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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 March 31, 1999
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
--------------
22,016,405 shares of the registrant's common shares, par value $0.001, were
outstanding as of May 12, 1999.
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AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q
Table of Contents
March 31,1999
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 (unaudited) and
December 31, 1998 ........................................................ 3
Condensed Consolidated Statements of Income for the Three Months Ended March 31,
1999 (unaudited) and the Thirteen Weeks Ended
April 25, 1998 (unaudited) ............................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 (unaudited) and the Thirteen Weeks Ended
April 25, 1998 (unaudited) ............................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 9
Year 2000 Readiness Disclosure Statements ......................................... 11
Factors That May Affect Future Results ............................................ 13
Item 3. Quantitative and Qualitative Disclosure About Market Risks ............... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................................... 20
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits .............................................................. 20
B. Reports on Form 8-K ................................................... 20
Signatures ........................................................................ 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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(unaudited) (restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 6,391 $ 8,763
Accounts receivable, net......................... 64,947 74,138
Inventories...................................... 12,803 11,323
Unbilled percentage of completion revenues....... 5,479 5,922
Other receivable................................. -- 10,550
Prepaid expenses and other current assets........ 10,264 10,232
-------- --------
Total current assets........................ 99,884 120,928
Property and equipment, net...................... 8,737 7,603
Intangibles, net................................. 129,358 129,792
Other assets..................................... 2,165 2,196
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Total assets................................ $240,144 $260,519
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............. $ 169 $ 216
Accounts payable................................. 37,263 43,937
Accrued compensation............................. 6,215 5,791
Deferred revenue................................. 4,961 4,732
Other accrued liabilities........................ 5,524 7,821
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Total current liabilities................... 54,132 62,497
Long-term debt........................................ 77,527 90,218
Deferred income taxes................................. 398 141
Other long-term liabilities........................... 976 697
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Total liabilities........................... 133,033 153,553
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Stockholders' equity:
Common stock--$.001 par value, 150,000,000
shares authorized, 22,016,405 issued
and outstanding................................ 22 22
Additional paid-in capital....................... 93,584 93,584
Retained earnings................................ 13,505 13,360
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Total stockholders' equity.................. 107,111 106,966
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Total liabilities and stockholders' equity.. $240,144 $260,519
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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13 WEEKS FROM
3 MONTHS ENDED JANUARY 25, 1998 TO
MARCH 31, 1999 APRIL 25, 1998
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Revenues:
Products ........................................... $ 47,495 $ 32,657
Services ........................................... 38,481 33,172
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Total revenues ................................... 85,976 65,829
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Gross profit:
Products ........................................... 4,303 3,996
Services ........................................... 14,272 11,411
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Total gross profit ............................... 18,575 15,407
Selling, general and administrative expenses ......... 15,522 12,234
Amortization of intangibles .......................... 1,260 426
Strategic restructuring costs ........................ -- 1,750
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Operating income ................................. 1,793 997
Interest and other expense (income) .................. 1,529 (136)
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Income before provision for income taxes ............. 264 1,133
Provision for income taxes ........................... 119 1,231
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Net income (loss)..................................... $ 145 $ (98)
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Weighted-average shares outstanding:
Basic .............................................. 22,017 26,770
Diluted ............................................ 22,361 26,770
Per share amounts:
Basic .............................................. $ 0.01 $ (0.00)
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Diluted ............................................ $ 0.01 $ (0.00)
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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13 WEEKS FROM
3 MONTHS ENDED JANUARY 25, 1998 TO
MARCH 31, 1999 APRIL 25, 1998
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Cash flows from operating activities:
Net income (loss) ............................................. $ 145 $ (98)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense ..................... 1,736 852
Deferred income taxes ..................................... 257 123
Changes in current assets and liabilities ................. 10,354 475
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Net cash provided by operating activities ............... 12,492 1,352
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Cash flows from investing activities:
Cash paid in acquisitions ..................................... (826) (363)
Additions to property and equipment, net of disposals ......... (1,632) (1,309)
Other ......................................................... 332
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Net cash used in investing activities (2,126) (1,672)
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Cash flows from financing activities:
Payments of long-term debt .................................... (12,738) (77)
Payments to U.S. Office Products .............................. (13,042)
Capital contribution by U.S. Office Products .................. 15,298
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Net cash (used in) provided by financing activities ..... (12,738) 2,179
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Net (decrease) increase in cash and cash equivalents ............ (2,372) 1,859
Cash and cash equivalents at beginning of period ................ 8,763 117
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Cash and cash equivalents at end of period ...................... $ 6,391 $ 1,976
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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
and Internet development and consulting to corporate customers. The
Company provides this broad range of services principally in the
Northeast region of the United States and, to a lesser extent, 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
thirty-five weeks ended December 31, 1998, included in the Company's
Transition 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 three months ended March
31, 1999 are not necessarily indicative of results expected for the
full fiscal period or any other future periods.
