities 50,636 34,792
Long-term debt 69,145 309
Deferred income taxes 763 1,025
Other long-term liabilities 418 --
-------- --------
Total liabilities 120,962 36,126
-------- --------
Stockholders' equity:
Common stock - $0.001 par value; 150,000,000
shares authorized, 21,965,879 issued and
outstanding 22 --
Additional paid-in-capital 93,584 --
Divisional equity -- 96,116
Retained earnings 12,369 9,203
-------- --------
Total stockholders' equity 105,975 105,319
-------- --------
Total liabilities and stockholders' equity $226,937 $141,445
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks from 13 Weeks from 22 Weeks from 26 Weeks from
July 1, 1998 to July 27, 1997 to April 26, 1998 to April 27, 1997 to
September 30, 1998 October 25, 1997 September 30, 1998 October 25, 1997
------------------ ---------------- ------------------ -----------------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues $ 78,102 $ 36,875 $ 128,810 $ 79,605
Cost of revenues 58,697 27,157 97,038 60,840
----------- ---------- ----------- ----------
Gross profit 19,405 9,718 31,772 18,765
Selling, general and administrative expenses 12,752 5,997 21,238 12,295
Goodwill amortization expense 793 34 1,067 34
Strategic restructuring costs -- -- 3,196 --
----------- ---------- ----------- ----------
Operating Income 5,860 3,687 6,271 6,436
Other (income) expense 488 (144) 526 (206)
----------- ---------- ----------- ----------
Income before provision for income taxes 5,372 3,831 5,745 6,642
Provision for income taxes 2,415 1,598 2,579 2,773
----------- ---------- ----------- ----------
Net Income $ 2,957 $ 2,233 $ 3,166 $ 3,869
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Weighted-average shares outstanding:
Basic 21,963 22,080 23,350 21,672
Diluted 21,963 22,666 23,433 21,148
Per share amounts:
Basic $ 0.13 $ 0.10 $ 0.14 $ 0.18
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted $ 0.13 $ 0.10 $ 0.14 $ 0.17
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
22 Weeks from 26 Weeks from
April 26, 1998 April 27, 1997 to
September 30, 1998 October 25, 1997
------------------ ------------------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,166 $ 3,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 1,874 416
Deferred income taxes 164 --
Stock option tender offer 1,774 --
Changes in current assets and liabilities 680 4,988
--------- ---------
Net cash provided by operating activities 7,658 9,273
--------- ---------
Cash flows from investing activities:
Cash (paid) received in acquisitions (69,795) 182
Additions to property and equipment (1,540) (838)
Payments of non-recurring acquisition costs -- (460)
Deposits -- 1,727
--------- ---------
Net cash provided by (used in) investing activities (71,335) 611
--------- ---------
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, net -- (1,103)
Proceeds from issuance of long-term debt 74,200 --
Payments of long-term debt (55) (843)
Debt issuance costs (1,800) --
Payments of dividends at pooled companies -- (1,320)
Advances from (payments to) U.S. Office Products (474) (7,145)
Reduction of capital contribution by U.S. Office Products (4,284) --
--------- ---------
Net cash used in financing activities 67,587 (10,411)
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,910 (527)
Cash and cash equivalents at beginning of period 1,976 1,106
---------- ----------
Cash and cash equivalents at end of period $ 5,886 $ 579
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands except per share data)
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, Inc.
("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 periods presented. The results of operations for the
thirteen weeks from July 1, 1998 to September 30, 1998 and the twenty two
weeks from April 26, 1998 to September 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.
6
<PAGE>
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 thirteen weeks from July 1, 1998 to September 30, 1998, the
thirteen weeks from July 27, 1997 to October 25, 1997, the twenty two weeks
from April 26, 1998 to September 30, 1998 and the twenty six weeks from
April 27, 1997 to October 25, 1997. Consequently, the results are not
directly comparable. The Company will file a transition report on Form 10-K
covering the period April 26, 1998 to December 31, 1998.
