<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 June 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
-----------------------
22,196,357 shares of the registrant's common stock, par value $0.001, were
outstanding as of August 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 six months ended June
30, 1999 (See Note 3 to the condensed consolidated financial statements).
Unless otherwise stated, information in the originally filed Form 10-Q for the
three and six months ended June 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
June 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 .................................................................................... 10
Year 2000 Readiness Disclosure Statements............................................................... 13
Factors That May Affect Future Results.................................................................. 15
Item 3. Quantitative and Qualitative Disclosure About Market Risks..................................... 20
PART II--OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................. 20
Item 5. Other Information .............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits ...................................................................................... 20
B. Reports on Form 8-K ........................................................................... 20
Signatures ............................................................................................. 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
----------- -----------
(unaudited)
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 3,163 $ 8,763
Accounts receivable, net ............................................................... 71,758 74,138
Inventories, net ....................................................................... 10,446 11,323
Unbilled percentage of completion revenues ............................................. 2,616 5,922
Other receivable ....................................................................... -- 10,550
Prepaid expenses and other current assets .............................................. 11,900 10,232
-------- --------
Total current assets ....................................................... 99,883 120,928
Property and equipment, net ............................................................ 9,475 7,603
Intangibles, net ....................................................................... 128,098 129,792
Other assets ........................................................................... 1,995 2,196
-------- --------
Total assets ....................................................................... $239,451 $260,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................................... $ 197 $ 216
Accounts payable ....................................................................... 35,176 43,937
Accrued compensation ................................................................... 7,627 5,791
Deferred revenue ....................................................................... 7,823 4,732
Other accrued liabilities .............................................................. 3,523 7,821
-------- --------
Total current liabilities .................................................... 54,346 62,497
Long-term debt ............................................................................. 75,535 90,218
Deferred income taxes ...................................................................... 473 141
Other long-term liabilities ................................................................ 1,255 697
-------- --------
Total liabilities .................................................................. 131,609 153,553
-------- --------
Stockholders' equity:
Common stock - $.001 par value, 150,000,000 shares authorized, 22,196,865 and 21,937,902
shares issued and outstanding, respectively ........................................... 22 22
Additional paid-in capital ............................................................. 94,032 93,584
Retained earnings ...................................................................... 13,788 13,360
-------- --------
Total stockholders' equity ......................................................... 107,842 106,966
-------- --------
Total liabilities and stockholders' equity ......................................... $239,451 $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 THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
Products ......................................................... $ 53,715 $ 34,215 $ 101,208 $ 61,981
Services ......................................................... 41,051 37,358 79,477 74,883
--------- --------- --------- ---------
Total revenues ............................................... 94,766 71,573 180,685 136,864