The condensed statement of income for the thirteen weeks from January
25, 1998 to April 25, 1998 reflects revenues and expenses that were
directly related to the Company as it was operated within USOP and
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.
Weighted-average shares outstanding used in the basic and diluted
earnings per share calculations for the thirteen weeks ended April
25, 1998 is calculated based upon the number of USOP common shares
outstanding.
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 three months ended March 31, 1999 and the
thirteen weeks from January 25, 1998 to April 25, 1998. The Company did
not recast the data for the three months ended March 31, 1998 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 three months ended March 31,
1999 are
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not directly comparable to those of the thirteen weeks ended April 25,
1998. The Company has filed 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 thirty-five weeks ended
December 31, 1998. This compensation expense results from options
with a three-year guaranteed appreciation beginning May 15, 1998 and
certain bonus agreements which should have been accrued at year-end.
Accordingly, compensation expense is increased by $139, $418, and
$949 for the 9 week period ended June 30, 1998, the 22 week period
ended September 30, 1998 and the 35 week period ended December 31,
1998, respectively. The effect of the restatement is as follows:
35 week period ended December 31, 1998:
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Previously
Reported Restated
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Accrued compensation $ 5,539 $ 5,791
Other accrued liabilities 7,936 7,821
Deferred taxes 460 141
Other long-term liabilities -- 697
Net income 4,672 4,157
Net income per share
Basic $ 0.20 $ 0.18
Diluted $ 0.20 $ 0.18
</TABLE>
<TABLE>
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22 week period ended September 30, 1998:
Net income $ 3,396 $ 3,166
Net income
Basic $ 0.15 $ 0.14
Diluted $ 0.14 $ 0.14
</TABLE>
9 week period ended June 30, 1998:
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Net income $ 287 $ 209
Net income per share
Basic $ 0.01 $ 0.01
Diluted $ 0.01 $ 0.01
</TABLE>
5. SEGMENT DATA
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of the New
England, Tri-State, Northeast Telephony, and West regions of the United
States. Other operating segments are located in other sections of the
country. Each operating segment provides products and services as
described in Note 1.
The Company evaluates the performance of its segments based on
operating income. Operating income for each segment includes selling,
general and administrative expenses directly attributable to the
segment and excludes certain expenses which are managed outside of the
reportable segments. Costs excluded from segments' operating income
primarily consist of corporate expenses including administrative
expenses, amortization of intangibles, interest and income taxes, as
well as other non-recurring restructuring and acquisition related
costs. Segment assets exclude corporate assets which primarily consist
of cash and cash equivalents, certain deferred assets, intangibles and
investments in subsidiaries. Capital expenditures for long-lived assets
are not a significant activity of the reportable operating segments
and, as such, not a primary focus of management in reviewing operating
segment performance.
