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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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)
<TABLE>
<CAPTION>
DELAWARE 04-3408450
<S> <C>
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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 / /
------------------------
22,593,046 shares of the registrant's common shares, par value $0.001, were
outstanding as of May 12, 2000.
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AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
MARCH 31, 2000
<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............................................. 10
Risk Factors--Certain Factors That May Affect Future
Results................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risks..................................................... 17
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits............................................. 18
B. Reports on Form 8-K.................................. 18
Signatures.................................................. 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,315 $ 4,550
Accounts receivable, net.................................. 60,431 65,481
Inventories, net.......................................... 8,670 10,685
Unbilled percentage of completion revenues................ 4,860 4,730
Prepaid expenses and other current assets................. 10,428 11,289
Deferred income taxes..................................... 5,432 5,432
-------- --------
Total current assets.................................... 93,136 102,167
Property and equipment, net............................... 10,475 10,386
Intangibles, net.......................................... 55,158 55,760
Deferred tax asset........................................ 2,476 2,476
Other assets.............................................. 1,969 1,908
-------- --------
Total assets............................................ $163,214 $172,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 70,456 $ 166
Accounts payable.......................................... 28,316 34,538
Accrued compensation...................................... 7,503 6,570
Deferred revenue.......................................... 10,426 10,140
Other accrued liabilities................................. 10,382 10,847
-------- --------
Total current liabilities............................... 127,083 62,261
Long-term debt.............................................. 160 74,544
Other long-term liabilities................................. 2,217 1,956
-------- --------
Total liabilities....................................... 129,460 138,761
-------- --------
Stockholders' equity:
Preferred stock $.001 par value; 1,000,000 shares
authorized,
no shares issued and outstanding........................
Common stock--$.001 par value, 150,000,000 shares
authorized,
22,590,199 and 22,428,837 shares issued and outstanding,
respectively............................................ 23 22
Additional paid-in capital................................ 95,006 94,354
Retained deficit.......................................... (61,275) (60,440)
-------- --------
Total stockholders' equity.............................. 33,754 33,936
-------- --------
Total liabilities and stockholders' equity.............. $163,214 $172,697
======== ========
</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
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Products................................................ $40,385 $47,495
Services................................................ 41,132 38,424
------- -------
Total revenues........................................ 81,517 85,919
------- -------
Gross profit:
Products................................................ 6,315 4,303
Services................................................ 12,288 14,216
------- -------
Total gross profit.................................... 18,603 18,519
Selling, general and administrative expenses.............. 18,081 15,522
Amortization of intangibles............................... 623 1,260
------- -------
Operating income (loss)............................... (101) 1,737
Interest and other expense................................ 1,309 1,529
------- -------
Income (loss) before income tax provision (benefit)....... (1,410) 208
Income tax provision (benefit)............................ (575) 97
------- -------
Net income (loss)......................................... $ (835) $ 111
======= =======
Weighted-average shares outstanding:
Basic................................................... 22,518 22,017
Diluted................................................. 22,518 22,361
Per share amounts:
Basic................................................... $ (0.04) $ 0.01
======= =======
Diluted................................................. $ (0.04) $ 0.01
======= =======
</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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (835) $ 111
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense................. 1,335 1,736
Deferred income taxes................................. 257
Changes in current assets and liabilities............. 2,564 10,388
------- --------
Net cash provided by operating activities........... 3,064 12,492
------- --------
Cash flows from investing activities:
Cash paid in acquisitions............................... (826)
Additions to property and equipment, net of disposals... (797) (1,632)
Other................................................... (61) 332
------- --------
Net cash used in investing activities............... (858) (2,126)
------- --------
Cash flows from financing activities:
Payments of long-term debt.............................. (4,094) (12,738)
Proceeds from issuance of common stock.................. 653
------- --------
Net cash used in financing activities............... (3,441) (12,738)
------- --------
Net decrease in cash and cash equivalents................. (1,235) (2,372)
Cash and cash equivalents at beginning of period.......... 4,550 8,763
------- --------
Cash and cash equivalents at end of period................ $ 3,315 $ 6,391
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF BUSINESS
Aztec Technology Partners, Inc. ("Aztec" or the "Company") is a provider of
e-Solutions for businesses, helping clients exploit Internet, intranet and
extranet technologies for a 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.
