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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 September 30, 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
--------------
22,196,633 shares of the registrant's common stock, par value $0.001, were
outstanding as of November 10, 1999.
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AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q
Table of Contents
September 30, 1999
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.................................... 3
Condensed Consolidated Statements of Operations.......................... 4
Condensed Consolidated Statements of Cash Flows.......................... 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 11
Year 2000 Readiness Disclosure Statements................................ 14
Factors That May Affect Future Results................................... 16
Item 3. Quantitative and Qualitative Disclosure About Market Risks...... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 22
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits .................................................... 22
B. Reports on Form 8-K ......................................... 22
Signatures .............................................................. 22
</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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 3,458 $ 8,763
Accounts receivable, net ........................................ 73,244 74,138
Inventories ..................................................... 10,479 11,323
Unbilled percentage of completion revenues ...................... 4,561 5,922
Other receivable ................................................ -- 10,550
Prepaid expenses and other current assets ....................... 12,458 10,232
--------- ---------
Total current assets ........................................ 104,200 120,928
Property and equipment, net ..................................... 10,539 7,603
Intangibles, net ................................................ 84,215 129,792
Deferred tax asset .............................................. 13,437 --
Other assets .................................................... 1,790 2,196
--------- ---------
Total assets ................................................ $ 214,181 $ 260,519
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................ $ 72,481 $ 216
Accounts payable ................................................ 38,749 43,937
Accrued compensation ............................................ 9,639 5,791
Deferred revenue ................................................ 7,921 4,732
Other accrued liabilities........................................ 8,123 7,821
--------- ---------
Total current liabilities ................................... 136,913 62,497
Long-term debt ...................................................... 232 90,218
Deferred income taxes ............................................... -- 141
Other long-term liabilities ......................................... 1,295 697
--------- ---------
Total liabilities ........................................... 138,440 153,553
--------- ---------
Stockholders' equity:
Common stock - $.001 par value, 150,000,000 shares authorized,
22,196,633 and 21,937,902 shares issued and outstanding,
respectively .................................................. 22 22
Additional paid-in capital ...................................... 94,032 93,584
Retained earnings (deficit) ..................................... (18,313) 13,360
--------- ---------
Total stockholders' equity .................................. 75,741 106,966
--------- ---------
Total liabilities and stockholders' equity .................. $ 214,181 $ 260,519
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Products ............................... $ 52,962 $ 39,011 $ 154,198 $ 100,992
Services ............................... 43,496 39,091 123,623 113,974
--------- --------- --------- ---------
Total revenues ..................... 96,458 78,102 277,821 214,966
--------- --------- --------- ---------
Gross profit:
Products ............................... 3,403 5,856 13,803 12,815
Services ............................... 17,839 13,549 48,168 38,765
--------- --------- --------- ---------
Total gross profit ................. 21,242 19,405 61,971 51,580
Selling, general and administrative expenses 19,755 12,752 53,642 36,265
Amortization of intangibles................. 1,260 793 3,780 1,624
Strategic restructuring costs............... 3,988 -- 3,644 4,946
Write-off of goodwill ...................... 41,723 -- 41,723 --
--------- --------- --------- ---------
Operating income (loss) ............ (45,484) 5,860 (40,818) 8,745
Interest and other expense ................. 1,637 488 4,652 470
--------- --------- --------- ---------
Income (loss) before income tax
provision (benefit) ...................... (47,121) 5,372 (45,470) 8,275
Income tax provision (benefit) ............. (14,633) 2,415 (13,797) 4,207
--------- --------- --------- ---------
Net income (loss) .......................... $ (32,488) $ 2,957 $ (31,673) $ 4,068
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted-average shares outstanding:
Basic .................................. 22,197 21,963 22,077 24,676
Diluted ................................ 22,197 21,963 22,077 24,920
Per share amounts:
Basic .................................. $ (1.46) $ 0.13 $ (1.43) $ 0.16
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted ................................ $ (1.46) $ 0.13 $ (1.43) $ 0.16
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
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NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
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Cash flows from operating activities:
Net income (loss)...................................... $(31,673) $ 4,068
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expense ............... 5,495 2,808
Write-off of goodwill ............................... 41,723 --
Deferred income taxes ............................... (13,578) 763
Stock option tender offer ........................... -- 1,897
Changes in current assets and liabilities ........... 14,172 (20,709)
-------- --------
Net cash provided by (used in) operating activities 16,139 (11,173)
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions ............................. -- (67,247)
Additions to property and equipment, net of disposals . (4,577) (3,077)
Other ................................................. 406 (1,838)
-------- --------
Net cash used in investing activities ............. (4,171) (72,162)
-------- --------
Cash flows from financing activities:
Payments of long-term debt ............................ (17,721) 74,092
Proceeds from issuance of common stock ................ 448 --
Payments to U.S. Office Products ...................... -- (1,033)
Capital contribution by U.S. Office Products .......... -- 14,344
-------- --------
Net cash (used in) provided by financing activities (17,273) 87,403
-------- --------
Net increase (decrease) in cash and cash equivalents ... (5,305) 4,068
Cash and cash equivalents at beginning of period ....... 8,763 1,818
-------- --------
Cash and cash equivalents at end of period ............. $ 3,458 $ 5,886
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Data)
(unaudited)
1. NATURE OF BUSINESS
Aztec Technology Partners, Inc. ("Aztec" or the "Company") is a
single-source provider of comprehensive e-Solutions for business,
helping clients exploit internet, intranet and extranet technologies
for competitive advantage. The Company provides a 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,
which 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/A Amendment No.1 filed August 4, 1999.
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 and the nine months ended
September 30, 1999 are not necessarily indicative of results expected
for the full fiscal period or any other future periods.
The condensed consolidated statement of operations for the nine
months ended September 30, 1998 reflects revenues and expenses
incurred through June 9, 1998 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 nine months ended September 30,
1998 are calculated based upon the number of USOP common shares
outstanding through June 9, 1998 and the number of Aztec common shares
outstanding from June 10, 1998 to September 30, 1998.
3. CREDIT FACILITY
As of September 30, 1999, the Company was in noncompliance with a
certain financial covenant under its credit facility. Effective
September 30, 1999, the Company entered into an amendment to its
credit facility whereby it received a waiver of noncompliance for the
third quarter of 1999. The amendment reduced the maximum amount that
the Company may
6
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borrow for acquisition purposes under its acquisition line of credit
from $125 million to the amount outstanding at September 30, 1999 of
$69.3 million and increased the interest rates on borrowings under the
facility. There can be no assurance that the Company will be in
compliance with the financial covenants in the fourth quarter or that
its Bank group would grant a waiver in the event of noncompliance with
a financial covenant. The credit facility contains conditions, that in
the event of noncompliance with financial covenants, could require
that any amounts of outstanding borrowings under the facility become
due and payable. As a result, the amount of outstanding borrowings
under the credit facility at September 30, 1999 of $72.3 million has
been classified as current on the condensed consolidated balance
sheet.
4. STRATEGIC RESTRUCTURING COSTS
During the third quarter of 1999, the Company initiated a
restructuring plan to improve operational efficiencies and close
non-profitable operations. The plan includes the closing of the
Company's Canfield, Ohio location, as well as significant staff
reductions at certain of the Company's operating locations. The
Company recorded a strategic restructuring charge of $4.8 million in
the third quarter which included employee severance costs, asset
impairments, contractual commitments and other costs associated with
personnel reductions and facility closures, as well as $.8 million of
inventory write-offs which is shown as a reduction of product gross
profit. The strategic restructuring plan is expected to be complete by
the end of the calendar year.
5. IMPAIRMENT OF INTANGIBLE ASSETS
The Company recorded a non-cash accounting charge of $41.7 million in
the third quarter of 1999 related to the impairment of certain
intangible assets. Of this amount, $37.4 million was related to the
Company's review of the carrying value of its intangible assets
against the estimated undiscounted future cash flows associated with
them. Based on this review, certain intangible assets were reduced to
their estimated fair value. In addition, the Company recorded an
impairment charge of $4.3 million to reduce certain intangible assets
to their estimated fair value based on the Company's announced
closing of its Canfield, Ohio location.
6. EARNINGS PER SHARE
The following is a summary of the shares used in computing basic and
diluted net income (loss) per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
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Weighted average shares outstanding used in computing
basic net income (loss) per share ................ 22,197 21,963 22,077 24,676
Dilutive stock options .............................. -- -- -- 244
------ ------ ------ ------
Weighted average shares outstanding used in computing
diluted net income (loss) per share .............. 22,197 21,963 22,077 24,920
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
7
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7. 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 comprehensive e-Solutions 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.