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Summary information by segment for the three months ended March 31, 1999 and
the thirteen weeks ended April 25, 1998 is as follows:
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NORTHEAST
NEW ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
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3 MONTHS ENDED
MARCH 31, 1999
Revenue:
Products...................... $ 24,595 $ 10,369 $ 1,790 $ -- $ 10,741 $ 47,495
Services...................... 7,823 9,031 7,720 7,228 6,679 38,481
-------- -------- -------- -------- -------- --------
Total....................... $ 32,418 $ 19,400 $ 9,510 $ 7,228 $ 17,420 $ 85,976
Gross margin.................... $ 4,932 $ 4,607 $ 3,779 $ 1,446 $ 3,811 $ 18,575
Operating income................ $ 1,078 $ 927 $ 1,338 $ 100 $ 1,712 $ 5,155
Depreciation.................... $ 124 $ 125 $ 60 $ 98 $ 54 $ 461
Assets.......................... $ 38,765 $ 22,438 $ 14,922 $ 9,011 $ 15,951 $101,087
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
13 WEEKS ENDED
APRIL 25, 1998
Revenue:
Products...................... $ 21,670 $ 5,646 $ 2,110 $ -- $ 3,231 $ 32,657
Services...................... 4,919 7,379 7,416 11,689 1,769 33,172
-------- -------- -------- -------- -------- --------
Total....................... $ 26,589 $ 13,025 $ 9,526 $ 11,689 $ 5,000 $ 65,829
Gross margin.................... $ 4,906 $ 3,410 $ 3,598 $ 2,388 $ 1,105 $ 15,407
Operating income................ $ 1,228 $ 767 $ 528 $ 993 $ 218 $ 3,734
Depreciation.................... $ 109 $ 117 $ 59 $ 35 $ 29 $ 349
Assets.......................... $ 31,508 $ 16,773 $ 12,074 $ 12,502 $ 4,451 $ 77,308
-------- -------- -------- -------- -------- --------
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</TABLE>
A reconciliation of the Company's reportable segment operating income
and segment assets to the corresponding consolidated amounts as of and
for the three months ended March 31, 1999 and as of and for the
thirteen week period ended April 25, 1998 is as follows:
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13 WEEKS FROM
3 MONTHS ENDED JANUARY 25, 1998 TO
MARCH 31, 1999 APRIL 25, 1998
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Segment operating income............................. $ 5,155 $ 3,734
Corporate expenses................................... 2,102 561
Amortization of intangibles.......................... 1,260 426
Strategic restructuring costs........................ -- 1,750
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Total operating income............................... $ 1,793 $ 997
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Segment assets....................................... $ 101,087 $ 77,308
Corporate assets..................................... 9,699 309
Intangible assets.................................... 129,358 63,828
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Total assets......................................... $ 240,144 $ 141,445
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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 and Internet development and consulting, and derives its
revenue principally from (i) fees for services rendered to customers for Web and
network design and implementation, software development and customization, voice
and data infrastructure, design and integration, and IT consulting, support and
outsourcing, and (ii) sales of products to customers within these business
sectors (including telephony systems and network and systems hardware and
software). Aztec's primary focus is the middle-market and Fortune 1000
companies, in a wide range of industries including communications, health care,
financial services, government, manufacturing, pharmaceuticals, professional
services and technology.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the three months ended March 31, 1999 and the thirteen week period ended April
25, 1998.
<TABLE>
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13 WEEKS FROM
3 MONTHS ENDED JANUARY 25, 1998 TO
MARCH 31, 1999 APRIL 25, 1998
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(unaudited) (unaudited)
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 78.4 76.6
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Gross profit 21.6 23.4
Selling, general and administrative expenses 18.0 18.6
Amortization of intangibles 1.5 0.6
Strategic restructuring costs -- 2.7
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Operating income 2.1 1.5
Interest and other expense (income), net 1.8 (0.2)
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Income before provision for income taxes 0.3 1.7
Provision for income taxes 0.1 1.8
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Net income (loss) 0.2% (0.1)%
-------------- -------------------
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</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THIRTEEN WEEK PERIOD ENDED
APRIL 25, 1998.
