<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
EXPLANATORY NOTE
On March 30, 2000, the registrant announced that it had restated its
consolidated financial statements for the first three quarters of the year ended
December 31, 1999 to properly reflect revenue recognition related to an unsigned
contract. This amended Quarterly Report on Form 10-Q/A contains restated
financial information and disclosures for the three and nine months ended
September 30, 1999 (See Note 6 to the condensed consolidated financial
statements).
Unless otherwise stated, information in the originally filed Form 10-Q for the
three and nine months ended September 30, 1999 is presented as of the original
filing date, and has not been updated in this amended filing. Financial
statement information and related disclosures included in this amended filing
reflect, where appropriate, changes as a result of the restatement.
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q/A
Table of Contents
September 30, 1999
<TABLE>
<CAPTION>
Page
------
<S> <C>
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
<PAGE>
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)
(RESTATED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 3,458 $ 8,763
Accounts receivable, net ......................................... 73,244 74,138
Inventories ...................................................... 10,714 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 ........................................... 104,435 120,928
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 ................................................... $ 214,416 $ 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 ................................................. 9,827 4,732
Other accrued liabilities ........................................ 7,438 7,821
------------- -------------
Total current liabilities ...................................... 138,134 62,497
Long-term debt ................................................... 232 90,218
Deferred income taxes ............................................ -- 141
Other long-term liabilities ...................................... 1,295 697
------------- -------------
Total liabilities .............................................. 139,661 153,553
------------- -------------
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) ..................................... (19,299) 13,360
------------- -------------
Total stockholders' equity .................................... 74,755 106,966
------------- -------------
Total liabilities and stockholders' equity .................... $ 214,416 $ 260,519
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
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
------------------ ------------------ ------------------ ------------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
Products ........................................... 52,717 $ 39,011 $ 153,925 $ 100,992
Services ........................................... 42,514 39,091 121,991 113,974
------------ ------------ ------------ -----------
Total revenues ................................... 95,231 78,102 275,916 214,966
------------ ------------ ------------ -----------
Gross profit:
Products ........................................... 3,365 5,856 13,764 12,815
Services ........................................... 16,862 13,549 46,537 38,765
------------ ------------ ------------ -----------
Total gross profit ............................... 20,227 19,405 60,301 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 ........................ 3,989 -- 3,644 4,946
Write-off of goodwill ................................ 41,723 -- 41,723 -
------------ ------------ ------------ -----------
Operating income (loss) .......................... (46,500) 5,860 (42,488) 8,745
Interests and other expense .......................... 1,637 488 4,652 470
------------ ------------ ------------ -----------
Income (loss) before income tax provision (benefit) .. (48,137) 5,372 (47,140) 8,275
Income tax provision (benefit) ....................... (15,050) 2,415 (14,481) 4,207
------------ ------------ ------------ -----------
Net income (loss) .................................... $ (33,087) $ 2,957 $ (32,659) $ 4,068
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weight-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 .............................................. $ (1.49) $ 0.13 $ (1.48) $ 0.16
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Diluted ............................................ $ (1.49) $ 0.13 (1.48) $ 0.16
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ (32,659) $ 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 ................ 15,158 (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:
Proceeds from (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
<PAGE>
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.
6
<PAGE>
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 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
are 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.
7
<PAGE>
6. RESTATEMENT OF EARNINGS
During the quarter ended December 31, 1999, the Company concluded that
the first three quarters of the year ended December 31, 1999 would be
restated to properly reflect revenue recognition related to an unsigned
contract. The effect of the restatement is to reduce revenues in the
first, second and third quarters of 1999 by $0.1 million, $0.6 million
and $1.2 million, respectively. The effect of the restatement on the
accompanying condensed consolidated financial statements is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY
REPORTED RESTATED
---------- --------
<S> <C> <C>
AS OF SEPTEMBER 30, 1999:
Inventories $ 10,479 $ 10,714
Deferred revenue 7,921 9,827
Other accrued liabilities 8,123 7,438
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Total revenues 96,458 95,231
Total gross profit 21,242 20,227
Net income (32,488) (33,087)
Net income per share
Basic $ (1.46) $ (1.49)
Diluted $ (1.46) $ (1.49)
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Total revenues 277,821 275,916
Total gross profit 61,971 60,301
Net income (31,673) (32,659)
Net income per share
Basic $ (1.43) $ (1.48)
Diluted $ (1.43) $ (1.48)
</TABLE>
7. 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
---- ---- ---- ----
<S> <C> <C> <C> <C>
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>
8
<PAGE>
8. 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.