8
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Summary information by segment for the three and nine months ended
September 30, 1999 and September 30, 1998 is as follows:
<TABLE>
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
--------- ---------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue:
Products ......... $ 35,045 $ 8,290 $ 2,427 $ -- $ 7,200 $ 52,962
Services ......... 9,263 8,975 7,052 12,395 5,811 $ 43,496
-------- -------- -------- -------- -------- --------
Total .......... $ 44,308 $ 17,265 $ 9,479 $ 12,395 $ 13,011 $ 96,458
Gross profit ...... $ 6,123 $ 4,543 $ 4,180 $ 3,313 $ 3,083 $ 21,242
Operating income .. $ 1,064 $ 310 $ 1,580 $ 1,481 $ 413 $ 4,848
Depreciation ...... $ 256 $ 146 $ 84 $ 98 $ 41 $ 625
Assets ............ $ 50,562 $ 21,047 $ 12,517 $ 14,689 $ 11,172 $109,987
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
-------- --------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue:
Products ......... $24,589 $ 4,882 $ 2,432 $ -- $ 7,108 $39,011
Services ......... 8,141 7,487 9,761 10,584 3,118 $39,091
------- ------- ------- ------- ------- -------
Total .......... $32,730 $12,369 $12,193 $10,584 $10,226 $78,102
Gross profit ...... $ 5,619 $ 3,365 $ 5,441 $ 2,230 $ 2,750 $19,405
Operating income .. $ 2,265 $ 500 $ 2,956 $ 767 $ 1,465 $ 7,953
Depreciation ...... $ 107 $ 106 $ 62 $ 92 $ 34 $ 401
Assets ............ $30,439 $16,319 $12,859 $12,599 $12,850 $85,066
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
-------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue:
Products ...... $ 96,063 $ 26,108 $ 6,038 $ -- $ 25,989 $154,198
Services ...... 27,430 27,659 21,191 28,514 18,829 $123,623
-------- -------- -------- -------- -------- --------
Total ....... $123,493 $ 53,767 $ 27,229 $ 28,514 $ 44,818 $277,821
Gross profit ... $ 18,430 $ 14,100 $ 11,206 $ 7,364 $ 10,871 $ 61,971
Operating income $ 4,122 $ 2,010 $ 3,775 $ 2,687 $ 3,824 $ 16,418
Depreciation ... $ 518 $ 408 $ 204 $ 294 $ 113 $ 1,537
Assets ......... $ 50,562 $ 21,047 $ 12,517 $ 14,689 $ 11,172 $109,987
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
-------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue:
Products ...... $ 64,871 $ 15,989 $ 6,449 $ -- $ 13,683 $100,992
Services ...... 25,363 22,200 25,244 34,421 6,746 $113,974
-------- -------- -------- -------- -------- --------
Total ....... $ 90,234 $ 38,189 $ 31,693 $ 34,421 $ 20,429 $214,966
Gross profit ... $ 16,147 $ 10,647 $ 13,259 $ 7,006 $ 4,521 $ 51,580
Operating income $ 5,228 $ 2,401 $ 5,536 $ 2,926 $ 2,176 $ 18,267
Depreciation ... $ 325 $ 327 $ 188 $ 294 $ 90 $ 1,224
Assets ......... $ 30,439 $ 16,319 $ 12,859 $ 12,599 $ 12,850 $ 85,066
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
9
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A reconciliation of the Company's reportable segment operating income
and segment assets to the corresponding consolidated amounts as of
and for the three and nine months ended September 30, 1999 and
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Segment operating income .... $ 4,848 $ 7,953 $ 16,418 $ 18,267
Corporate expenses .......... 3,361 1,300 8,089 2,952
Amortization of intangibles . 1,260 793 3,780 1,624
Strategic restructuring costs 3,988 -- 3,644 4,946
Write-off of goodwill ....... 41,723 -- 41,723 --
--------- --------- --------- ---------
Consolidated operating
income (loss)............... $ (45,484) $ 5,860 $ (40,818) $ 8,745
--------- --------- --------- ---------
--------- --------- --------- ---------
Segment assets .............. $ 109,987 $ 85,066 $ 109,987 $ 85,066
Corporate assets ............ 19,979 12,226 19,979 12,226
Intangible assets ........... 84,215 129,645 84,215 129,645
--------- --------- --------- ---------
Consolidated assets ......... $ 214,181 $ 226,937 $ 214,181 $ 226,937
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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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 comprehensive e-Solutions for business,
helping clients exploit internet, intranet and extranet technologies for
competitive advantage. The Company derives its revenues principally from (i)
fees for services rendered to customers for Web and network design and
implementation, web-based application 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 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
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------- ------------------ ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues ................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................... 78.0 75.2 77.7 76.0
-------------- ------------- ------------- -------------
Gross profit ............................ 22.0 24.8 22.3 24.0
Selling, general and administrative expenses 20.5 16.3 19.3 16.9
Amortization of intangibles ................ 1.3 1.0 1.4 0.7
Strategic restructuring costs .............. 4.1 -- 1.3 2.3
Write-off of goodwill ...................... 43.3 -- 15.0 --
-------------- ------------- ------------- -------------
Operating income (loss) ................. (47.2) 7.5 (14.7) 4.1
Other expense, net ......................... 1.7 0.6 1.7 0.2
-------------- ------------- ------------- -------------
Income (loss) before income taxes ....... (48.9) 6.9 (16.4) 3.9
Provision for (benefit from) income taxes .. (15.2) 3.1 (5.0) 2.0
-------------- ------------- ------------- -------------
Net income (loss) ....................... (33.7)% 3.8% (11.4)% 1.9%
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Consolidated revenues increased 23.5% from $78.1 million for the three
months ended September 30, 1998 to $96.5 million for the three months ended
September 30, 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. Services revenue for the three month period ended September 30, 1999
increased modestly from the comparable period of the prior year due to staffing
related services resulting from an acquisition in September 1998 combined with
an increase in network and application development related services in the New
England and Tri-State regions, as well as voice and data infrastructure revenue
in the West region. This increase was offset in part by a reduction in voice and
data revenue in the Northeast Telephony region.
11
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Gross profit increased 9.5% from $19.4 million, or 24.8% of
revenues, for the three months ended September 30, 1998 to $21.2 million, or
22.0% of revenues, for the three months ended September 30, 1999. The
decrease in gross profit as a percentage of revenues was due primarily to a
higher concentration of product revenue as a percent of total revenues for
the three months ended September 30, 1999 compared to the prior year period,
combined with competitive pressures on product pricing and the write off of
approximately $.8 million of inventory due to restructuring. The decrease in
gross profit as a percentage of revenue was offset in-part by improved
margins from services due primarily to improved margins in network and
web-based application development related services in the Company's New
England and Tri-State regions.
Selling, general and administrative expenses increased 55.0% from $12.8
million, or 16.3% of revenues, for the three months ended September 30, 1998 to
$19.8 million, or 20.5% of revenues, for the three months ended September 30,
1999. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to incentive related costs, primarily
commissions, due to increased revenue, higher corporate administrative costs
due to increased staffing and investment banking and related legal
activities, increased regional costs in New England and higher costs from an
acquisition completed in September 1998.
Amortization of intangibles increased $.5 million from $.8 million for
the three months ended September 30, 1998 to $1.3 million for the three months
ended September 30, 1999 due to amortization expense related to companies
acquired in the second half of 1998.
Strategic restructuring costs of $4.0 million for the three months
ended September 30, 1999 represent costs incurred in connection with closing a
facility and significantly reducing staff in the Company's Tri-State and New
England regions including employee severance, contractual obligations and other
costs associated with personnel reductions and facility closures.
Write-off of goodwill of $41.7 million for the three months ended
September 30, 1999 represents $37.4 million for the write-down of intangibles to
their estimated fair value, as well as a write-off of goodwill of $4.3 million
due to the closing of the Canfield, OH location.
Interest and other expense of $.5 million for the three months ended
September 30, 1998 increased to $1.6 million of interest and other expense for
the three months ended September 30, 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 was $2.4 million in the three months ended
September 30, 1998 compared to a benefit from income taxes of ($14.6) million
in the three months ended September 30, 1999, reflecting effective tax rates of
44.9% and (31.0%), respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
Consolidated revenues increased 29.2% from $215.0 million for the
nine months ended September 30, 1998 to $277.8 million for the nine months
ended September 30, 1999. This increase was due primarily to an increase in
product sales in the Company's New England and Tri-State regions to existing
customers, combined with revenue from the Company's expanded customer base
resulting from an acquisition in July 1998. Services revenue for the nine
month period ended September 30, 1999 increased modestly from the comparable
period of the prior year due to staffing related services resulting from an
acquisition in September 1998 combined with an increase in network and
application development related services in the New England and Tri-State
regions.
12
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This increase was offset in part by a reduction in voice and data infrastructure
revenues in the Company's Northeast Telephony and West regions.
Gross profit increased 20.1% from $51.6 million, or 24.0% of
revenues, for the nine months ended September 30, 1998 to $62.0 million, or
22.3% of revenues, for the nine months ended September 30, 1999. The decrease
in gross profit as a percentage of revenues was due primarily to a higher
concentration of product revenue as a percent of total revenues for the nine
months ended September 30, 1999 compared to the prior year period, combined
with competitive pressures on product pricing and the write-off of
approximately $.8 million of inventory due to the restructuring. The
decrease in gross profit as a percentage of revenue was offset in-part by
improved margins from network and web-based application development related
services in the Company's New England and Tri-State regions.