4. RESTATEMENT OF EARNINGS
During the quarter ended March 31, 1999, the Company concluded that
compensation expense related to certain employment incentive agreements,
which were signed with key personnel prior to the spin-off from USOP,
should be recognized over the term of the agreements, including amounts
related to the thirteen and twenty-two week periods ended September 30,
1998. This compensation expense results from options with a three-year
guaranteed appreciation beginning May 14, 1998 and certain bonus
agreements. Accordingly, compensation expense increased by $279 and $418,
respectively, for the thirteen and twenty-two week periods ended September
30, 1998. The effects of the restatement on the Company's consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
Previously
Reported Restated
---------- --------
<S> <C> <C>
AS OF SEPTEMBER 30, 1998:
Deferred income taxes $ 951 $ 763
Other long-term liabilities -- 418
Total liabilities 120,732 120,962
Total stockholders' equity 106,205 105,975
</TABLE>
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 30, 1998:
Selling, general and administrative expenses $ 12,473 $ 12,752
Net income 3,109 2,957
Net income per share:
Basic $ 0.14 $ 0.13
Diluted $ 0.14 $ 0.13
TWENTY-TWO WEEK PERIOD ENDED SEPTEMBER 30, 1998:
Selling, general and administrative expenses $ 20,820 $ 21,238
Net income 3,396 3,166
Net income per share:
Basic $ 0.15 $ 0.14
Diluted $ 0.14 $ 0.14
7
<PAGE>
5. CREDIT FACILITY
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.
6. ACQUISITIONS OF SUBSIDIARIES
On July 27, 1998, the Company acquired all of the outstanding capital stock
of PCM, Inc. ("PCM"), a Chicago based provider of network and enterprise
design and implementation services. The Company paid approximately $56
million in cash, including transaction expenses. The purchase price was
principally financed with borrowings from the Company's acquisition credit
facility. The purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair value at the date of
acquisition. The excess of the consideration paid over the estimated fair
value of the net assets acquired of $51 million has been allocated to
identifiable intangible assets and is being amortized over an estimated
life of 25 years.
The following summary, prepared on an unaudited pro forma basis, combines
the statements of income as if PCM had been acquired as of the beginning of
each of the pro forma periods presented. The pro forma results have been
adjusted in each of the periods presented below to reflect the amortization
of goodwill and interest expense on the new borrowings.
<TABLE>
<CAPTION>
22 Weeks from 26 Weeks from
April 26, 1998 to April 27, 1997 to
September 30, 1998 October 25, 1997
------------------ -----------------
(restated)
<S> <C> <C>
Total revenues $134,562 $96,482
--------- -------
--------- -------
Net income $ 2,890 $ 3,959
--------- -------
--------- -------
Net income per share:
Basic 0.12 0.18
--------- -------
--------- -------
Diluted 0.12 0.18
--------- -------
--------- -------
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect for the
entire periods presented. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from combined operations.
On September 17, 1998, the Company acquired all of the outstanding capital
stock of McDowell, Tucker & Co., Inc. and Softech Communications, Inc.
(collectively, ("MTC") a
8
<PAGE>
Plano, Texas based technology resources company providing software
programming and systems expertise outsourcing. The Company paid
approximately $16 million in cash, less a $1.6 million hold back to secure
certain obligations, plus an earnout over the next two years. The
acquisition will be accounted for as a purchase.
6. NET INCOME PER SHARE
Weighted-average shares for the twenty two weeks from April 26, 1998 to
September 30, 1998 is calculated based upon the number of U.S. Office
Products common shares outstanding from April 26, 1998 to June 9, 1998 and
the number of Aztec common shares outstanding from June 10, 1998 to
September 30, 1998. U.S. Office products completed a tender offer on
June 1, 1998, reducing the number of outstanding shares by 23%.