Consolidated revenues increased 30.6% from $65.8 million in the
thirteen week period ended April 25, 1998 to $86.0 million for the three months
ended March 31, 1999. This increase was due primarily to an increase in product
sales in the Company's New England and Tri-State regions from sales to existing
customers combined with revenue from the Company's expanded customer base
resulting from an acquisition in July 1998. In addition, services revenue
increased modestly from staffing related services resulting from an acquisition
in September 1998 combined with engineering and application development related
services in the New England and Tri-State regions. This
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increase was offset in part by a reduction of data communications revenue in the
Company's West region.
Gross profit increased 20.6% from $15.4 million, or 23.4% of revenues,
for the thirteen week period ended April 25, 1998 to $18.6 million, or 21.6% of
revenues, for the three months ended March 31, 1999. The decrease in gross
profit as a percentage of revenues was due primarily to a higher concentration
of product revenue with a lower concentration of service revenue, combined with
competitive pressures on pricing. The decrease in gross profit as a percentage
of revenue was offset slightly by improved margins from services due primarily
to improved margins in engineering and application development related services
in the Company's Tri-State region.
Selling, general and administrative expenses increased 26.9% from $12.2
million, or 18.6% of revenues, for the thirteen week period ended April 25, 1998
to $15.5 million, or 18.0% of revenues, for the three months ended March 31,
1999. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to revenues resulting from acquisitions
in the second half of 1998, increasing at a faster rate than selling, general
and administrative expenses, offset in part by higher corporate costs associated
with being an independent, publicly traded company.
Amortization of intangibles increased $.9 million from $.4 million for
the thirteen week period ended April 25, 1998 to $1.3 million for the three
months ended March 31, 1999 due to amortization expense related to companies
acquired in the second half of 1998.
Strategic restructuring costs of $1.8 million for the thirteen weeks
ended April 25, 1998 represent the Company's portion of the costs incurred by
USOP as a result of USOP's restructuring plan including costs incurred
related to the Company's withdrawn initial public offering.
Interest and other expense (income) of ($.1) million for the thirteen
weeks ended April 25, 1998 increased to $1.5 million of interest and other
expense in the three months ended March 31, 1999 primarily due to the Company's
financing of its acquisitions in the second half of 1998 through its credit
facility.
Provision for income taxes decreased from $1.2 million in the thirteen
week period ended April 25, 1998 to $.1 million in the three months ended March
31, 1999, reflecting effective tax rates of 108.6% and 45.0%, respectively.
The higher effective tax rate for the thirteen weeks ended April 25, 1998 is
the result of the fiscal 1998 fourth quarter tax provision adjustment to
state tax expense at the effective rate for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Aztec had cash of $6.4 million and working capital
of $45.8 million. Aztec's capitalization, defined as the sum of long-term debt
and stockholders' equity, at March 31, 1999 was approximately $184.8 million.
During the three months ended March 31, 1999, net cash provided by
operating activities was $12.5 million. Net cash used in investing activities
was $2.1 million, which consisted primarily of $1.6 million of additions of
property and equipment, and $.8 million for acquisition related costs. Net cash
used in financing activities was $12.7 million, reflecting the $10.6 million
recovery from Solutions E.T.C. used to pay down long-term debt on the credit
facility, as well as payment of $2.0 million to reduce the working capital
portion of the credit facility.
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During the thirteen week period ended April 25, 1998, net cash provided
by operating activities was $1.4 million. Net cash used in investing
activities was $ 1.7 million, which consisted primarily of additions of
property and equipment. Net cash provided by financing activities was $2.2
million which consisted primarily of financing activities between the Company
and USOP.
As of March 31, 1999, Aztec had made $1.6 million in capital
expenditures against the $4.0 million budgeted for 1999. The largest items
include $.5 million for year 2000 remediation. In addition, the Company may
be required to pay $3.3 million related to certain option agreements, pending
certain events, during April 2001. See note 4 of the notes to condensed
consolidated financial statements.