Selling, general and administrative expenses increased 47.9% from $36.3
million, or 16.9% of revenues, for the nine months ended September 30, 1998 to
$53.6 million, or 19.3% of revenues, for the nine months ended September 30,
1999. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to higher corporate costs associated
with being an independent, publicly traded company, incentive related costs,
primarily commissions, due to increased revenue and legal and investment bank
fees associated with the Company's strategic initiatives. Legal and investment
bank fees approximated $1.3 million.
Amortization of intangibles increased $2.2 million from $1.6 million
for the nine months ended September 30, 1998 to $3.8 million for the nine months
ended September 30, 1999 due to amortization expense related to companies
acquired in the second half of 1998.
Strategic restructuring costs of $3.6 million for the nine months ended
September 30, 1999 represent the costs incurred in connection with closing a
facility and significantly reducing staff in the Company's Tri-State and New
England regions including employee severance, contractual obligations and other
costs associated with personnel reductions and facility closures and ($.3)
million for the reversal of excess severance costs associated with restructuring
charges accrued in the fourth quarter of 1998. Strategic restructuring costs of
$4.9 million for the nine months ended September 30, 1998 represent costs
incurred related to the Company's spin-off from USOP, compensation related
non-cash charges resulting from USOP's buyback of certain employee options
during its tender offer on June 1, 1998, and 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.
Write-off of goodwill for $41.7 million for the nine months ended
September 30, 1999 represents $37.4 million for the write-down of intangibles
to their estimated fair value, as well as a write-off of goodwill of $4.3
million due to the closing of the Canfield, OH location.
Interest and other expense of $.5 million for the nine months ended
September 30, 1998 increased to $4.7 million of interest and other expense in
the nine months ended September 30, 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 was $4.2 million in the nine months ended
September 30, 1998 compared to a benefit from income taxes of ($13.8) million
in the nine months ended September 30, 1999, reflecting effective tax rates
of 50.8% and (30.3%), respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Effective September 30, 1999, the Company entered into an amendment
to its credit facility whereby it received a waiver of noncompliance for a
certain financial covenant for the third quarter, reduced the maximum amount
which the Company may borrow under its acquisition line of credit from $125
million to the amount outstanding at September 30, 1999 of $69.3 million and
increased the interest rates on borrowings under the facility. There can be
no assurance that the Company will be in compliance with the financial
covenants during the fourth quarter. 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.
At September 30, 1999, Aztec had cash of $3.5 million and working
capital of ($32.7) million resulting from the classification of the amount
outstanding under its credit facility of $72.3 million as a current
liability as described on page 6, Note 3. At September 30, 1999, Aztecs'
stockholders' equity was $75.7 million.
During the nine months ended September 30, 1999, net cash provided by
operating activities was $16.1 million. Net cash used in investing activities
was $4.2 million, which consisted primarily of $4.6 million of additions of
property and equipment. Net cash used in financing activities was $17.3 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 approximately $7.0
million to reduce the working capital portion of the credit facility.
During the nine months ended September 30, 1998, net cash used in
operating activities was $11.2 million. Net cash used in investing activities
was $72.2 million, which consisted primarily of cash paid in acquisitions. Net
cash provided by financing activities was $87.4 million which consisted
primarily of increase in long-term debt for acquisitions, as well as capital
contributed by USOP in anticipation of a strategic restructuring.
As of September 30, 1999, Aztec had made $4.6 million in capital
expenditures for 1999. The largest items include $1.8 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.
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 conducted 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.
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IT RELATED SYSTEMS
The Company has implemented a Year 2000 readiness plan for 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 conducted the assessment phase
for all IT Systems used by the business, has evaluated solutions for all
critical IT Systems used by the business, and has neared completion of the
implementation and results monitoring phases. The Company utilizes primarily
packaged software and certain systems have been upgraded and others replaced
in order to meet Year 2000 requirements. The Company anticipates that its
critical systems will be Year 2000 compliant during 1999.
NON-IT RELATED SYSTEMS
The Company has implemented a Year 2000 readiness plan for 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". The
Year 2000 plan includes assessment, solution evaluation, 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 conducted the assessment and
solution evaluation phases for all critical Non-IT Systems in the first half of
1999. The implementation, results monitoring and contingency planning phases
have neared completion.
THIRD PARTIES
The Company has been 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 the exposure of Year 2000 issues to suppliers and customers,
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 $2.6 million has been incurred. The majority of costs
represent implementation of new systems and thus, have been capitalized as of
September 30, 1999. The source of funds for the Company's Year 2000 plan is
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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, 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).
The Company believes that services provided customers are Year 2000
compliant. However, the Company integrates third party products into the
solutions created for customers. Aztec cannot evaluate whether all of these
third-party products are Year 2000 compliant. The Company may face claims based
on Year 2000 problems in other companies' products or based on issues arising
from the integration of such products into the Company's solutions. Although no
Year 2000 claims have been made against Aztec, in the future, the Company may be
required to defend its products in legal proceedings which could have a material
impact regardless of the merits of these claims.
CONTINGENCY PLANS
The Company has established a formalized contingency plan in the event
of a Year 2000 failure. However, the contingency plan will further depend on
results of evaluation and testing of remediation which will be conducted during
the fourth quarter of 1999. 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.
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
THIS 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 WORDS 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.
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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 IN OUR
10-K, 10-Q, 8-K AND OTHER REPORTS TO THE SEC.
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,
1999 approximately 70% 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.
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RELIANCE ON KEY PERSONNEL
Aztec's operations depend on the continued efforts of Ira Cohen, its
President and Chief Operating Officer, Benjamin Tandowski, its Chief Technology
Officer, Ross Weintraub, its Chief Financial Officer, 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, Aztec's
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.
ACCELERATION OF BANK DEBT
Aztec received a waiver from its Bank group in the third quarter
from compliance with certain financial covenants under its credit facility.
There can be no assurances that the Bank group would grant such waiver if the
Company fails to satisfy the financial covenants in the future. The failure
to comply with such financial covenants could cause the bank debt to become
due and payable.
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 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, 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
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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-Off 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.
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RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES IN THE DISTRIBUTION
Under the Distribution Agreement, Aztec is liable to USOP 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 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 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.
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 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 involving Aztec during such period will be accounted for under the
purchase method resulting in the recording of goodwill.
MATERIAL AMOUNT OF GOODWILL AND INTANGIBLES
As of September 30, 1999, approximately $84.2 million, or 39.3% of
Aztec's total assets and 111.2% 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.
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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.
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 September 30, 1999, $72.3 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes since the Company's Transition
Report on Form 10-K/A Amendment No. 1, filed August 4, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.16 Amendment to the Revolving Credit Agreement by and among
the Registrant, BankBoston, N.A. as agent, and other banks named
therein, dated September 30, 1999
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.
Date: November 15, 1999 BY: /s/ Ross J. Weintraub
---------------------- ---------------------------
Ross J. Weintraub
Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
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EXHIBIT 10.16
SECOND AMENDMENT
TO REVOLVING CREDIT AGREEMENT
AND LIMITED WAIVER
Second Amendment and Limited Waiver dated as of September 30, 1999 to
Revolving Credit Agreement (the "Second Amendment"), by and among AZTEC
TECHNOLOGY PARTNERS, INC., a Delaware corporation (the "Borrower"), BANKBOSTON,
N.A. and the other lending institutions listed on SCHEDULE 1 to the Credit
Agreement (as hereinafter defined) (the "Banks"), amending certain provisions of
the Revolving Credit Agreement dated as of July 27, 1998 (as amended and in
effect from time to time, the "Credit Agreement") by and among the Borrower, the
Banks and BankBoston, N.A. as agent for the Banks (the "Agent"). Terms not
otherwise defined herein which are defined in the Credit Agreement shall have
the same respective meanings herein as therein.
WHEREAS, the Borrower has requested that the Banks amend certain
provisions contained in the Credit Agreement and waive a covenant contained
therein; and
WHEREAS, the Banks have agreed with the Borrower, subject to the terms
and conditions contained herein, to modify certain terms and conditions of the
Credit Agreement and grant such waiver as specifically set forth in this Second
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. WAIVER. The Borrower has informed the Agent and the Banks
that the Leverage Ratio for the period of July 1, 1999 through September 30,
1999 (the "Third Quarter") exceed 3.50:1.00 during such Third Quarter and, as
such, the Borrower has failed to comply with Section 11.1 of the Credit
Agreement during the Third Quarter. The Borrower has requested that the Banks
waive, to the limited extent necessary to permit such noncompliance for the
Third Quarter, the provisions of Section 11.1 of the Credit Agreement. Subject
always to compliance by the Borrower with the terms and provisions of the Credit
Agreement (as amended hereby) and the other Loan Documents and the terms and
conditions contained herein (including, without limitation, Section 2 hereof),
and subject to the Borrower having an EBITDA (as calculated pursuant to the
revised definition set forth in Section 3(b) of this Second Amendment) for the
fiscal quarter ended September 30, 1999 of not less than $5,200,000, from and
after the Effective Date (as defined in Section 14 hereof) the Banks hereby
waive the provisions of Section 11.1 of the Credit Agreement solely to the
extent necessary to permit the above-referenced noncompliance, and only with
respect to the determination of compliance for the Third Quarter.