7. CONTINGENCY
The Company and USOP have entered into tolling agreements with the sellers
of two businesses that USOP acquired in the fall of 1997 and that were spun
off to Aztec in the Distribution. In addition, the Company has been advised
of the filing of a complaint against USOP by the sellers of a third
business (which has not been served). These disputes generally related to
events surrounding USOP's strategic restructuring plan. USOP has indicated
that it believes that, if claims are asserted against it as a result of
such disputes, some or all of such claims may be subject to indemnification
by the Company and the other Spin-Off Companies under the terms of the
Distribution Agreement between USOP and the Spin-Off Companies that was
executed in connection with USOP's strategic restructuring plan.
8. SUBSEQUENT EVENTS
On October 2, 1998, the Company acquired all of the outstanding capital
stock of Solutions ETC, Inc.("Solutions"), a Woburn, Massachusetts based
provider of network and enterprise design services, for $12 million in
cash, less a $1.2 million hold back to secure certain obligations. The
acquisition will be accounted for as a purchase. On November 12, 1998, the
Company announced that Ahmad Shreateh, former owner and president of its
recently acquired subsidiary, Solutions, was arrested in San Francisco,
California by federal authorities on charges of wire and mail fraud. The
charges stem from fraudulent records presented in connection with the sale
of Solutions to the Company on October 2, 1998 for $12 million subject to a
$1.2 million hold back. The fraudulent records materially overstated the
revenues and related items of Solutions. Based upon the Company's
preliminary analysis, the Company does not expect this event to have a
material impact on its financial position or on the results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT
The Company has restated its previously filed condensed consolidated
financial statements as of and for the thirteen and twenty-two week periods
ended September 30, 1998 to recognize compensation expense related to certain
employment incentive agreements, which were signed with key personnel prior to
the spin-off from USOP. This compensation expense results from options with a
three-year guaranteed appreciation beginning May 14, 1998 and certain bonus
agreements. During the quarter ended March 31, 1999, the Company concluded that
compensation expense related to these agreements should be recognized over the
term of the agreements, including amounts related to the thirteen and twenty-two
week periods ended September 30, 1998. Accordingly, compensation expense
increased by $279 and $418, respectively, for the thirteen and twenty-two week
periods ended September 30, 1998.
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. 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 21 offices in 11 states and employs nearly 1,400 people.
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 thirteen week periods ended September 30, 1998 and October 25, 1997, the
twenty two week period ended September 30, 1998 and the twenty six week period
ended October 25, 1997. The Management's Discussion and Analysis of Financial
Condition and Results of Operations that follows compares the results for the
thirteen week periods ended September 30, 1998 and October 25, 1997 and compares
the twenty two week period ended September 30, 1998 with the twenty six week
period ended October 25, 1997. The Company did not recast the data for the
period April 27, 1997 to September 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
these periods would have been impractical and would have required significant
judgmental estimates, and would not in the Company's judgement, be meaningful to
investors. Therefore, the results for the thirteen weeks ended September 30,
1998 are not directly comparable to those of the thirteen weeks ended October
25, 1997 and the results for the twenty two weeks ended September 30, 1998 are
not directly comparable to those of the twenty six weeks ended October 25, 1997.
10
<PAGE>
On September 17, 1998, the Company acquired all of the outstanding capital
stock of McDowell, Tucker & Co., Inc. and Softech Communications, Inc.
(collectively, "MTC") a Plano, Texas based technology resources company
providing software programming and systems expertise outsourcing. The Company
paid approximately $16 million in cash, less $1.6 million hold back to secure
certain obligations, plus an earnout over the next two years. The acquisition
will be accounted for as a purchase.