The Company anticipates that its working capital line of credit and
cash flow from operations will be sufficient to meet the Company's liquidity
requirements for its existing operations through the end of calendar 1999.
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 "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.
The Company has neared completion of its assessment of 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 all critical IT Systems used by the business, and the
implementation phase is in its final stages. The Company utilizes primarily
packaged software and has determined that certain systems will be upgraded and
others 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 is in its final stages of assessing 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,
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implementation, results monitoring, and contingency planning. Assurances
regarding Year 2000 compliance for Non-IT related system vendors are being
handled in the same manner as other third parties (see discussion below). 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, as an ongoing process, 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, and the company believes that customers and prospective customers
may defer non-critical IT projects in order to devote necessary resources to
fixing their own Year 2000 problems. The inability of those parties to become
Year 2000 compliant on a timely basis could materially impact the Company.
COST OF REMEDIATION
The Company estimates that the total cost of remediation for all three
categories of year 2000 problems will be approximately $2.8 million, of which,
to date, approximately $1.2 million has been incurred. The majority of costs
represent implementation of new systems and thus, have been capitalized as of
March 31, 1999. The source of funds for the Company's Year 2000 plan is from
operating cash flows. No 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 related to the Year 2000 problem, there can be no assurances that the
Company 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 or material costs. Undetected errors or
defects in the technology used for the Company's systems, which include hardware
and software, and defects in the systems of the Company's third parties, could
cause these consequences. The most likely worst case scenario would include 1)
hardware failure, or 2) software failure resulting in an inability to receive
orders from customers or shipments from suppliers or to bill customers and pay
suppliers, and 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 and formalizing 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.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual
results to differ from those indicated in the forward-looking statements made in
the Form 10-Q and presented elsewhere by management from time to time. The
following factors contain some forward looking statements. Forward-looking
statements give our current expectations or forecasts of future events. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. They use works such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," believe," and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. In particular, these include statements relating to our
anticipated operating results for the year ended December 31, 1999, and our
anticipated cash flow and to future actions, future performance or results of
current and anticipated sales and marketing efforts, expenses, the outcome of
contingencies such as legal proceedings, and other financial results. From time
to time, we also may provide oral or written forward-looking statements in other
materials we release to the public.
Any or all of our forward-looking statements in this report, and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in the discussion below will be important
in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and other reports to the SEC.
LISTING OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET
The Company's Common Stock may be delisted from Nasdaq, which may
affect the Company's operations. The Company's shares of Common Stock have been
listed and have traded on the Nasdaq National Market System since June 1998. On
April 1, 1999, Nasdaq gave notice to the Company that the staff had concluded
that the Company failed to comply with continued listing standards and commenced
an action to delist the Company's Common Stock from the National Market System
effective with the close of business on April 9, 1999. That decision by Nasdaq
staff has been suspended pending the resolution of the Company's appeal of the
determination.
Nasdaq requires that as a condition of continued listing, companies
satisfy at least one of the two maintenance standards relating to a company's
financial condition, results of operations and trading market for its listed
securities. Since the Company carries substantial goodwill on its books related
to companies acquired in business combinations accounted for under the purchase
method, and has acquired a number of subsidiaries through the issuance of debt
rather than securities, the Company's net tangible assets are substantially
below the threshold requirements under one of the maintenance standards. The
alternative standard requires, among other items, that the minimum bid price for
the listed securities be at least $5.00 per share. The closing price of the
Company's Common Stock on March 31, 1999, was $1.6875 per share.