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 year ended December 31, 1999, included in the Company's
Annual Report on Form 10-K/A filed May 1, 2000. The accompanying condensed
consolidated financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of results expected for the full fiscal period or any
other future periods.
3. CREDIT FACILITY
As of March 31, 2000, the Company was in noncompliance with a certain
financial covenant under its credit facility. The Company has requested that the
banks waive the noncompliance for the first quarter of 2000. There can be no
assurance however that the Company will be granted a waiver. The failure to
receive a waiver could result in the total amount of the Company's outstanding
borrowings under the credit facility becoming immediately due and payable.
Aztec received a waiver of noncompliance from its bank lenders in the fourth
quarter of 1999 with regard to certain financial covenants under its credit
facility. The amendment entered into in March 2000 advanced the maturity date of
the credit facility from July 27, 2003 to April 30, 2001 and replaced the
current financial covenants with a minimum debt service coverage covenant and a
capital expenditure covenant of no more than $4.0 million for 2000. The amended
credit facility contemplates that Aztec will divest certain of its non-core
subsidiaries and raise additional capital or debt through the capital
marketplace and contemplates a loan reduction schedule through April 30, 2001.
Aztec has committed to proceed on a commercially reasonable basis with the
initial public offering of its Web-application subsidiary, Professional Computer
Solutions, Inc., ("PCSI"). There can be no assurance that Aztec will be able to
successfully complete the divestiture of its non-core subsidiaries, or that it
will be able to access the capital markets to raise additional funds, or that it
will be able to complete the initial public offering of PCSI. Failure to raise
sufficient funds to reduce the outstanding bank obligations to certain levels
during 2000 will result in the incurrence of additional fees payable to the bank
lenders and the issuance of common stock warrants to purchase a number of shares
equal to up to 4% of the outstanding shares of the Company, with an exercise
price of $0.01 per share.
6
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. EARNINGS (LOSS) 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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Weighted average shares outstanding used in computing basic
net income (loss) per share............................... 22,518 22,017
Dilutive stock options...................................... 1,562 344
------ ------
Weighted average shares outstanding used in computing
diluted net income (loss) per share....................... 24,080 22,361
====== ======
</TABLE>
Options to purchase approximately 1.6 million shares of common stock were
excluded from the computation of diluted EPS for the quarter ended March 31,
2000 as their effect would be anti-dilutive.
5. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
6. SEGMENT DATA
The Company manages its business segments primarily on a business sector
basis. The Company's reportable segments are comprised of e-Integration,
e-Solutions, Voice and Data and Other. Included in the Other segment are certain
subsidiaries which provide e-Integration products and services, but are
considered non-core businesses (see Note 3) which the credit facility
contemplates Aztec may divest. Each operating segment provides products and
services as described in Note 1.
The Company evaluates the performance of its segments based on operating
income. Operating income for each segment includes selling, general and
administrative expenses directly attributable to the segment and excludes
certain expenses which are managed outside of the reportable segments. Costs
excluded from segments' operating income primarily consist of corporate expenses
including administrative expenses, amortization of intangibles, interest and
income taxes, as well as other non-recurring restructuring and acquisition
related costs. Segment assets exclude corporate assets which primarily consist
of cash and cash equivalents, certain deferred assets, intangibles and
investments in subsidiaries. Capital expenditures for long-lived assets are not
a significant activity of the reportable
7
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. SEGMENT DATA (CONTINUED)
operating segments and, as such, not a primary focus of management in reviewing
operating segment performance.