On October 2, 1998, the Company acquired all of the outstanding capital
stock of Solutions ETC, Inc. ("Solutions"), a Woburn, Massachusetts based
provider of network and enterprise design services for $12 million in cash, less
a $1.2 million hold back to secure certain obligations. The acquisition will be
accounted for as a purchase. On November 12, 1998, the Company announced that
Ahmad Shreateh, former owner and president of its recently acquired subsidiary,
Solutions, was arrested in San Francisco, California by federal authorities on
charges of wire and mail fraud. The charges stem from fraudulent records
presented in connection with the sale of Solutions to the Company on October 2,
1998 for $12 million subject to a $1.2 million hold back. The fraudulent records
materially overstated the revenues and related items of Solutions. Based upon
the Company's preliminary analysis, the Company does not expect this event to
have a material impact on its financial position or on the results of
operations.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues
for the thirteen week periods ended September 30, 1998 and October 25, 1997, the
twenty-two week period ended September 30, 1998 and the twenty-six week period
ended October 25, 1997.
<TABLE>
<CAPTION>
July 1, 1998 to July 27, 1997 to April 26, 1998 to April 27, 1997 to
September 30, 1998 October 25, 1997 September 30, 1998 October 25, 1997
------------------ ---------------- ------------------ -----------------
(1) (1)
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 75.2% 73.6% 75.3% 76.4%
------ ------ ------ ------
Gross profit 24.8% 26.4% 24.7% 23.6%
Selling, general and administrative expenses 16.3% 16.3% 16.5% 15.4%
Goodwill amortization expense 1.0% 0.1% 0.8% 0.0%
Strategic restructing costs 0.0% 0.0% 2.5% 0.0%
------ ------ ------ ------
Operating income 7.5% 10.0% 4.9% 8.2%
Other (income) expense, net 0.6% (0.4)% 0.4% (0.3)%
------ ------ ------ ------
Income before provision for income taxes 6.9% 10.4% 4.5% 8.5%
Provision for income taxes 3.1% 4.3% 2.0% 3.5%
------ ------ ------ ------
Net income 3.8% 6.1% 2.5% 5.0%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(1) As restated. See Note 4 to the Condensed Consolidated Financial Statements.
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THIRTEEN WEEK PERIOD
ENDED OCTOBER 25, 1997
Consolidated revenues increased 112%, from $36.9 million in the thirteen
week period ended October 25, 1997 to $78.1 million for the thirteen week period
ended September 30, 1998. This increase was due primarily to revenues of
companies acquired during September and October 1997,
11
<PAGE>
revenues from PCM acquired on July 27, 1998, and to a lesser extent from
increased sales in existing companies.
Gross profit increased 99.7%, from $9.7 million, or 26.4% of revenues, for
the thirteen week period ended October 25, 1997 to $19.4 million, or 24.8% of
revenues, for the thirteen week period ended September 30, 1998. This decrease
in gross profit as a percentage of revenues was due to a higher concentration of
product sales in the systems and network design and implementation services
sector during the current period.
Selling, general and administrative (SG&A) expenses increased 112.6%, from
$6.0 million, or 16.3% of revenues, for the thirteen week period ended October
25, 1997 to $12.8 million, or 16.3% of revenues, for the thirteen week period
ended September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses in the thirteen week period ended September 30, 1998
were flat as compared with the thirteen week period ended October 25, 1997.
Other (Income) expense, net decreased $632,000, from other income of
$144,000 in the thirteen weeks ended October 25, 1997 to other expense of
$488,000 in the thirteen week period ended September 30, 1998 primarily due
to increases in long-term debt as a result of the acquisition of PCM and MTC
in the current period.
Provision for income taxes increased from $1.6 million in the thirteen week
period ended October 25, 1997 to $2.4 million in the thirteen week period ended
September 30, 1998, reflecting effective tax rates of 41.7% and 45.0%
respectively. The higher effective tax rate for the thirteen week period ended
September 30, 1998 is the result of an increase in non-deductible goodwill
amortization.