Nasdaq's Listing Qualifications Panel will conduct a hearing on May 21,
1999 to consider the Company's appeal of the decision of Nasdaq staff. The
Company is seeking to remain on the National Market, or in the alternative to be
listed on the Nasdaq SmallCap Market. If the Panel rules against the Company,
and does not waive certain initial listing requirements for the SmallCap Market,
13
<PAGE>
the shares of Common Stock will cease to be listed on Nasdaq which could
adversely affect the liquidity of the Company's Common Stock, the ability of
the Company to raise capital and the ability of the Company to attract and
retain employees. In such event, the shares of Common Stock will likely be
quoted in the "pink sheets" maintained by the National Quotation Bureau, Inc.
or the OTC Bulletin Board. In such case, the spread between the bid and ask
price of the shares of Common Stock is likely to be greater than at present,
and stockholders may experience a greater degree of difficulty in engaging in
trades of shares of Common Stock.
In addition, low trading prices of the Company's Common Stock may have
an adverse impact upon the efficient operation of the trading market in the
securities. In particular, brokerage firms often charge a greater percentage
commission on low-priced shares than that which would be charged on a
transaction in the same dollar amount of securities with a higher per share
price. A number of brokerage firms will not recommend purchases of low-priced
stock to their clients or make a market in such shares, which tendencies may
adversely affect the Company.
RISKS RELATED TO 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: restructuring charges associated with the acquisitions and
other expenses associated with a change of control, non-recurring acquisition
costs, such as 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 of incurring unanticipated problems or legal liabilities.
Although Aztec conducts due diligence, hires outside independent
financial and accounting consultants, and generally requires representations,
warranties and indemnificiations from the former owners of the 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.
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
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<PAGE>
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 March 31,
1999 approximately 69% 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. 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.
RELIANCE ON KEY PERSONNEL
Aztec's operations depend on the continued efforts of James E.
Claypoole, its Chairman and Chief Executive Officer, Benjamin Tandowski, its
Chief Technology Officer, Ira Cohen, its Chief Operating Officer, Ross
Weintraub, its Vice President Finance and Corporate Controller, its operating
company presidents, and the senior management of certain of its operating
companies. 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.
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.
POTENTIAL CONFLICTS IN THE DISTRIBUTION
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 a distribution agreement, tax allocation agreement, and employee
benefits agreement. The Spin-Off Companies also entered into the tax
indemnification agreement. These agreements provide for, among other things,
USOP 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 USOP are joint and several. Therefore, if one of the other Spin-Off
Companies fails to satisfy its indemnification obligations to USOP when such a
loss occurs, Aztec may be required to reimburse USOP 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
15
<PAGE>
liabilities of USOP not specifically related to the specific businesses to be
conducted by the Spin-Off Companies and post-Distribution USOP among USOP and
each of the Spin-Off Companies. Adverse developments involving USOP or the other
Spin-Off Companies, or material disputes with USOP following the Distribution,
could have a material adverse effect on Aztec.
The terms of the agreements that govern the relationships among Aztec,
USOP and the other Spin-Off Companies were established by USOP in consultation
with management of Aztec and the other Spin-Off Companies prior to the
Distribution and while Aztec and the other Spin-Off Companies were wholly-owned
subsidiaries of USOP. The terms of these agreements, including the allocation of
general corporate and securities liabilities among USOP, 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 USOP
Board of Directors , received options for 1,660,500 shares of the Company's
common stock and options for 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 of the receipt of the options, Mr. Ledecky had interests
in the Distribution that differed in certain respects from the interests of
other stockholders of USOP and Aztec.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTION
In connection with the Distribution, Aztec entered into a tax
allocation agreement with USOP and the other Spin-Off Companies, which provides
that Aztec and the other Spin-Off Companies will jointly and severally indemnify
USOP for any losses associated with taxes related to the Distribution
("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 spin-offs in the Distribution are taxable. Aztec also entered into
a tax indemnification agreement with the other Spin-Off Companies under which
the Spin-0ff Company that is responsible for the Adverse Tax Act will indemnify
the other Spin-Off Companies for any liability to indemnify USOP 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 USOP or any of the Spin-Off Companies, USOP 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
Distribution. As a result, Aztec could become liable for a pro rata portion for
Distribution Taxes with respect to not only its own spin-off but to the
spin-offs of the other Spin-Off Companies.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES IN THE DISTRIBUTION
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, and (iii) certain liabilities
under the securities laws related to the Distribution. Each of the other
Spin-Off Companies is similarly obligated to USOP. Aztec and the other Spin-Off
Companies have also agreed to bear a pro rata portion of (i) USOP liabilities
under the securities laws (other than claims relating solely to a specific
Spin-Off Company or relating specifically to the continuing businesses of USOP)
and (ii) USOP's
16
<PAGE>
general corporate liabilities (other than debt, except for that specifically
allocated to the Spin-Off Companies) incurred prior to the Distribution (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 USOP, 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 USOP in respect of obligations and
liabilities not related to its business or operations and over which neither it
nor its management has or has hand any control or responsibility. The aggregate
of the Share 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,
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 USOP.