Summary information by segment for the three months ended March 31, 2000 and
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
E-INTEGRATION E-SOLUTIONS VOICE & DATA OTHER TOTAL
------------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Revenue:
Products.............................. $32,414 $ -- $ 2,860 $ 5,111 $ 40,385
Services.............................. 8,822 5,697 23,226 3,387 41,132
------- ------ ------- ------- --------
Total............................... $41,236 $5,697 $26,086 $ 8,498 $ 81,517
Gross profit............................ $ 7,524 $1,620 $ 7,705 $ 1,754 $ 18,603
Operating income (loss)................. $ 1,276 $ (872) $ 2,456 $ (46) $ 2,814
Depreciation............................ $ 233 $ 117 $ 214 $ 58 $ 622
Assets.................................. $44,741 $8,803 $30,644 $ 7,847 $ 92,035
======= ====== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
E-INTEGRATION E-SOLUTIONS VOICE & DATA OTHER TOTAL
------------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenue:
Products.............................. $35,209 $ -- $ 1,791 $10,495 $ 47,495
Services.............................. 9,137 5,369 17,370 6,548 38,424
------- ------ ------- ------- --------
Total............................... $44,346 $5,369 $19,161 $17,043 $ 85,919
Gross profit............................ $ 6,381 $2,449 $ 5,878 $ 3,811 $ 18,519
Operating income........................ $ 836 $ 983 $ 1,568 $ 1,712 $ 5,099
Depreciation............................ $ 157 $ 69 $ 183 $ 52 $ 461
Assets.................................. $47,792 $6,010 $31,334 $15,951 $101,087
======= ====== ======= ======= ========
</TABLE>
8
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. SEGMENT DATA (CONTINUED)
A reconciliation of the Company's reportable segment operating income and
segment assets to the corresponding consolidated amounts as of and for the three
months ended March 31, 2000 and March 31, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Segment operating income.................................. $ 2,814 $ 5,099
Corporate expenses........................................ 2,292 2,102
Amortization of intangibles............................... 623 1,260
-------- --------
Consolidated operating income (loss)...................... $ (101) $ 1,737
======== ========
Segment assets............................................ $ 92,035 $101,087
Corporate assets.......................................... 16,021 9,699
Intangible assets......................................... 55,158 129,358
-------- --------
Consolidated assets....................................... $163,214 $240,144
======== ========
</TABLE>
7. SUBSEQUENT EVENTS
On May 14, 2000, the Company entered into an agreement to sell three of its
voice and data subsidiaries to Morgenthaler Partners. The Company anticipates
that the closing will occur on or about June 1, 2000. However, there can be no
assurance that the closing of the sale will occur at such time. The Stock
Purchase and Sale Agreement by and among Aztec, Compel LLC, Fortran Corp., Mahon
Communications Corporation, Morgenthaler Partners VI, L.P. and CMF Holdings,
Inc., provides for the sale of all of Aztec's equity interests in the Compel,
Fortran and Mahon subsidiaries for the amount of $34.5 million, with $2.0
million of such amount placed in escrow to satisfy indemnification of
obligations of Aztec. These subsidiaries have been classified as "to be disposed
of" under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the three months ended
March 31, 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In the past, including our fiscal year ended December 31, 1999, we have
focused in the following areas of enterprise-wide computing and communications:
(1) e-Solutions; (2) e-Integration; (3) consulting, support and outsourcing; and
(4) voice and data infrastructure, design and integration. We are currently
pursuing the sale of certain of our subsidiaries involved with voice and data
activities. There can be no assurance, however, that such divestitures will
occur. Proceeds from completed sales will be used to reduce our outstanding
borrowings under our credit facility.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the three months ended March 31, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues................................................. 100.0 % 100.0 %
Cost of revenues......................................... 77.2 78.4
----- -----
Gross profit........................................... 22.8 21.6
Selling, general and administrative expenses............. 22.2 18.1
Amortization of intangibles.............................. 0.8 1.5
----- -----
Operating income (loss)................................ (0.2) 2.0
Other expenses, net...................................... 1.6 1.8
----- -----
Income (loss) before income taxes...................... (1.8) 0.2
Provision for (benefit from) income taxes................ (0.7) 0.1
----- -----
Net income (loss)...................................... (1.1)% 0.1 %
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Consolidated revenues decreased 5.1% from $85.9 million in the three months
ended March 31, 1999 to $81.5 million for the three months ended March 31, 2000.
This decrease was due primarily to a decrease in product and service revenues in
our Other segment due to the closure of our Canfield, Ohio location in the
fourth quarter of 1999, as well as, reduced product revenues in our
e-Integration business as this business segment attempts to move towards a
higher concentration of service sales. This decrease was offset in part by an
increase in service revenues in our Voice and Data segment.
Gross profit increased .5% from $18.5 million, or 21.6% of revenues, for the
three months ended March 31, 1999 to $18.6 million, or 22.8% of revenues, for
the three months ended March 31, 2000. The increase in gross profit as a
percentage of revenues was due primarily to a higher concentration of service
revenue with higher margins.
Selling, general and administrative expenses increased 16.5% from
$15.5 million, or 18.1% of revenues, for the three months ended March 31, 1999
to $18.1 million, or 22.2% of revenues, for the three months ended March 31,
2000. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the cost of our e-Solutions and
non-core subsidiary divestiture strategic initiatives and higher incentive
related costs, primarily commissions in the e-Integration segment.