TWENTY TWO WEEK PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO TWENTY SIX WEEK
PERIOD ENDED OCTOBER 25, 1997
Consolidated revenues increased 61.8% from $79.6 million in the twenty six
week period ended October 25, 1997 to $128.8 million in the twenty two week
period ended September 30, 1998. This increase was due primarily to revenues of
companies acquired during September and October 1997, revenues of PCM acquired
on July 27, 1998 and to a lesser extent from increased sales in existing
companies.
Gross profit increased 69.3% from $18.8 million, or 23.6% of revenues for
the twenty six week period ended October 25, 1997 to $31.8 million or 24.7% of
revenues for the twenty two week period ended September 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 sectors of the business,
which has a higher inherent gross margin.
SG&A expenses increased 72.7% from $12.3 million or 15.4% of revenues for
the twenty six week period ended October 25, 1997 to $21.2 million or 16.5% of
revenues for the twenty two week period ended September 30, 1998. The increase
in selling, general and administrative expenses as a percentage of revenues was
primarily due to increased corporate overhead due to the spin-off from U.S.
Office Products including the costs of being an independent publicly traded
company.
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).
12
<PAGE>
Other (income) expense, net decreased $732,000 from other income of
$206,000 in the twenty six week period ended October 25, 1997 to other expense
of $526,000 in the twenty two week period ended September 30, 1998 primarily due
to increases in long-term debt as a result of the acquisition of PCM and MTC in
the current period.
Provision for income taxes was $2.8 million in the twenty six week period
ended October 25, 1997 and $2.6 million in the twenty two week period ended
September 30, 1998, reflecting effective tax rates of 41.7% and 44.9%
respectively. The higher effective tax rate for the twenty two week period ended
September 30, 1998 is the result of an increase in non-deductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, Aztec had cash of $5.9 million and working capital
of $37.7 million. Aztec's capitalization, defined as the sum of long-term debt
and stockholders' equity, at September 30, 1998 was approximately $180.8
million.
During the twenty two week period ended September 30, 1998, net cash
provided by operating activities was $7.7 million. Net cash used in investing
activities was $71.3 million, which consisted of the acquisitions of PCM and MTC
of $69.8 million and additions of property, plant, and equipment of $1.5
million. Net cash provided by financing activities was $67.6 million, including
$73.9 million of long-term debt from the credit facility, a $4.3 million
reduction in the capital contributed by U.S. Office Products as a result of the
spin-off, and $474,000 paid to U.S. Office Products as part of U.S. Office
Products centralized cash management process, prior to the spin-off of Aztec
Technology Partners, Inc. from U.S. Office Products.
During the twenty six week period ended October 25, 1997, net cash provided
by operating activities was $9.3 million. Net cash provided by investing
activities was $611,000, which consisted primarily of $838,000 of additions to
property and equipment and $460,000 of payments of non-recurring acquisition
costs, which was offset by $182,000 of cash received in acquisitions and by $1.7
million in deposits held by acquired companies. Net cash used in financing
activities of $10.4 million resulted from the $7.1 million paid to U.S. Office
Products as part of U.S. Office Products' centralized cash management process,
$1.3 million of payments of dividends by pooled companies and payment of
short-term debt of $1.1 million..
As of September 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 U.S. Office Products debt resulting in a
contribution to capital of $11.0 million at June 9, 1998, which has been
reflected in the financial statements as an increase in stockholders' equity.
During the thirteen week period ended September 30, 1998, the Company
borrowed $73.9 million against its $140 million credit and acquisition facility.
Of this amount, $68.9 million was borrowed to complete the acquisition of PCM
and MTC, and $5 million was borrowed to meet short-term working capital needs.
YEAR 2000 READINESS DISCLOSURE STATEMENTS
Historically, many computer programs have been written using two digits
rather than four to define the applicable year. This could lead, in many cases,
to a computer recognizing a date ending in
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"00" as 1900 rather than the year 2000. This phenomenon could result in major
computer system failures or miscalculations, and is generally referred to as the
"Year 2000" problem or issue.