--------- --------- --------- ---------
Gross profit:
Products ......................................................... 6,093 4,228 10,399 6,959
Services ......................................................... 15,462 12,728 29,675 25,216
--------- --------- --------- ---------
Total gross profit ........................................... 21,555 16,956 40,074 32,175
Selling, general and administrative expenses 18,365 12,575 33,887 23,513
Amortization of intangibles .......................................... 1,260 410 2,520 831
Strategic restructuring costs ........................................ (345) 4,946 (345) 4,946
--------- --------- --------- ---------
Operating income (loss) ...................................... 2,275 (975) 4,012 2,885
Interest and other expense (income) .................................. 1,486 33 3,015 (18)
--------- --------- --------- ---------
Income (loss) before provision for (benefit from) income taxes ....... 789 (1,008) 997 2,903
Provision for (benefit from) income taxes ............................ 472 (454) 569 1,792
--------- --------- --------- ---------
Net income (loss) .................................................... $ 317 $ (554) $ 428 $ 1,111
========= ========= ========= =========
Weighted-average shares outstanding:
Basic ............................................................ 22,016 25,662 22,016 26,001
Diluted .......................................................... 22,016 25,662 22,189 26,363
Per share amounts:
Basic ............................................................ $ 0.01 $ (0.02) $ 0.02 $ 0.04
========= ========= ========= =========
Diluted .......................................................... $ 0.01 $ (0.02) $ 0.02 $ 0.04
========= ========= ========= =========
</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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- -----------------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 428 $ 1,111
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense ............ 3,475 1,613
Deferred income taxes ............................ 332 890
Stock option tender offer ........................ -- 1,897
Changes in current assets and liabilities ........ 7,865 (16,444)
-------- --------
Net cash provided by (used in) operating activities . 12,100 (10,933)
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions ......................... -- (363)
Additions to property and equipment, net of disposals (2,722) (1,853)
Other ............................................. (724) (410)
-------- --------
Net cash used in investing activities ............... (3,446) (2,626)
-------- --------
Cash flows from financing activities:
Payments of long-term debt ........................ (14,702) (134)
Proceeds from issuance of common stock ............ 448 --
Payments to U.S. Office Products .................. -- (1,034)
Capital contribution by U.S. Office Products ...... -- 14,344
-------- --------
Net cash (used in) provided by financing
activities .................................... (14,254) 13,176
-------- --------
Net decrease in cash and cash equivalents ........... (5,600) (383)
Cash and cash equivalents at beginning of period .... 8,763 1,818
-------- --------
Cash and cash equivalents at end of period .......... $ 3,163 $ 1,435
======== ========
</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. 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 six months ended June 30, 1999 are not necessarily
indicative of results expected for the full fiscal period or any other
future periods.
The condensed statement of income for the six months ended June 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 six months ended June 30, 1998
is 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 June 30, 1998.
6
<PAGE>
3. 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 JUNE 30, 1999:
Inventories, net $ 10,423 $ 10,446
Deferred revenue 7,146 7,823
Other accrued liabilities 3,791 3,523
THREE MONTHS ENDED JUNE 30, 1999:
Total revenues 95,387 94,766
Total gross profit 22,154 21,555
Net income 670 317
Net income per share
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
SIX MONTHS ENDED JUNE 30, 1999:
Total revenues 181,362 180,685
Total gross profit 40,728 40,074
Net income 814 428
Net income per share
Basic $ 0.04 $ 0.02
Diluted $ 0.04 $ 0.02
</TABLE>
4. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding used in computing
basic net income (loss) per share............ 22,016 25,662 22,016 26,001
Dilutive stock options.......................... -- -- 173 362
------------- ------------ ------------ ------------
Weighted average shares outstanding used in computing
diluted net income (loss) per share............ 22,016 25,662 22,189 26,363
============= ============ ============ ============
</TABLE>
7
<PAGE>
5. SEGMENT DATA
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of the New