10
<PAGE>
Amortization of intangibles decreased $.7 million from $1.3 million for the
three months ended March 31, 1999 to $.6 million for the three months ended
March 31, 2000 due to write-offs of goodwill of $69.1 million for the year ended
December 31, 1999.
Interest and other expense of $1.5 million for the three months ended
March 31, 1999 decreased to $1.3 million in the three months ended March 31,
2000 primarily due to the sale of one of our Tri-State regions domain names for
$.4 million, which was offset in part by an increase in interest expense due to
increased interest rates on our credit facility beginning in the fourth quarter
of 1999.
Provision for income taxes decreased from $0.1 million in the three months
ended March 31, 1999 to $(0.6) million in the three months ended March 31, 2000,
reflecting effective tax rates of 46.6% and 40.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash of $3.3 million and working capital of
($33.9) million resulting from the reclassification of the amount outstanding
under its credit facility of $70.3 million as a current liability. This change
reflects the fact that as of March 31, 2000 we were in noncompliance with a
certain financial covenant under the credit facility. Our stockholders' equity,
at March 31, 2000 was $33.8 million.
During the three months ended March 31, 2000, net cash provided by operating
activities was $3.1 million. Net cash used in investing activities was
$.9 million, which consisted primarily of $.8 million of additions of property
and equipment. Net cash used in financing activities was $3.4 million, which
consisted of a $4.0 million paydown of the working capital portion of the credit
facility, offset by approximately $.7 million in proceeds from issuance of
common stock.
During the three months ended March 31, 1999, net cash provided by operating
activities was $12.5 million. Net cash used in investing activities was
$2.1 million, which consisted primarily of $1.6 million of additions of property
and equipment, and $0.8 million for acquisition related costs. Net cash used in
financing activities was $12.7 million, reflecting the $10.6 million recovery
from Solutions, E.T.C. used to pay down long-term debt on the credit facility,
as well as payment of $2.0 million to reduce the working capital portion of the
credit facility.
As of March 31, 2000, we had made $.8 million in capital expenditures
against the $4.0 million budgeted for 2000. The largest items include
$.6 million for additions to equipment.
We may be required to pay $3.3 million related to certain option agreements,
pending certain events, during April 2001.
We entered into a credit facility with our bank lenders in July 1998, with
amendments made to the underlying agreement on October 5, 1998, September 30,
1999 and March 30, 2000. As of March 31, 2000, we were in noncompliance with the
debt service covenant under the facility. We have requested that our banks waive
the noncompliance for the first quarter 2000. There can be no assurance that we
will be granted a waiver. The failure to obtain a waiver could result in the
entire amount of our outstanding borrowings under the credit facility becoming
due and payable.
As of December 31, 1999, we were also in noncompliance with financial
covenants under the credit facility. On March 30, 2000, we and our bank lenders
amended the facility to provide a waiver of noncompliance for the fourth quarter
of 1999. The March 2000 amendment advanced the maturity date of the facility
from July 27, 2003 to April 30, 2001 and replaced the financial covenants with a
minimum debt service coverage covenant and a capital expenditures covenant of no
more than $4.0 million for 2000. The amended credit facility requires the
payment of overadvance fees in the event that after June 30, 2000 the
outstanding balance of the credit facility exceeds a percentage of our accounts
receivable. The overadvance fees are payable by us at April 30, 2001 or in
connection with the
11
<PAGE>
sale of our subsidiaries or securities. The fees are 3% of the overadvance
amount, if any, as of June 30, 2000, plus 1.5% of the overadvance amount, if
any, that exists as of the last day of each fiscal quarter thereafter. The
amendment has provisions that we will commit to use commercially reasonable
efforts to pursue an initial public offering of the stock of PCSI, as well as,
to pursue additional financing of $20 million through the sale of equity or debt
securities.