The Company is currently in the process of assessing its exposure to the
Year 2000 problem and has established a detailed response to that exposure.
Generally, the Company has Year 2000 exposure in three areas: 1) Information
Technology ("IT") Related Systems--financial and management computerized
operating systems used to manage the Company's business, 2) Non-IT Related
Systems--equipment with "embedded chips" used by the company, including
telephone and building security systems and 3) Third Parties--computer systems
used by third parties, in particular customers and suppliers of the Company.
IT RELATED SYSTEMS
The Company has initiated a Year 2000 readiness plan of its financial and
management computerized operating systems. This plan includes assessment,
solution evaluation, implementation, results monitoring and contingency
planning. Assessment includes determining if the current systems are Year 2000
compliant and whether they meet the Company's business needs. The solution
evaluation phase involves the review of the remediation alternatives including
modification, upgrading or replacement of certain IT systems. The result of this
phase is the determination of the remediation effort involved. Implementation of
the solution includes extensive testing and verification. The results of the
remediation efforts must be monitored once the implementation phase is complete.
Contingency planning begins once a solution is determined and continues until
completion of the entire remediation effort. To date, the Company has completed
the assessment phase for all IT Systems used by the business, solution
evaluation is complete for most IT Systems used by the business and the
implementation phase has begun. The Company utilizes primarily packaged software
and has determined that most systems will be upgraded and some will be replaced
in order to meet Year 2000 requirements. The Company anticipates that critical
systems will be Year 2000 compliant during 1999.
NON-IT RELATED SYSTEMS
The Company has begun an assessment of its exposure to Year 2000 problems
related to Non-IT systems. Major Non-IT systems utilized by the company include
telephone and building security systems as well as other equipment with
"embedded chips". If the company determines that any Non-IT related systems are
not Year 2000 compliant, it will be necessary to adjust the estimates of the
cost of Year 2000 remediation and determine a Year 2000 plan including solution
evaluation, implementation monitoring results and contingency planning.
Assurances regarding Year 2000 compliance for Non-IT related system vendors are
being handled in the same way as other third parties (refer to Third Parties
section). The Company expects to complete its assessment of Year 2000 compliance
for Non-IT related systems in the first half of 1999 and will then determine the
Year 2000 plan.
THIRD PARTIES
The Company is seeking assurances from its suppliers and customers that
their systems and products are Year 2000 compliant. The determination of
compliance will include assessments by the Company of their exposure to Year
2000 Issues, anticipated risks, their responses to those risks and their
contingency plans. To date, the Company is not aware of any Year 2000 problems
at any of its customers or suppliers that would materially impact the Company's
results of operations, liquidity or capital resources. However, the Company has
no means of ensuring that these suppliers and customers will be Year 2000 ready.
The inability of those parties to become Year 2000 compliant on
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a timely basis could materially impact the Company. The Company has not
developed contingency plans in the event of a Year 2000 failure caused by a
supplier, customer or third party, although, should the Company learn of any
issues, it will do so.
COST OF REMEDIATION
The Company estimates that the total cost of remediation for all three
categories of year 2000 problems will be $1,600,000, of which, to date,
approximately $675,000 has been incurred. The majority of costs represent
implementation of new systems and thus, have been capitalized as of September
30, 1998. The source of funds for the Company's Year 2000 plan is from operating
cash flows. No other IT projects have been deferred by the Company due to Year
2000 efforts.
RISKS
Although the Company, based on its analysis to date, does not believe that
it will incur any material costs or experience material disruptions in its
business, there can be no assurances that the Company and/or its third parties,
customers or suppliers will successfully become Year 2000 compliant on a timely
basis and thus will not experience serious unanticipated negative consequences
and/or material costs. Undetected errors or defects in the technology used for
its systems, which include hardware and software, and/or defects in the systems
of the Company's third parties, could cause these consequences. The most
reasonably likely worst case scenario would include 1) hardware failure, and/or
2) software failure resulting in an inability to receive orders from customers
or shipments from suppliers or to bill customers and pay vendors and/or 3)
failure of infrastructure services provided by third parties (such as phone
systems and building security systems).