SECTION 2. LIMITATIONS ON NEW ACQUISITION LOANS. Notwithstanding
anything to the contrary contained in the Credit Agreement, the Borrower hereby
agrees that from and after the Effective Date through and including the
Acquisition Loan Maturity Date (the "Acquisition Loan Period"), it will not
borrow any Advances or Acquisition Loans other than the Acquisition
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2
Loans outstanding on November 8, 1999 (the "Current Acquisition Loans"), and the
Total Acquisition Commitment shall be permanently reduced to an amount equal to
the Current Acquisition Loans. To the extent the Borrower repays all or any
portion of the Current Acquisition Loans, the Borrower agrees that during the
Acquisition Loan Period it will not borrow any new Acquisition Loans. The
parties hereto hereby agree that from and after the Effective Date through and
including the Acquisition Loan Maturity Date, the Banks shall have no obligation
to make any Advances or Acquisition Loans.
SECTION 3. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1.1
of the Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by
deleting the definitions of "Adjustment Date", "Applicable
Margin", "Commitment Fee Rate" and "Rate Adjustment Period" in
their entirety.
(b) the definition of "EBITDA" is hereby amended by deleting such
definition in its entirety and restating it as follows:
EBITDA. With respect to the Borrower and its Subsidiaries for
any fiscal period, an amount equal to Consolidated Net Income for such
period, PLUS, to the extent deducted in the calculation of Consolidated
Net Income and without duplication, (a) depreciation and amortization
for such period, (b) other noncash charges for such period, including
(i) the noncash restructuring charge taken by the Borrower in the
fiscal quarter ended September 30, 1999 in an aggregate amount of
approximately $9,000,000 and (ii) the noncash charge associated with
the writedown of goodwill at PCM, Inc. taken by the Borrower in the
fiscal quarter ended September 30, 1999 in the aggregate amount of
approximately $35,000,000, (c) the cash restructuring charge taken by
the Borrower in the fiscal quarter ended September 30, 1999 in an
aggregate amount of not more than $4,000,000, (d) additional accruals
for the fiscal quarter ended September 30, 1999 in an amount not to
exceed $2,200,000 representing the writeoff of inventory and accounts
receivable in such period and accruals for legal expenses and other
activities in such period, (e) income tax expense for such period, and
(f) Consolidated Total Interest Expense for such period, and minus, to
the extent added in computing Consolidated Net Income and without
duplication, all noncash gains (including income tax benefits) for such
period, all as determined in accordance with generally accepted
accounting principles.
(c) Section 1.1 of the Credit Agreement is hereby amended by inserting
the following definitions in the appropriate alphabetical order:
ACCOUNTS RECEIVABLE. All rights of the Borrower or any of its
Subsidiaries to payment for goods sold, leased or otherwise marketed in
the ordinary course of business and all rights of the Borrower or any
of its Subsidiaries to payment for services rendered in the ordinary
course of business and all sums of money or other proceeds due thereon
pursuant to transactions with account debtors,
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except for that portion of the sum of money or other proceeds due
thereon that relate to sales, use or property taxes in conjunction
with such transaction, recorded on the books of account in accordance
with generally accepted accounting principles.
AGENCY ACCOUNT AGREEMENT. See Section 9.18.1.
BKB CONCENTRATION ACCOUNT. See Section 9.18.1.
BORROWING BASE. At the relevant time of reference thereto, an
amount determined by the Agent by reference to the most recent
Borrowing Base Report delivered to the Agent and the Banks pursuant to
Section 9.4(g), as adjusted pursuant to the provisions below, which is
equal to the sum of:
(a) 80% of Eligible Accounts Receivable for which
invoices have been issued and are payable; PLUS
(b) $45,000,000.
The Agent may, in its discretion, from time to time, upon [ten (10)]
days' prior notice to the Borrower, reduce the lending formula with
respect to Eligible Accounts Receivable to the extent that the Agent
reasonably and in good faith determines that the results of any
commercial finance examination or a review of any Accounts Receivable
aging report delivered to the Agent indicate a material deterioration
in the Borrower's and its Subsidiaries' Eligible Accounts Receivable
(taken as a whole) from November 8 1999 or from the date of the most
recent Accounts Receivable aging report delivered to the Agent, such
that a lower advance rate for Eligible Accounts Receivables is
warranted.
BORROWING BASE REPORT. A Borrowing Base Report signed by the
chief financial officer of the Borrower in substantially the form of
EXHIBIT H hereto.
ELIGIBLE ACCOUNTS RECEIVABLE. The aggregate of the unpaid
portions of Accounts Receivable (net of any credits, rebates, offsets,
holdbacks or other adjustments or commissions payable to third parties
that are adjustments to such Accounts Receivable) (a) that the Borrower
reasonably and in good faith determines to be collectible; (b) that are
with account debtors or other obligors that (i) are not Affiliates of
the Borrower, (ii) purchased the goods or services giving rise to the
relevant Account Receivable in an arm's length transaction, and (iii)
are not insolvent or involved in any case or proceeding, whether
voluntary or involuntary, under any bankruptcy, reorganization,
arrangement, insolvency, adjustment of debt, dissolution, liquidation
or similar law of any jurisdiction; (c) that are in payment of
obligations that have been fully performed, do not consist of progress
billings or bill and hold invoices and, if subject to dispute or any
other similar claims that would reduce the cash amount payable
therefor, that
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portion of such Account Receivable so subject to such dispute or claim
shall be excluded from being an Eligible Account Receivable; (d) that
are not subject to any pledge, restriction, security interest or other
lien or encumbrance other than those created by the Loan Documents;
(e) in which the Agent has a valid and perfected first priority
security interest; (f) that are not outstanding for more than ninety
(90) days past the date of the respective invoices therefor; (g) that
are not due from an account debtor or other obligor located in
Minnesota unless the Borrower (i) has received a certificate of
authority to do business and is in good standing in such state or (ii)
has filed a notice of business activities report with the appropriate
office or agency of such state for the current year; (h) that are not
due from any single account debtor or other obligor if more than
fifteen percent (15%) of the aggregate amount of all Accounts
Receivable owing from such account debtor or other obligor would
otherwise not be Eligible Accounts Receivable; (i) that are payable in
Dollars; (j) that are not payable from an office outside of the United
States; and (k) that are not secured by a letter of credit unless the
Agent has a prior, perfected security interest in such letter of
credit.
INTERIM CONCENTRATION ACCOUNT. See Section 9.18.1.
LOCAL ACCOUNT. See Section 9.18.1
NET CASH SALE PROCEEDS. The gross cash proceeds received by
the Borrower and/or any of its Subsidiaries in respect of any Asset
Sale, less the sum of (a) all reasonable out-of-pocket fees,
commissions and other expenses incurred in connection with such Asset
Sale, including the amount (estimated in good faith by such Person and
approved by the Agent) of income, franchise, sales and other applicable
taxes required to be paid by such Person in connection with such Asset
Sale, and (b) the aggregate amount of cash so received by such Person
which is used to retire (in whole or in part) any Indebtedness (other
than under the Loan Documents) of such Person permitted by this Credit
Agreement that was secured by a lien or security interest (if any)
permitted by this Credit Agreement having priority over the liens and
security interests (if any) of the Agent, for the benefit of the Banks,
with respect to such assets transferred, and which is required to be
repaid in whole or in part (which repayment, in the case of any other
revolving credit arrangements or multiple advance arrangements, reduces
the commitment thereunder) in connection with such Asset Sale.
OPERATING ACCOUNT. See Section 2.6.2.
SETTLEMENT. The making or receiving of payments, in
immediately available funds, by the Banks, to the extent necessary to
cause each Bank's actual share of the outstanding amount of Revolving
Credit Loans (after giving effect to any Loan Request) to be each to
such Bank's Commitment Percentage of the outstanding amount of such
Revolving Credit Loans (after giving effect to any Loan Request), in
any case where, prior to such event or action, the actual share is not
so equal.
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SETTLEMENT AMOUNT. See Section 2.9.1.
SETTLEMENT DATE. (a) The Drawdown Date relating to any Loan
Request, (b) Friday of each week, or if a Friday is not a Business Day,
the Business Day immediately following such Friday, (c) at the option
of the Agent, on any Business Day following a day on which the account
officers of the Agent active upon the Borrower's account become aware
of the existence of an Event of Default, (d) at the option of the
Agent, one Business Day after making any advance pursuant to Section
2.6.2, (e) any Business Day on which the amount of Revolving Credit
Loans outstanding from BKB plus the amount of the Acquisition Loan
outstanding from BKB plus BKB's Commitment Percentage of the sum of the
Maximum Drawing Amount and any Unpaid Reimbursement Obligations is
equal to or greater than BKB's Commitment Percentage of the Total
Commitment, (f) the Business Day immediately following any Business Day
on which the amount of Revolving Credit Loans outstanding increase or
decreases by more than $500,000 as compared to the previous Settlement
Date, (g) any day on which any conversion of a Base Rate Loan to a
LIBOR Rate Loan occurs, or (h) any Business Day on which (i) the amount
of outstanding Revolving Credit Loans decreases and (ii) the amount of
the Agent's Revolving Credit Loans outstanding equals zero Dollars
($0).