Due to the absence of a waiver from the banks for the March 31, 2000
noncompliance, we do not anticipate that our working capital line of credit and
cash flow from operations will be sufficient to meet our liquidity requirements
for existing operations through the end of 2000. However, if the banks were to
provide the waiver for our noncompliance, we believe that our working capital
line of credit and the cash flow from operations would be sufficient through the
end of 2000. The March 2000 amendment contemplates a loan reduction schedule
through April 2001. We intend to satisfy this reduction schedule through the
application of net proceeds from the sale of subsidiaries, or the sale of
securities, or from other sources. A failure to sufficiently reduce the amount
of the loan on a timely basis will result in the obligation to grant the bank
lenders warrants to purchase up to 4% of our common stock at a purchase price of
$0.01 per share. These warrants will be immediately exercisable and have a term
of three years. The issuance of the warrants and the number of shares
purchasable under the warrants will be based on the satisfaction of certain loan
commitment reduction milestones during 2000. In the event that we are unable to
timely reduce the loan commitment by approximately 25%, 40% and 65% by June 30,
2000, September 30, 2000 and December 31, 1200, respectively, we will be
required to issue to the bank lenders warrants to purchase 2%, 3% and 4%
respectively, of our outstanding common stock on a fully diluted basis. Under
the terms of the March 2000 amendment we will not be required to issue warrants
to purchase in the aggregate over 4% of the outstanding stock. In compliance
with the amendment, we have filed a Registration Statement on Form S-3 to
register the shares issuable upon exercise of the warrants.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
RISK FACTORS--CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS." FORWARD-LOOKING
STATEMENTS GIVE OUR CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. YOU CAN
IDENTIFY THESE STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO
HISTORICAL OR CURRENT FACTS. THEY USE WORKS SUCH AS "ANTICIPATE," "ESTIMATE,"
"EXPECT," "PROJECT," "INTENT," "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 THE
GRANT OF A WAIVER BY OUR BANKS FOR OUR NONCOMPLIANCE WITH THE CREDIT FACILITY,
OUR ANTICIPATED CASH FLOW, AND TO FUTURE ACTIONS SUCH AS SALE OF SECURITIES OR
ASSETS, FUTURE PERFORMANCE, OR RESULTS OF CURRENT AND ANTICIPATED SALES AND
MARKETING EFFORTS, EXPENSES, THE OUTCOME OF CONTINGENCIES SUCH AS LEGAL
PROCEEDINGS, THE NEED FOR BANK APPROVALS OF CERTAIN TRANSACTIONS, THE EXISTENCE
OF A MARKET FOR OUR SECURITIES OR SUBSIDIARIES, AND OTHER FINANCIAL RESULTS.
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ANY OF THESE FORWARD-LOOKING STATEMENTS MAY TURN OUT TO BE WRONG. THEY CAN
BE AFFECTED BY INACCURATE ASSUMPTIONS WE MIGHT MAKE OR BY KNOWN OR UNKNOWN RISKS
AND UNCERTAINTIES. THESE RISKS INCLUDE THE VARIABILITY OF OUR QUARTERLY
OPERATING RESULTS, THE INHERENT DIFFICULTIES IN PROJECTING FINANCIAL RESULTS IN
OUR INDUSTRY, AND OTHER RISKS IDENTIFIED BY US FROM TIME TO TIME IN OUR 10-Q,
8-K AND 10-K REPORTS, AND AMENDMENTS THERETO, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. ALSO NOT THAT WE PROVIDE A CAUTIONARY DISCUSSION OF RISKS,
UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR BUSINESS UNDER
THE SECTION TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--"RISK FACTORS--CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS." OTHER FACTORS BESIDES THOSE LISTED COULD ALSO ADVERSELY AFFECT US.
FINALLY, WE CALL YOUR ATTENTION TO THE FACT THAT WE UNDERTAKE NO OBLIGATION TO
PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
OUR NON-COMPLIANCE WITH OUR CREDIT FACILITY MAY RESULT IN AN ACCELERATION OF OUR
LOANS
We were in noncompliance with a certain financial covenant under the credit
facility as of March 31, 2000. We have requested that the banks waive the
noncompliance for the first quarter 2000. The banks may elect to deny our waiver
request and may elect to accelerate the credit facility, resulting in the full
amount of our outstanding borrowings becoming immediately due and payable. In
such an event, we may be unable to satisfy our obligations as they become due.
Additionally, the banks have certain rights under the security agreements that
secure the credit facility, including the right to foreclose on our assets.