CONTINGENCY PLANS
The Company is in the process of developing a contingency plan in the event
of a Year 2000 failure which will depend on results of evaluation and testing of
remediation. The Company expects to complete a plan by the third quarter of
1999, although such plan will evolve as the Company obtains more information.
The company expects its contingency plans to include, among other things, manual
and programmatic solutions to correct issues not imbedded in third party
hardware and software.
RISK FACTORS
Information provided by the Company from time to time, including statements
in this Form 10-Q/A, 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,
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.
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ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Aztec is the product of the consolidation of thirteen 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 are 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. At September 30,
1998 approximately 68% of Aztec's employees were 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.
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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.
On November 12, 1998, the Company announced that Ahmad Shreateh, former
owner and president of Solutions, had been apprehended in San Francisco by
Federal authorities on charges of wire and mail fraud, stemming from fraudulent
records presented in connection with the sale of Solutions to 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 the closing date; is secured by all assets of Aztec;
and is subject
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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, and its Chief Operating Officer. 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 or an officer of two
other public companies. Mr. Ledecky may be unable to devote substantial time to
the activities of Aztec.
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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 1,660,500 options for shares of
the Company's common stock and shares of each of the other Spin-Off Companies
exercisable for 7.5% of the common stock of each of the other Spin-Off
Companies. 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.
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COMPETITION
The IT solutions market includes a large number of participants, is subject
to rapid changes, and is highly competitive. The Company competes with, and
faces potential competition for client assignments and experienced personnel
from, a number of companies that have significantly greater financial, technical
and marketing resources, generate greater revenues, and have greater name
recognition than does the Company. The Company believes that the principal
competitive factors in the segment of the industry in which the Company competes
include scope of services, service delivery approach, technical and industry
expertise, perceived value, objectivity and results orientation. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the ability of its
competitors to hire, retain and motivate senior managers, the price at which
others offer comparable services and the extent of its competitors'
responsiveness to customer needs. There can be no assurance that the Company
will be able to compete successfully with its competitors in the future.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distribution and the spin-off of the other Spin-off
Companies (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. Office Products in connection with
its Strategic Restructuring Plan. Each of the other Spin-Off Companies is
similarly obligated to U.S.
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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 September 30, 1998, approximately $129.6 million, or 57.1% of Aztec's
total assets and 122.3% 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. 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
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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.
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 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.
INTELLECTUAL PROPERTY RIGHTS
The success of certain of Aztec's 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.
22
<PAGE>
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 is restricted by its Credit Facility.
INFLATION
Aztec does not believe that inflation has had a material impact on its
results of operations during the twenty two weeks ended September 30, 1998 or
the twenty six weeks ended October 25, 1997.
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
See the Company's disclosure under "YEAR 2000 READINESS DISCLOSURE
STATEMENTS" above.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and USOP have has entered into tolling
agreements with the sellers of two businesses that USOP
acquired in the fall of 1997 and that were spun off to Aztec
in the Distribution. In the case of the claims subject to the
tolling agreements, the former sellers claim that USOP failed
to disclose certain material facts during USOP's acquisition
of the two businesses. The former sellers also claim that they
were given assurances that they would be compensated for
damages suffered by them as the result of the drop in the
value of the USOP stock that they had received. The claims
asserted by the former sellers that are subject to the tolling
agreements amount to approximately $11.5 million. USOP has
indicated that it believes that, if claims are asserted
against it as a result of such disputes, some or all of such
claims may be subject to indemnification by the Company and
the other Spin-Off Companies under the terms of the
Distribution Agreement between USOP and the Spin-Off Companies
that was executed in connection with USOP's strategic
restructuring plan.