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 (1)
Revenue:
Products................ $35,045 $ 8,045 $ 2,427 $ - $ 7,200 $ 52,717
Services................ 9,263 7,993 7,052 12,395 5,811 42,514
------- ------- ------- ------- ------- --------
Total................. $44,308 $16,038 $ 9,479 $12,395 $13,011 $ 95,231
Gross Profit.............. $ 6,123 $ 3,528 $ 4,180 $ 3,313 $ 3,083 $ 20,227
Operating income.......... $ 1,064 $ (705) $ 1,580 $ 1,481 $ 413 $ 3,833
Depreciation.............. $ 256 $ 146 $ 84 $ 98 $ 41 $ 625
Assets.................... $50,562 $21,282 $12,517 $14,689 $11,172 $110,222
------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- --------
</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>
9
<PAGE>
8. SEGMENT DATA(CONTINUED)
<TABLE>
<CAPTION>
New Northeast
England Tri-State Telephony West Other Total
------- --------- --------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1999 (1)
Revenue:
Products................. $ 96,063 $ 25,835 $ 6,038 $ - $ 25,989 $ 153,925
Services................. 27,430 26,027 21,191 28,514 18,829 121,991
--------- --------- --------- --------- --------- ---------
Total.................. $ 123,493 $ 51,862 $ 27,229 $ 28,514 $ 44,818 $ 275,916
Gross profit............... $ 18,430 $ 12,430 $ 11,206 $ 7,364 $ 10,871 $ 60,301
Operating income........... $ 4,122 $ 340 $ 3,775 $ 2,687 $ 3,824 $ 14,748
Depreciation............... $ 518 $ 408 $ 204 $ 294 $ 113 $ 1,537
Assets..................... $ 50,562 $ 21,282 $ 12,517 $ 14,689 $ 11,172 $ 110,222
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</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>
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
------------------ ------------------ ------------------ ------------------
(1) (1)
<S> <C> <C> <C> <C>
Segment operating income.................. $ 3,833 $ 7,953 $ 14,748 $ 18,267
Corporate expenses........................ 3,361 1,300 8,089 2,952
Amortization of intangibles............... 1,260 793 3,780 1,624
Strategie restructuring costs............. 3,989 - 3,644 4,946
Write-off of goodwill..................... 41,723 - 41,723 -
--------- --------- --------- ---------
Consolidated operating income (loss)...... $ (46,500) $ 5,860 $ (42,488) $ 8,745
--------- --------- --------- ---------
--------- --------- --------- ---------
Segment assets............................ $ 110,222 $ 85,066 $ 110,222 $ 85,066
Corporate assets.......................... 19,979 12,226 19,979 12,226
Intangible assets......................... 84,215 129,645 84,215 129,645
--------- --------- --------- ---------
Consolidated assets....................... $ 214,416 $ 226,937 $ 214,416 $ 226,937
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(1) As restated. See Note 6 to the Condensed Consolidated Financial
Statements.
10
<PAGE>
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)
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 78.8 75.2 78.2 76.0
-------- -------- -------- --------
Gross profit 21.2 24.8 21.8 24.0
Selling general and administrative expenses 20.7 16.3 19.4 16.9
Amortization of intangibles 1.3 1.0 1.4 0.7
Strategic restructuring costs 4.2 -- 1.3 2.3
Write-off of goodwill 43.8 -- 15.1 --
-------- -------- -------- --------
Operating income (loss) (48.8) 7.5 (15.4) 4.1
Other expense, net 1.7 0.6 1.7 0.2
-------- -------- -------- --------
Income (loss) before income taxes (50.5) 6.9 (17.1) 3.9
Provision for (benefit from) income taxes (15.8) 3.1 (5.3) 2.0
-------- -------- -------- --------
Net income (loss) (34.7)% 3.8% (11.8)% 1.9%
-------- -------- -------- --------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Consolidated revenues increased 21.9% from $78.1 million for the three
months ended September 30, 1998 to $95.2 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
<PAGE>
Gross profit increased 4.2% from $19.4 million, or 24.8% of revenues,
for the three months ended September 30, 1998 to $20.2 million, or 21.2% 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 $0.8 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 54.9% from $12.8
million, or 16.3% of revenues, for the three months ended September 30, 1998 to
$19.8 million, or 20.7% 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 $0.5 million from $0.8 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 $0.5 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 ($15.0) million in
the three months ended September 30, 1999, reflecting effective tax rates of
45.0% and (31.3%), respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998.
Consolidated revenues increased 28.4% from $215.0 million for the nine
months ended September 30, 1998 to $275.9 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.
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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 16.9% from $51.6 million, or 24.0% of revenues,
for the nine months ended September 30, 1998 to $60.3 million, or 21.8% 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 $0.8 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 19.4% 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 ($0.3)
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 $0.5 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 ($14.5) million in
the nine months ended September 30, 1999, reflecting effective tax rates of
50.8% and (30.7%), 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 ($33.7) 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 7, Note 3. At September 30, 1999, Aztec's stockholders' equity
was $74.7 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 from
operating cash flows. No IT projects have been deferred by the Company due to
Year 2000 efforts.
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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.
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.
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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.
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.
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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 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
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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.
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
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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 112.7% 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.
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.
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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
--------------------------------
*(Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q dated November 15, 1999.)
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: JUNE 20, 2000 BY: /s/ ROSS J. WEINTRAUB
----------------- ------------------------------
Ross J. Weintraub
Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
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