We received a waiver of noncompliance with certain financial covenants under
the credit facility from our bank lenders in the fourth quarter of 1999. The
amendment advances the maturity date of the credit facility from July 27, 2003
to April 30, 2001 and replaces the current financial covenants with a minimum
debt service coverage covenant and a capital expenditure covenant. The amendment
contemplates that we will divest certain of our non-core subsidiaries and raise
additional capital or debt through the capital marketplace and contemplates a
loan reduction schedule through April 30, 2001. We have committed to proceed on
a commercially reasonable basis with the initial public offering of our
Web-application subsidiary, PCSI. There can be no assurance that we will be able
to successfully complete the divestiture of our non-core subsidiaries, or that
we will be able to access the capital markets to raise additional funds, or that
we will be able to complete the initial public offering of PCSI. Failure to
raise sufficient funds through such divestitures and equity or debt financings
to comply with the amended loan reduction schedule will result in the incurrence
of additional fees payable to the bank lenders, and the issuance of common stock
purchase warrants, with an exercise price of $0.01 per share.
OUR STOCKHOLDERS WILL FACE A RISK OF SUBSTANTIAL DILUTION IN THE EVENT OF OUR
NON-COMPLIANCE WITH THE BANK AMENDMENT
In the event that we fail to reduce the loan commitment amount at set
milestones we will be required to issue to the bank lenders certain stock
purchase warrants to purchase up to 4% of our common stock on a fully diluted
basis at $0.01 per share. In the event that the bank lenders receive and
exercise such warrants, our stockholders would recognize substantial dilution
and the market price of our common stock may be adversely affected.
WE MAY BE UNABLE TO ATTRACT AND RETAIN OUR EMPLOYEES WHICH MAY RESULT IN OUR
INABILITY TO SUCCESSFULLY COMPETE
Our business involves the delivery of professional services and is labor
intensive. Our success depends in large part on our ability to attract, develop,
motivate, and retain technical professionals. At March 31, 2000 approximately
70.0% of our employees were technical professionals. Qualified technical
professionals are in great demand and are likely to remain a limited resource
for the foreseeable
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future. There can be no assurance that we 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 our business, including
our ability to secure and complete engagements and obtain new business, which
could have a material adverse effect on our operating results and financial
condition.
WE RELY ON A NUMBER OF KEY PERSONNEL, THE LOSS OF ANY OF THESE INDIVIDUALS COULD
ADVERSELY AFFECT OUR OPERATIONS
Our operations depend on the continued efforts of Ira Cohen, our President
and Chief Operating Officer, Ross Weintraub, our Chief Financial Officer, our
operating company presidents, including Benjamin Tandowski, the president of
PCSI, and the senior management of certain of our operating companies. If any of
these people becomes unable to continue in his or her present role, or if we are
unable to attract and retain other skilled professionals, our business could be
adversely affected. We do not currently maintain key man life insurance policies
for any of our officers or other personnel.
OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATION ON A QUARTERLY BASIS AND THE
FLUCTUATIONS MAY ADVERSELY AFFECT OUR STOCK PRICE
We have experienced, and may in the future continue to experience,
fluctuations in our quarterly operating results. Factors that may cause our
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
our personnel utilization rates which may cause further variation in quarterly
operating results. The timing of revenues is difficult to forecast because our
sales cycle is relatively long and our services are impacted by both the
financial condition and management decisions of its clients and general economic
conditions. Because a high percentage of our expenses are relatively fixed at
the beginning of any period and our general policy is to not adjust our staffing
levels based upon what we view 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 our engagements are, and may be in the future,
terminable by our clients without penalty. A termination of a major project
could require us 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 our results of operations will not be below the
expectations of investors for any given fiscal period.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ADJUST TO RAPID TECHNOLOGICAL
CHANGES
As with all IT solutions companies, our success will depend in part on our
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 we will be successful in adequately addressing these developments
on a timely basis or that, if these developments are addressed, we will be
successful in the marketplace. In addition, there can be no assurance that
products or technologies developed by others will not render our services
uncompetitive or obsolete. Our failure to address these developments could have
a material adverse effect on our operating results and financial condition.
THE SPIN-OFF AGREEMENTS WITH OUR PREDECESSOR MAY NOT HAVE BEEN STRUCTURED ON AN
ARMS LENGTH BASIS AND MAY CREATE COMPETITIVE DISADVANTAGES
We, 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 us to
14
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indemnify each other from tax and other liabilities relating to our respective
businesses prior to and following the Distribution.