. On November 12, 1998, the Company announced that
Ahmad Shreateh, former owner and president of its recently
acquired subsidiary, Solutions, was arrested in San
Francisco, California by federal authorities on charges of
wire and mail fraud. The charges stem from fraudulent
records presented in connection with the sale of Solutions
to the Company on October 2, 1998 for $12 million subject to
a $1.2 million hold back. The fraudulent records materially
overstated the revenues and related items of Solutions.
Based upon the Company's preliminary analysis, the Company
does not expect this event to have a material impact on its
financial position or on the results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company
was held on September 25, 1998. The stockholders of the
Company elected one member of the Board of Directors,
ratified the adoption of the 1998 Employee Stock Purchase
Plan, and ratified the selection of PricewaterhouseCoopers
LLP as the Company's auditors for 1998. In addition to
Johathan J. Ledecky, the term of office as a director for
Clifford Mitman, Jr., Benjamin Tandowski, James E.
Claypoole and Lawrence M. Howell, continued after the
annual meeting.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK
----------------------------------------------------
FOR AGAINST ABSTAINED WITHHELD
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Election of Jonathan J. Ledecky
as Director of the Company 17,409,073 963,335
Ratification of 1998 Employee
Stock Purchase Plan 17,976,107 350,057 46,244
Selection of
PricewaterhouseCoopers LLP 18,190,415 163,375 18,618
</TABLE>
24
<PAGE>
ITEM 5 OTHER INFORMATION
Persons named in the Company's proxy for the 1999
Annual Meeting of Stockholders will have discretionary
authority to vote on any matter proposed by a stockholder
for consideration at the 1999 Annual Meeting that is not
included in the Company's proxy statement relating to such
meeting if the Company has not received notice of such
proposal by July 7, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Documents listed below are not being filed herewith, and
pursuant to Rule 12b-32 of the General Rules and Regulations
promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act") reference is made to such documents as
previously filed as exhibits with the Commission. The
Company's file number under the Exchange Act is 0-24417.
10.15 (1) Agreement and Plan of Reorganization By and
Among the Registrant, PCM Merger Corporation, PCM,
Inc., Avi Shaked, Babs Waldman and Benjamin Beiler,
dated as of July 27, 1998.
10.16 (2) Revolving Credit Agreement By and Among the
registrant and BankBoston, N.A., dated as of
July 27, 1998.
10.17 (2) Amended and Restated 1998 Employee Stock Purchase
Plan.
(1) Previously filed with the Current Report on Form 8-K filed
August 12, 1998.
(2) Previously filed with the Quarterly Report on Form 10-Q
filed November 16, 1998.
B. Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K/A on
October 13, 1998 to amend and restate Item 7 of the Current
Report on Form 8-K filed August 12, 1998 so that amended and
restated Item 7 included audited financial statements of
PCM, Inc. together with the report thereon by Blackman
Kallick Bartelstein, LLP.
25
<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/ ROSS J. WEINTRAUB
---------------------------
Ross J. Weintraub
Vice President Finance and Corporate Controller
Duly Authorized Officer and
Principal Accounting Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,886
<SECURITIES> 0
<RECEIVABLES> 59,263
<ALLOWANCES> 1,508
<INVENTORY> 10,648
<CURRENT-ASSETS> 88,314
<PP&E> 11,070
<DEPRECIATION> 4,096
<TOTAL-ASSETS> 226,937
<CURRENT-LIABILITIES> 50,636
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 105,953
<TOTAL-LIABILITY-AND-EQUITY> 226,937
<SALES> 78,102
<TOTAL-REVENUES> 78,102
<CGS> 58,697
<TOTAL-COSTS> 58,697
<OTHER-EXPENSES> 13,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,372
<INCOME-TAX> 2,415
<INCOME-CONTINUING> 2,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,957
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