SETTLING BANK. See Section 2.9.1.
TRIGGER DATE. The date which is ten (10) days after the Agent
has delivered written notice to the Borrower of the Majority Banks' or
the Agent's election to apply the funds in the BKB Concentration
Account in accordance with Section 2.10.2(b).
SECTION 4. AMENDMENT TO SECTION 2 OF THE CREDIT AGREEMENT.
----------------------------------------------
Section 2 of the Credit Agreement is hereby amended as follows:
(a) Section 2.1 of the Credit Agreement is hereby amended by deleting
the words "PROVIDED, that the sum of the outstanding amount of the Revolving
Credit Loans (after giving effect to all amounts requested) PLUS the Maximum
Drawing Amount and all Unpaid Reimbursement Obligations shall not at any time
exceed the Total Commitment" which appear in the first sentence of Section 2.1
and substituting in place thereof the words "PROVIDED, that the sum of the
outstanding amount of the Revolving Credit Loans (after giving effect to all
amounts requested) PLUS the Maximum Drawing Amount and all Unpaid Reimbursement
Obligations shall not at any time exceed the lesser of (a) the Total Commitment
and (b) the Borrowing Base and, provided, further, that the sum of the
outstanding amount of the Revolving Credit Loans (after giving effect to all
amounts requested) PLUS the outstanding amount of the Acquisition Loans, PLUS
the Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall not at
any time exceed the lesser of (a) the sum of the Total Commitment and the Total
Acquisition Commitment and (b) the Borrowing Base".
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(b) Section 2.2 of the Credit Agreement is hereby amended by deleting
the words "a commitment fee calculated at the applicable Commitment Fee Rate on
the" and substituting in place thereof the words "a commitment fee calculated at
the rate of one half of one percent (1/2%) per annum on the".
(c) Section 2.3 of the Credit Agreement is hereby amended by deleting
Section 2.3.2 in its entirety.
(d) Section 2.5 of the Credit Agreement is hereby amended by (i)
deleting the words "rate per annum equal to the Base Rate PLUS the Applicable
Margin with respect to Base Rate Loans" which appears in Section 2.5(a) and
substituting in place thereof the words "rate of one and one-half percent (1
1/2%) per annum above the Base Rate"; and (ii) deleting the words "rate per
annum equal to the LIBOR Rate determined for such Interest Period PLUS the
Applicable Margin with respect to LIBOR Rate Loans" which appears in Section
2.5(b) and substituting in place thereof the words "rate of three percent (3%)
per annum above the LIBOR Rate determined for such Interest Period".
(e) Section 2.6 of the Credit Agreement is hereby amended by deleting
Section 2.6 in its entirety and restating it as follows:
2.6. REQUESTS FOR REVOLVING CREDIT LOANS.
2.6.1. GENERAL. The Borrower shall give to the Agent written
notice in the form of EXHIBIT B hereto (or telephonic notice confirmed
in a writing in the form of EXHIBIT B hereto) of each Revolving Credit
Loan requested hereunder (a "Loan Request") no less than (a) one (1)
Business Days prior to the proposed Drawdown Date of any Base Rate Loan
and (b) three (3) LIBOR Business Days prior to the proposed Drawdown
Date of any LIBOR Rate Loan. Each such notice shall specify (i) the
principal amount of the Revolving Credit Loan requested, (ii) the
proposed Drawdown Date of such Revolving Credit Loan, (iii) the
Interest Period for such Revolving Credit Loan and (iv) the Type of
such Revolving Credit Loan. Promptly upon receipt of any such notice,
the Agent shall notify each of the Banks thereof. Each Loan Request
shall be irrevocable and binding on the Borrower and shall obligate the
Borrower to accept the Revolving Credit Loan requested from the Banks
on the proposed Drawdown Date. Each Loan Request shall be in a minimum
aggregate amount of $1,000,000 or an integral multiple thereof of
$500,000 in excess thereof.
2.6.2. SWING LINE. Notwithstanding the notice and minimum
amount requirements set forth in Section 2.6.1 but otherwise in
accordance with the terms and conditions of this Credit Agreement, the
Agent may, in its sole discretion and without conferring with the
Banks, after the occurrence of the Trigger Date, make Revolving Credit
Loans to the Borrower by entry of credits to the Borrower's operating
account (No. 89843299) (the "Operating Account") with the Agent to
cover checks or other charges which the Borrower has drawn or made
against such account. The Borrower hereby requests and authorizes the
Agent to
<PAGE>
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make from time to time such Revolving Credit Loans by means of
appropriate entries of such credits sufficient to cover checks and
other charges then presented for payment from the Operating Account.
The Borrower acknowledges and agrees that the making of such Revolving
Credit Loans shall, in each case, be subject in all respects to the
provisions of this Credit Agreement as if they were Revolving Credit
Loans covered by a Loan Request including, without limitation, the
limitations set forth in Section 2.1 and the requirements that the
applicable provisions of Section 12 (in the case of Revolving Credit
Loans made on the Closing Date) and Section 13 be satisfied. All
actions taken by the Agent pursuant to the provisions of this Section
2.6.2 shall be conclusive and binding on the Borrower and the Banks
absent the Agent's gross negligence or willful misconduct. Revolving
Credit Loans made pursuant to this Section 2.6.2 shall be Base Rate
Loans until converted in accordance with the provisions of the Credit
Agreement and, prior to a Settlement, such interest shall be for the
account of the Agent.
(f) Section 2 of the Credit Agreement is further amended by inserting
immediately after the text of Section 2.8 the following new Section Section 2.9,
2.10, 2.11 and 2.12:
2.9. SETTLEMENTS.
2.9.1. GENERAL. On each Settlement Date, the Agent shall, not
later than 11:00 a.m. (Boston time), give telephonic or facsimile
notice (a) to the Banks and the Borrower of the respective outstanding
amount of Revolving Credit Loans made by the Agent on behalf of the
Banks from the immediately preceding Settlement Date through the close
of business on the prior day and the amount of any LIBOR Rate Loans to
be made (following the giving of notice pursuant to Section 2.6.1(b))
on such date pursuant to a Loan Request and (b) to the Banks of the
amount (a "Settlement Amount") that each Bank (a "Settling Bank") shall
pay to effect a Settlement of any Revolving Credit Loan. A statement of
the Agent submitted to the Banks and the Borrower or to the Banks with
respect to any amounts owing under this Section 2.9 shall be PRIMA
FACIE evidence of the amount due and owing. Each Settling Bank shall,
not later than 3:00 p.m. (Boston time) on such Settlement Date, effect
a wire transfer of immediately available funds to the Agent in the
amount of the Settlement Amount for such Settling Bank. All funds
advanced by any Bank as a Settling Bank pursuant to this Section 2.9
shall for all purposes be treated as a Revolving Credit Loan made by
such Settling Bank to the Borrower and all funds received by any Bank
pursuant to this Section 2.9 shall for all purposes be treated as
repayment of amounts owed with respect to Revolving Credit Loans made
by such Bank. In the event that any bankruptcy, reorganization,
liquidation, receivership or similar cases or proceedings in which the
Borrower is a debtor prevent a Settling Bank from making any Revolving
Credit Loan to effect a Settlement as contemplated hereby, such
Settling Bank will make such dispositions and arrangements with the
other Banks with respect to such Revolving Credit Loans, either by way
of purchase of participations, distribution, PRO TANTO assignment of
claims, subrogation or otherwise as shall result in each Bank's share
of the outstanding Revolving Credit Loans being
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equal, as nearly as may be, to such Bank's Commitment Percentage of
the outstanding amount of the Revolving Credit Loans.
2.9.2. FAILURE TO MAKE FUNDS AVAILABLE. The Agent may, unless
notified to the contrary by any Settling Bank prior to a Settlement
Date, assume that such Settling Bank has made or will make available to
the Agent on such Settlement Date the amount of such Settling Bank's
Settlement Amount, and the Agent may (but it shall not be required to),
in reliance upon such assumption, make available to the Borrower a
corresponding amount. If any Settling Bank makes available to the Agent
such amount on a date after such Settlement Date, such Settling Bank
shall pay to the Agent on demand an amount equal to the product of (a)
the average computed for the period referred to in clause (c) below, of
the weighted average interest rate paid by the Agent for federal funds
acquired by the Agent during each day included in such period, times
(b) the amount of such Settlement Amount, times (c) a fraction, the
numerator of which is the number of days that elapse from and including
such Settlement Date to the date on which the amount of such Settlement
Amount shall become immediately available to the Agent, and the
denominator of which is 360. A statement of the Agent submitted to such
Settling Bank with respect to any amounts owing under this Section
2.9.2 shall be prima facie evidence of the amount due and owing to the
Agent by such Settling Bank. If such Settling Bank's Settlement Amount
is not made available to the Agent by such Settling Bank within three
(3) Business Days following such Settlement Date, the Agent shall be
entitled to recover such amount from the Borrower on demand, with
interest thereon at the rate per annum applicable to the Revolving
Credit Loans as of such Settlement Date.