Certain indemnification obligations of ours 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, we 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 following the Distribution, could have a material adverse
effect on us.
The terms of the agreements that govern the relationships among us, USOP and
the other Spin-Off Companies were established by USOP in consultation with our
management and the other Spin-Off Companies prior to the Distribution, and while
we 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, our company, 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 us
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 our 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 our
Company.
WE MAY FACE POTENTIAL TAX LIABILITIES RELATED TO THE SPIN-OFF FROM OUR
PREDECESSOR CORPORATION
In connection with the Distribution, we entered into a tax allocation
agreement with USOP and the other Spin-Off Companies, which provides that we 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. We 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, we will be liable for any distribution taxes
resulting from any Adverse Tax Act by us 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, we 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.
IN CONNECTION WITH THE SPIN-OFF WE FACE RISKS RELATED TO THE ALLOCATION OF
LIABILITIES
Under the Distribution Agreement, we are liable for (i) any liabilities
arising out of or in connection with the business conducted by us or our
subsidiaries, (ii) our liabilities under the employee benefits agreement, tax
allocation agreement and related agreements, and (iii) certain liabilities under
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the securities laws related to the Distribution. Each of the other Spin-Off
Companies is similarly obligated to USOP. We 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, we could be obligated to USOP in respect of obligations
and liabilities not related to our business or operations and over which neither
we nor our management has or 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.
WE HAVE A SIGNIFICANT AMOUNT OF GOODWILL AND INTANGIBLES ON OUR FINANCIAL
STATEMENTS WHICH IS SUBJECT TO PERIODIC REVIEW AND POTENTIAL WRITE DOWNS,
WHICH MAY REDUCE OUR INCOME AND ADVERSELY AFFECT OUR STOCK PRICE
As of March 31, 2000, approximately $55.2 million, or 33.8% of our total
assets and 163.4% of our 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. We currently
amortize 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 our 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, we 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, we 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 our Common Stock.
OUR CHARTER AND BYLAWS MAY DISCOURAGE A MERGER, TENDER OFFER, PROXY CONTEST OR
ASSUMPTION OF CONTROL
Our Board of Directors 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 our stockholders. The
rights of the holders of our Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of preferred stock. While we
have 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 and entrenching our current management. In
addition, such preferred stock may have other rights, including economic rights
senior to those of our Common Stock, and, as a result, the issuance thereof
could have a material adverse effect on the market value of our Common Stock.
A number of provisions of our 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,
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even when stockholders other than our principal stockholders consider such a
transaction to be in their best interest.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO PROTECT OUR PROPRIETARY INTELLECTUAL
PROPERTY RIGHTS
The success of certain of our operating companies 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 we believe that our services do not infringe the intellectual
property rights of others and that we have all rights necessary to utilize the
intellectual property employed in our business, we are subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require us 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
We are exposed to interest rate change market risk principally with respect
to our credit facility, which is priced based on certain interest rate
alternatives. At March 31, 2000, approximately $70.3 million was outstanding
under the credit facility. Changes in the prime interest rate during calendar
year 2000 could have a positive or negative effect on our interest expense. We
do not engage in financial transactions for trading or speculative purposes.
We do not believe that we face primary market risk exposure that is material
to our operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27. Financial Data Schedule
B. Reports on Form 8-K
None
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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.
<TABLE>
<S> <C> <C>
AZTEC TECHNOLOGY PARTNERS, INC.
Date: May 15, 2000 BY: /s/ ROSS J. WEINTRAUB
-----------------------------------------
Ross J. Weintraub
CHIEF FINANCIAL OFFICER
DULY AUTHORIZED OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,315
<SECURITIES> 0
<RECEIVABLES> 66,060
<ALLOWANCES> 5,629
<INVENTORY> 8,670
<CURRENT-ASSETS> 93,136
<PP&E> 17,714
<DEPRECIATION> 7,239
<TOTAL-ASSETS> 163,214
<CURRENT-LIABILITIES> 127,083
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 33,731
<TOTAL-LIABILITY-AND-EQUITY> 33,754
<SALES> 40,385
<TOTAL-REVENUES> 81,517
<CGS> 34,070
<TOTAL-COSTS> 62,914
<OTHER-EXPENSES> 18,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,309
<INCOME-PRETAX> (1,410)
<INCOME-TAX> (575)
<INCOME-CONTINUING> (835)
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<NET-INCOME> (835)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