Aztec entered into a Tax Allocation Agreement and a Tax Indemnification
Agreement pursuant to which Aztec will be liable to USOP 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 AND INTANGIBLES
As of March 31, 1999, approximately $129.4 million, or 53.9% of Aztec's
total assets and 120.8% of Aztec's stockholders' equity constituted goodwill and
intangibles. Goodwill represents the excess of cost over the fair market value
of net tangible and identified intangible 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 15-40 years and identified intangible assets are amortized on a straight
line basis, generally over four years with the amount amortized in a particular
period constituting a non-cash expense that reduces Aztec's operating results.
Amortization of goodwill resulting from certain past acquisitions, and
additional goodwill recorded in certain future acquisitions, may not be
deductible for tax purposes. In addition, Aztec will be required to periodically
evaluate the recoverability of goodwill by reviewing the anticipated
undiscounted future cash flows from the operations of the acquired companies and
comparing such cash flows to the carrying value of the associated goodwill. If
goodwill becomes impaired, Aztec would be required to write down the carrying
value of the goodwill and incur a related charge to its income. A reduction in
net income resulting from the amortization or write down of goodwill could have
a material and adverse impact upon the market price of Aztec Common Stock.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
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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 USOP prior to the Distribution, Aztec
is 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, and may
adversely affect Aztec's ability to successfully compete for acquisition
targets.
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.
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.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is exposed to interest rate change market risk principally
with respect to its credit facility, which is priced based on certain interest
rate alternatives. At March 31, 1999, approximately $77.3 million was
outstanding under the credit facility. Changes in the prime interest rate during
calendar year 1999 could have a positive or negative effect on the Company's
interest expense. The Company does not engage in financial transactions for
trading or speculative purposes.
The Company does not believe that it faces primary market risk exposure
that is material to its operations.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes since the company's Transition
Report on Form 10-K for the thirty-five weeks ended December
31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27. Financial Data Schedule
B. Reports on Form 8-K
None
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
20
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,391
<SECURITIES> 0
<RECEIVABLES> 67,643
<ALLOWANCES> 2,696
<INVENTORY> 12,803
<CURRENT-ASSETS> 99,884
<PP&E> 13,549
<DEPRECIATION> 4,812
<TOTAL-ASSETS> 240,144
<CURRENT-LIABILITIES> 54,132
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 107,089
<TOTAL-LIABILITY-AND-EQUITY> 240,144
<SALES> 47,495
<TOTAL-REVENUES> 85,976
<CGS> 43,192
<TOTAL-COSTS> 67,401
<OTHER-EXPENSES> 16,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,529
<INCOME-PRETAX> 264
<INCOME-TAX> 119
<INCOME-CONTINUING> 145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
<F1>RESULTS FOR THE 8 MONTH INTERIM-YEAR ENDED DECEMBER 31,1998
WILL BE RESTATED FOR COMPENSATION EXPENSE RELATED TO CERTAIN
EMPLOYMENT AGREEMENTS WHICH SHOULD HAVE BEEN REFLECTED IN THE
PRIOR-YEAR.
</FN>
</TABLE>