2.9.3. NO EFFECT ON OTHER BANKS. The failure or refusal of any
Settling Bank to make available to the Agent at the aforesaid time and
place on any Settlement Date the amount of such Settling Bank's
Settlement Amount shall not (a) relieve any other Settling Bank from
its several obligations hereunder to make available to the Agent the
amount of such other Settling Bank's Settlement Amount or (b) impose
upon any Bank, other than the Settling Bank so failing or refusing, any
liability with respect to such failure or refusal or otherwise increase
the Commitment of such other Bank.
SECTION 2.10. REPAYMENTS OF REVOLVING CREDIT LOANS PRIOR TO
EVENT OF DEFAULT.
2.10.1. CREDIT FOR FUNDS RECEIVED IN CONCENTRATION ACCOUNT.
Prior to the occurrence of an Event of Default as to which the
account officers of the Agent active upon the Borrower's account have
actual knowledge, (a) all funds and cash proceeds in the form of money,
checks and like items received in the BKB Concentration Account as
contemplated by Section 9.18 shall be credited, on the same Business
Day on which the Agent determines that good collected funds have been
received, and, prior to the receipt of good collected
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funds, on a provisional basis until final receipt of good collected
funds, and applied as contemplated by Section 2.10.2, (b) all funds
and cash proceeds in the form of a wire transfer received in the BKB
Concentration Account as contemplated by Section 9.18 shall be
credited on the same Business Day as the Agent's receipt of such
amounts (or up to such later date as the Agent determines that good
collected funds have been received), and applied as contemplated by
Section 2.10.2, and (c) all funds and cash proceeds in the form of an
automated clearing house transfer received in the BKB Concentration
Account as contemplated by Section 9.18 shall be credited, on the next
Business Day following the Agent's receipt of such amounts (or up to
such later date as the Agent determines that good collected funds have
been received), and applied as contemplated by Section 2.10.2. For
purposes of the foregoing provisions of this Section 2.10.1, the Agent
shall not be deemed to have received any such funds or cash proceeds
on any day unless received by the Agent before 2:30 p.m. (Boston time)
on such day. The Borrower further acknowledges and agrees that any
such provisional credits or credits in respect of wire or automatic
clearing house funds transfers shall be subject to reversal if final
collection in good funds of the related item is not received by, or
final settlement of the funds transfer is not made in favor of, the
Agent in accordance with the Agent's customary procedures and
practices for collecting provisional items or receiving settlement of
funds transfers.
2.10.2. APPLICATION OF PAYMENTS PRIOR TO EVENT OF DEFAULT.
(a) Prior to the occurrence of the Trigger Date, and
so long as no Event of Default has occurred of which the
account officers of the Agent active on the Borrower's account
have knowledge, all funds transferred to the BKB Concentration
Account and for which the Borrower has received credits shall
be, except as otherwise required by Section 5.2(b) and (c),
applied to the Operating Account and made available to the
Borrower.
(b) After the occurrence of the Trigger Date and
prior to the occurrence of an Event of Default of which the
account officers of the Agent active on the Borrower's account
have knowledge, all funds transferred to the BKB Concentration
Account and for which the Borrower has received credits shall
be applied to the Obligations as follows:
(i) first, to pay amounts then due and
payable under this Credit Agreement, the Notes and
the other Loan Documents;
(ii) second, to reduce Revolving Credit
Loans made by the Agent pursuant to Section 2.6.2 and
for which Settlement has not then been made;
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(iii) third, to reduce other Revolving
Credit Loans which are Base Rate Loans;
(iv) fourth, to reduce Revolving Credit
Loans which are LIBOR Rate Loans; and
(v) fifth, except as otherwise required by
Section 5.2(b) and (c), to the Operating Account.
(c) All prepayments of LIBOR Rate Loans prior to the
end of an Interest Period shall obligate the Borrower to pay
any breakage costs associated with such LIBOR Rate Loans in
accordance with Section 6.10. Prior to the occurrence of an
Event of Default, the Borrower may elect to avoid such
breakage costs by providing to the Agent cash in an amount
sufficient to cash collateralize such LIBOR Rate Loans, but in
no event shall the Borrower be deemed to have paid such LIBOR
Rate Loans until such cash has been paid to the Agent for
application to such LIBOR Rate Loans. The Agent may elect to
cause such cash collateral to be deposited into either (i) a
cash collateral account pursuant to the terms of a cash
collateral agreement executed by the Borrower and the Agent
and in form and substance satisfactory to the Agent or (ii)
the Borrower's Operating Account with appropriate instructions
prohibiting the Borrower's withdrawal of such funds so long as
they remain cash collateral. In each such case, the Borrower
agrees to execute and deliver to the Agent such instruments
and documents, including Uniform Commercial Code financing
statements and agreements with any third party depository
banks, as the Agent may request.
(d) All prepayments of the Revolving Credit Loans
pursuant to this Section 2.10.2 shall be allocated among the
Banks making such Revolving Credit Loans, in proportion, as
nearly as practicable, to the respective unpaid principal
amount of such Revolving Credit Loans outstanding, with
adjustments to the extent practicable to equalize any prior
payments or repayments not exactly in proportion. Prior to any
Settlement Date, however, all prepayments of the Revolving
Credit Loans shall be applied in accordance with this Section
2.10.2, first to outstanding Revolving Credit Loans of the
Agent.
2.11. REPAYMENTS OF REVOLVING CREDIT LOANS AFTER
EVENT OF DEFAULT. Following the occurrence and during the
continuance of an Event of Default of which the account
officers of the Agent active on the Borrower's account have
knowledge, all funds transferred to the BKB Concentration
Account and for which the Borrower has received credits shall
be applied to the Obligations in accordance with Section 14.4.
2.12. CHANGE IN BORROWING BASE. The Borrowing Base
shall be determined monthly (or at such other interval as may
be specified
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pursuant to Section 9.4(g)) by the Agent by reference to the
Borrowing Base Report, commercial finance and collateral audit
reports and other information obtained by or provided to the
Agent. The Agent shall give to the Borrower written notice of
any change in the Borrowing Base determined by the Agent. In
the case of a reduction in the lending formula with respect to
Eligible Accounts Receivable, such notice shall be effective
ten (10) days after its receipt by the Borrower, and in the
case of any change in the general criteria for Eligible
Accounts Receivable, such notice shall be effective upon its
receipt by the Borrower.
SECTION 5. AMENDMENT TO SECTION 3 OF THE CREDIT AGREEMENT. Section 3.2
of the Credit Agreement is hereby amended by deleting the words "exceeds the
Total Commitment" which appear in the first sentence of Section 3.2 and
substituting in place thereof the words "exceeds the lesser of (a) the Total
Commitment and (b) the Borrowing Base or if at any time the sum of the
outstanding amount of the Revolving Credit Loans, the Acquisition Loan, the
Maximum Drawing Amount and all Unpaid Reimbursement Obligations exceeds the
lesser of (a) the sum of the Total Commitment and the Total Acquisition
Commitment and (b) the Borrowing Base".
SECTION 6. AMENDMENT TO SECTION 4 OF THE CREDIT AGREEMENT. Section 4
of the Credit Agreement is hereby amended as follows:
(a) Section 4.1.1. of the Credit Agreement is hereby amended by
inserting immediately after the words "PROVIDED, that each Bank's Acquisition
Loan shall not exceed its Acquisition Commitment" the words "and provided that
the sum of the outstanding amount of the Acquisition Loan (after giving effect
to all amounts requested) shall not at any time exceed the lesser of (a) the
Total Acquisition Commitment and (b) the Borrowing Base and, PROVIDED, FURTHER,
that the sum of the outstanding amount of the Revolving Credit Loans (after
giving effect to all amounts requested) PLUS the outstanding amount of the
Acquisition Loans, PLUS the Maximum Drawing Amount and all Unpaid Reimbursement
Obligations shall not at any time exceed the lesser of (a) the sum of the Total
Commitment and the Total Acquisition Commitment and (b) the Borrowing Base"
(b) Section 4.2 of the Credit Agreement is hereby amended by deleting
the words "a commitment fee calculated at the applicable Commitment Fee Rate on
the" and substituting in place thereof the words "a commitment fee calculated at
the rate of one half of one percent (1/2%) per annum on the".
(c) Section 4.5.1 of the Credit Agreement is hereby amended by (i)
deleting the words "rate per annum equal to the Base Rate PLUS the Applicable
Margin with respect to Base Rate Loans" which appears in Section 4.5.1(a) and
substituting in place thereof the words "rate of one and one-half percent (1
1/2%) per annum above the Base Rate"; and (ii) deleting the words ""rate per
annum equal to the LIBOR Rate determined for such Interest Period PLUS the
Applicable Margin with respect to LIBOR Rate Loans" which appears in Section
4.5.1(b) and substituting in place thereof the words "rate of three percent (3%)
per annum above the LIBOR Rate determined for such Interest Period".
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(d) Section 4.8 of the Credit Agreement is hereby amended by deleting
Section 4.8 in its entirety and restating it as follows:
4.8. MANDATORY REPAYMENTS OF ACQUISITION LOAN.
4.8.1. GENERAL. If at any time the sum of the outstanding
amount of the Advances for Acquisition Loans exceeds the lesser of (a)
the Total Acquisition Commitment and (b) the Borrowing Base, or if at
any time the sum of the outstanding amount of the sum of the
outstanding Acquisition Loans, the outstanding Revolving Credit Loans,
the Maximum Drawing Amount and all Unpaid Reimbursement Obligations
exceeds the lesser of (a) the sum of the Total Acquisition Commitment
and the Total Commitment and (b) the Borrowing Base , then the Borrower
shall immediately pay the amount of such excess to the Agent for the
respective accounts of the Banks for application to the Acquisition
Loan, to be applied, in the absence of instruction by the Borrower,
first to the principal of Base Rate Loans and then to the principal of
LIBOR Rate Loans. Each prepayment of the Acquisition Loan shall be
allocated among the Banks, in proportion, as nearly as practicable, to
the respective unpaid principal amount of each Bank's Acquisition Note,
with adjustments to the extent practicable to equalize any prior
payments or repayments not exactly in proportion.
4.8.2. PROCEEDS OF ASSET SALES. In the event the Borrower or
any of its Subsidiaries receives any Net Cash Sale Proceeds from any
Asset Sale permitted by Section 10.5.2 or otherwise consented to in
writing by the Majority Banks (or, in the event such a sale constitutes
a sale of all or substantially all of the Collateral, then all the
Banks), the Borrower shall, immediately upon receipt thereof, make a
prepayment of principal on the Acquisition Loan in the amount of such
proceeds, with the Total Acquisition Commitment also being permanently
reduced by such amount. To the extent the Acquisition Loans have been
repaid in full, then the Borrower shall make a prepayment of principal
on the Revolving Credit Loans in an amount of such Net Cash Sale
Proceeds (or such portion which is remaining after repaying any
remaining Acquisition Loans), with the Total Commitment also being
permanently reduced by such amount. All prepayments of LIBOR Rate Loans
prior to the end of an Interest Period shall obligate the Borrower to
pay any breakage costs associated with such LIBOR Rate Loans in
accordance with Section 6.10. Prior to the occurrence of an Event of
Default, the Borrower may elect to avoid such breakage costs by
providing to the Agent cash in an amount sufficient to cash
collateralize such LIBOR Rate Loans, but in no event shall the Borrower
be deemed to have paid such LIBOR Rate Loans until such cash has been
paid to the Agent for application to such LIBOR Rate Loans. The Agent
may elect to cause such cash collateral to be deposited into either (i)
a cash collateral account pursuant to the terms of a cash collateral
agreement executed by the Borrower and the Agent and in form and
substance satisfactory to the Agent or (ii) the Borrower's Operating
Account with appropriate instructions prohibiting the Borrower's
withdrawal of such funds so
<PAGE>
-13-
long as they remain cash collateral. In each such case, the Borrower
agrees to execute and deliver to the Agent such instruments and
documents, including Uniform Commercial Code financing statements and
agreements with any third party depository banks, as the Agent may
request.
SECTION 7. AMENDMENT TO SECTION 5 OF THE CREDIT AGREEMENT. Section 5
of the Credit Agreement is hereby amended as follows:
(a) Section 5.1.1. of the Credit Agreement is hereby amended by
deleting the words "the amount of all Revolving Credit Loans outstanding shall
not exceed the Total Commitment" which appears in Section 5.1.1.(iii) and
substituting in place thereof the words "the amount of all Revolving Credit
Loans outstanding shall not exceed the lesser of (a) the Total Commitment and
(b) the Borrowing Base and (c) the sum of the Maximum Drawing Amount, all Unpaid
Reimbursement Obligations, the amount of all Revolving Credit Loans outstanding
and the amount of all Acquisition Loans outstanding shall not exceed the lesser
of (i) the sum of the Total Commitment and the Total Acquisition Commitment and
(ii) the Borrowing Base".
(b) Section 5.6 of the Credit Agreement is hereby amended by deleting
the words "the rate of the Applicable Margin for letter of credit fees" in each
place in which such words appear in Section 5.6 and substituting in each place
the words "three percent (3%)".
SECTION 8. AMENDMENT TO SECTION 8 OF THE CREDIT AGREEMENT. Section 8 of
the Credit Agreement is hereby amended by inserting the following immediately
after the end of the text of Section 8.24:
8.25. BANK ACCOUNTS. SCHEDULE 8.25 sets forth the account
numbers and locations of all Local Accounts, Interim Concentration
Accounts and other bank accounts of the Borrower or any of its
Subsidiaries.
SECTION 9. AMENDMENT TO SECTION 9 OF THE CREDIT AGREEMENT. Section 9
of the Credit Agreement is hereby amended as follows:
(a) Section 9.4(c) of the Credit Agreement is hereby amended by
inserting immediately prior to the beginning of the text of Section 9.4(c) the
words "in addition, as soon as practicable, but in any event within thirty (30)
days after the end of each month in each fiscal year of the Borrower, unaudited
monthly consolidated financial statements of the Borrower and its Subsidiaries
for such month and unaudited monthly consolidating financial statements of the
Borrower and its Subsidiaries for such month (which monthly statements shall
including a consolidated and consolidating profit and loss statement and
statement of cash flow), each prepared in accordance with generally accepted
accounting principles, together with a certification by the principal financial
or accounting officer of the Borrower that the information contained in such
financial statements fairly presents the financial condition of the Borrower and
its Subsidiaries on the date thereof (subject to year-end adjustments) and, in
addition,".
(b) Section 9.4(e) of the Credit Agreement is hereby amended be
deleting the word "and" which appears at the end of Section 9.4(e).
<PAGE>
-14-
(c) Section 9.4(f) of the Credit Agreement is hereby amended by
deleting the period which appears at the end of the text of Section 9.4(f) and
substituting in place thereof a semicolon.
(d) Section 9.4 of the Credit Agreement is further amended by inserting
immediately after the end of the text of Section 9.4(f) the following:
(g) within twenty (20) days after the end of each calendar
month or at such earlier time as the Agent may reasonably request, a
Borrowing Base Report setting forth the Borrowing Base as at the end of
such calendar month or other date so requested by the Agent; and
(h) within twenty (20) days after the end of each calendar
month, an Accounts Receivable aging report.
(e) Section 9.9 of the Credit Agreement is hereby amended by inserting
immediately after the end of the text of Section 9.9.2 the following:
9.9.3. COLLATERAL REPORTS. No more frequently than four times
during each calendar year, or more frequently as determined by the
Agent if an Event of Default shall have occurred and be continuing,
upon the request of the Agent, the Borrower will obtain and deliver to
the Agent, or if the Agent so elects, will cooperate with the Agent in
the Agent's obtaining a report of an independent collateral auditor
satisfactory to the Agent (with may be affiliated with one of the
Banks) with respect to the Accounts Receivable component included in
the Borrowing Base, which report shall indicate whether or not the
information set forth in the Borrowing Base Report most recently
delivered is accurate and complete in all material respects based upon
a review by such auditors of the Accounts Receivable (including
verification with respect to the amount, aging, identity and credit of
the respective account debtors and the billing practices of the
Borrower or its applicable Subsidiary).
(f) Section 9 of the Credit Agreement is further amended by inserting
the following immediately after the end of the text of Section 9.17:
9.18. BANK ACCOUNTS.
9.18.1. GENERAL. On or prior to November 30, 1999, the
Borrower will, and will cause each of its Subsidiaries to, (a)
establish a depository account (the "BKB Concentration Account") under
the control of the Agent for the benefit of the Banks and the Agent, in
the name of the Borrower and (b) instruct all account debtors and other
obligors, pursuant to notices of assignment and instruction letters in
form and substance satisfactory to the Agent, to remit all cash
proceeds of Accounts Receivable to the BKB Concentration Account or
local depository accounts ("Local Accounts") or concentration
depository accounts ("Interim Concentration Accounts") with other
financial institutions. On or prior to January 1, 2000, the Borrower
will, and will cause each of its Subsidiaries to (a)
<PAGE>
-15-
deliver to the Agent evidence satisfactory to the Agent that the
financial institutions in which such Local Accounts and Interim
Concentration Accounts are located have entered into agency account
agreements and, if applicable, lock box agreements (collectively,
"Agency Account Agreements") in form and substance satisfactory to the
Agent, (b) direct all depository institutions with Local Accounts to
cause all funds held in each such Local Account to be transferred no
less frequently than once each day to, and only to, an Interim
Concentration Account or the BKB Concentration Account, (c) direct all
depository institutions with Interim Concentration Accounts to cause
all funds of the Borrower and its Subsidiaries held in such Interim
Concentration Accounts to be transferred daily to, and only to, the
BKB Concentration Account, and (d) at all times ensure that
immediately upon the Borrower's or any of its Subsidiaries' receipt of
any funds constituting or cash proceeds of any Collateral, all such
amounts shall have been deposited in a Local Account, an Interim
Concentration Account or the BKB Concentration Account.
9.18.2. ACKNOWLEDGMENT OF APPLICATION. The Borrower hereby
agrees that all amounts received by the Agent in the BKB Concentration
Account will be the sole and exclusive property of the Agent, for the
accounts of the Banks and the Agent, to be applied in accordance
Section 2.10 or Section 2.11 as applicable.
9.19. CONSULTANT. The Borrower hereby agrees that it shall
engage the services of a professional consultant to, among other
things, visit the Borrower's and any Subsidiary's corporate offices at
such times and with such frequency as the consultant deems appropriate,
discuss the Borrower's or any Subsidiary's financial matters with its
officers, examine any of the Borrower's or any Subsidiary's books or
other financial records and advise the Banks as to the business,
operations and financial condition of the Borrower and its
Subsidiaries. All reasonable fees and expenses of the consultant shall
be borne by the Borrower and shall be included as an Obligation.
SECTION 10. AMENDMENT TO SECTION 10 OF THE CREDIT AGREEMENT. Section
10.5.1 of the Credit Agreement is hereby amended by deleting Section 10.5.1 in
its entirety and restating it as follows:
10.5.1. MERGERS AND ACQUISITIONS. The Borrower will not, and
will not permit any of its Subsidiaries to, become a party to any
merger or consolidation, or agree to or effect any asset acquisition or
stock acquisition except, so long as no Default or Event of Default has
occurred and is continuing or would exist after giving effect thereto
the Borrower or any Subsidiary shall be permitted to merge or
consolidate one or more of the Subsidiaries of the Borrower with and
into the Borrower or a Guarantor hereunder, provided the Borrower or
the Guarantor, as the case may be, has taken or caused to be taken all
action necessary to grant to the Agent a first priority perfected
security interest in the Borrower's or such other Guarantor's assets
after such merger or consolidation to the same extent as in the assets
of parties to the merger prior thereto.
<PAGE>
-16-
In the event any new Domestic Subsidiary is formed or
otherwise comes into existence, such new Domestic Subsidiary shall,
immediately upon its creation or formation, execute and deliver to the
Agent for the benefit of the Agent and the Banks, an Instrument of
Adherence in substantially the form of EXHIBIT F hereto (an "Instrument
of Adherence") and the Loan Documents shall be amended and/or
supplemented as necessary to make the terms and conditions of the Loan
Documents applicable to such Domestic Subsidiary. Such Domestic
Subsidiary shall become a Guarantor hereunder and shall become party to
the Guaranty and the Security Agreement and shall execute and deliver
to the Agent any and all other agreements, documents, instruments and
financing statements necessary to grant to the Agent a first priority
perfected lien in such Subsidiary's assets to the extent required by
the Loan Documents. The Borrower and its Subsidiaries shall,
immediately upon the creation or formation of such Subsidiary, pledge
all of such Subsidiary's capital stock to the Agent for the benefit of
the Agent and the Banks.
SECTION 11. AMENDMENT TO SECTION 11 OF THE CREDIT AGREEMENT. Section
11.2 of the Credit Agreement is hereby amended by deleting Section 11.2 in its
entirety and restating it as follows:
11.2. CAPITAL EXPENDITURES. The Borrower will not make, or
permit any Subsidiary of the Borrower to make, Capital Expenditures in
any fiscal year that exceed, in the aggregate, (a) $6,000,000 for the
Borrower's 1999 fiscal year and (b) $4,000,000 for each fiscal year
ending thereafter.
SECTION 12. AMENDMENT TO SECTION 14 OF THE CREDIT AGREEMENT. Section
14.1(c) of the Credit Agreement is hereby by inserting immediately after the
reference to "9.16" a comma and the references "9.18".
SECTION 13. AMENDMENT TO THE CREDIT AGREEMENT. The Credit Agreement is
further amended by including as part of the Schedules referenced therein the
SCHEDULE 8.25 attached hereto.
SECTION 14. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall
become effective (the "Effective Date") only upon the satisfaction of the
following conditions on or prior to November 8, 1999:
(a) this Second Amendment shall have been executed by the Company, each
Guarantor, the Banks and the Agent; and
(b) the Agent shall have received from the Company a waiver fee in the
amount of $210,750, which fee shall be for the PRO RATA accounts of the Banks.
SECTION 15. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
repeats, on and as of the date hereof, each of the representations and
warranties made by it in Section 8 of the Credit Agreement, and such
representations and warranties remain true as of the date hereof (except to the
extent of changes resulting from transactions contemplated or permitted by the
Credit
<PAGE>
-17-
Agreement and the other Loan Documents and changes occurring in the ordinary
course of business that singly or in the aggregate are not materially adverse,
and to the extent that such representations and warranties relate expressly to
an earlier date), PROVIDED, that all references therein to the Credit Agreement
shall refer to such Credit Agreement as amended hereby. In addition, the
Borrower hereby represents and warrants that the execution and delivery by the
Borrower and each Guarantor of this Second Amendment and the performance by the
Borrower and each Guarantor of all of its agreements and obligations under the
Credit Agreement as amended hereby and the other Loan Documents are within the
corporate authority of each of the Borrower and each Guarantor and has been duly
authorized by all necessary corporate action on the part of the Borrower and
each Guarantor.
SECTION 16. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto,
including, but not limited to the Security Documents, are hereby ratified and
confirmed in all respects and shall continue in full force and effect. The
Credit Agreement and this Second Amendment shall be read and construed as a
single agreement. All references in the Credit Agreement or any related
agreement or instrument to the Credit Agreement shall hereafter refer to the
Credit Agreement as amended hereby.
SECTION 17. NO WAIVER. Nothing contained herein shall constitute a
waiver of, impair or otherwise affect any Obligations, any other obligation of
the Borrower or any rights of the Agent or the Banks consequent thereon.
SECTION 18. COUNTERPARTS. This Second Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
SECTION 19. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE>
-18-
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as a document under seal as of the date first above written.
AZTEC TECHNOLOGY PARTNERS, INC.
By:
------------------------------------
Title:
BANKBOSTON, N.A.
By:
------------------------------------
Title:
CITIZENS BANK OF MASSACHUSETTS
By:
------------------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
------------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
------------------------------------
Name:
Title:
NATIONAL CITY BANK OF KENTUCKY
By:
------------------------------------
Name:
Title:
<PAGE>
-19-
LASALLE NATIONAL BANK
By:
------------------------------------
Name:
Title:
PEOPLE'S BANK
By:
------------------------------------
Name:
Title:
<PAGE>
RATIFICATION OF GUARANTY
Each of the undersigned guarantors hereby acknowledges and consents to
the foregoing Second Amendment as of September 30, 1999, and agrees that the
Guaranty dated as of (a) July 27, 1998; (b) September 17, 1998; and (c) October
2, 1998 from each of the undersigned Guarantors remain in full force and effect,
and each of the Guarantors confirms and ratifies all of its obligations
thereunder.
AZTEC INTERNATIONAL LLC
By:
---------------------------------------------
Title:
AZTEC TECHNOLOGY PARTNERS OF NEW ENGLAND LLC
(F/K/A BAY STATE COMPUTER GROUP LLC)
By:
---------------------------------------------
Title:
COMPEL LLC
By:
---------------------------------------------
Title:
ENTRA COMPUTER CORP.
By:
---------------------------------------------
Title:
FORTRAN CORP.
By:
---------------------------------------------
Title:
<PAGE>
-2-
MAHON COMMUNICATIONS CORPORATION
By:
--------------------------------------------
Title:
OFFICE EQUIPMENT SERVICE, INC.
By:
---------------------------------------------
Title:
PCM, INC.
By:
---------------------------------------------
Title:
PROFESSIONAL COMPUTER SOLUTIONS, INC.
By:
---------------------------------------------
Title:
PROFESSIONAL NETWORK SERVICES, INC.
By:
---------------------------------------------
Title:
MCDOWELL, TUCKER & CO., INC.
By:
---------------------------------------------
Title:
SOFTECH COMMUNICATIONS, INC.
By:
---------------------------------------------
Title:
SOLUTIONS E.T.C. INC.
By:
---------------------------------------------
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET & INCOME STATEMENT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,458
<SECURITIES> 0
<RECEIVABLES> 77,122
<ALLOWANCES> 3,878
<INVENTORY> 10,479
<CURRENT-ASSETS> 104,200
<PP&E> 16,509
<DEPRECIATION> 5,970
<TOTAL-ASSETS> 214,181
<CURRENT-LIABILITIES> 136,913
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 75,719
<TOTAL-LIABILITY-AND-EQUITY> 214,181
<SALES> 154,198
<TOTAL-REVENUES> 277,821
<CGS> 140,395<F1>
<TOTAL-COSTS> 215,850
<OTHER-EXPENSES> 102,789<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,652
<INCOME-PRETAX> (45,470)
<INCOME-TAX> (13,797)
<INCOME-CONTINUING> (31,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,673)
<EPS-BASIC> (1.43)
<EPS-DILUTED> (1.43)
<FN>
<F1>INCLUDES $.8 MILLION INVENTORY IMPAIRMENT DUE TO STRATEGIC
RESTRUCTURING Q399
<F2>INCLUDES RESTRUCTURING COSTS OF $3.6 MILLION AND GOODWILL
WRITE-OFF OF $41.7 MILLION
</FN>
</TABLE>