England, Tri-State, Northeast Telephony, and West regions of the United
States. Other operating segments are located in other sections of the
country. Each operating segment provides 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 six months ended June
30, 1999 and June 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
JUNE 30, 1999 (1)
Revenue:
Products ....................... $ 36,176 $ 7,409 $ 1,820 $ -- $ 8,310 $ 53,715
Services ....................... 10,229 9,059 6,419 8,890 6,454 41,051
--------- --------- --------- --------- --------- ---------
Total......................... $ 46,405 $ 16,468 $ 8,239 $ 8,890 $ 14,764 $ 94,766
Gross profit...................... $ 7,374 $ 4,352 $ 3,247 $ 2,605 $ 3,977 $ 21,555
Operating income.................. $ 1,980 $ 175 $ 857 $ 1,105 $ 1,700 $ 5,817
Depreciation...................... $ 137 $ 133 $ 61 $ 98 $ 26 $ 455
Assets............................ $ 41,405 $ 22,223 $ 10,288 $ 11,064 $ 14,348 $ 99,328
========= ========= ========= ========= ========= =========
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
--------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
JUNE 30, 1998
Revenue:
Products ....................... $ 23,255 $ 5,772 $ 2,099 $ -- $ 3,089 $ 34,215
Services ....................... 8,828 8,036 7,838 10,862 1,794 37,358
--------- --------- --------- --------- --------- ---------
Total......................... $ 32,083 $ 13,808 $ 9,937 $ 10,862 $ 4,883 $ 71,573
Gross profit...................... $ 5,771 $ 3,967 $ 3,744 $ 2,279 $ 1,195 $ 16,956
Operating income.................. $ 1,969 $ 1,056 $ 857 $ 987 $ 922 $ 5,791
Depreciation ..................... $ 124 $ 132 $ 62 $ 106 $ 80 $ 504
Assets............................ $ 27,007 $ 17,240 $ 12,398 $ 13,112 $ 5,041 $ 74,798
========= ========= ========= ========= ========= =========
</TABLE>
8
<PAGE>
5. SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
--------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30, 1999 (1)
Revenue:
Products ....................... $ 61,017 $ 17,792 $ 3,611 $ -- $ 18,788 $101,208
Services ....................... 18,168 18,033 14,139 16,119 13,018 79,477
--------- --------- --------- --------- --------- ---------
Total......................... $ 79,185 $ 35,825 $ 17,750 $ 16,119 $ 31,806 $180,685
Gross profit...................... $ 12,306 $ 8,903 $ 7,026 $ 4,051 $ 7,788 $ 40,074
Operating income.................. $ 3,058 $ 1,046 $ 2,195 $ 1,205 $ 3,412 $ 10,916
Depreciation...................... $ 261 $ 261 $ 120 $ 196 $ 73 $ 911
Assets ........................... $ 41,405 $ 22,223 $ 10,288 $ 11,064 $ 14,348 $ 99,328
========= ========= ========= ========= ========= ========
NEW NORTHEAST
ENGLAND TRI-STATE TELEPHONY WEST OTHER TOTAL
--------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30, 1998
Revenue:
Products ....................... $ 40,283 $ 11,107 $ 4,017 $ -- $ 6,574 $ 61,981
Services ....................... 17,221 14,713 15,483 23,837 3,629 74,883
--------- --------- --------- --------- --------- ---------
Total ........................ $ 57,504 $ 25,820 $ 19,500 $ 23,837 $ 10,203 $ 136,864
Gross profit...................... $ 10,528 $ 7,281 $ 7,818 $ 4,776 $ 1,772 $ 32,175
Operating income.................. $ 2,963 $ 1,901 $ 2,580 $ 2,160 $ 709 $ 10,313
Depreciation...................... $ 218 $ 221 $ 125 $ 202 $ 57 $ 823
Assets............................ $ 27,007 $ 17,240 $ 12,398 $ 13,112 $ 5,041 $ 74,798
========= ========= ========= ========= ========= =========
</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 six months ended June 30, 1999 and June 30, 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
(1) (1)
<S> <C> <C> <C> <C>
Segment operating income .... $ 5,817 $ 5,791 $ 10,916 $ 10,313
Corporate expenses .......... 2,627 1,410 4,729 1,651
Amortization of intangibles . 1,260 410 2,520 831
Strategic restructuring
costs...................... (345) 4,946 (345) 4,946
------------- ------------- ------------- -------------
Total operating income ...... $ 2,275 $ (975) $ 4,012 $ 2,885
============ ============= ============= =============
Segment assets .............. $ 99,328 $ 74,798 $ 99,328 $ 74,798
Corporate assets ........... 12,025 3,114 12,025 3,114
Intangible assets ........... 128,098 63,554 128,098 63,554
------------- ------------- ------------- -------------
Total assets ................ $ 239,451 $ 141,466 $ 239,451 $ 141,466
============ ============= ============= =============
</TABLE>
------------------
(1) As restated. See Note 3 to the Condensed Consolidated Financial Statements.
9
<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 SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 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 77.3 76.3 77.8 76.5
---------- ------- --------- -------
Gross profit 22.7 23.7 22.2 23.5
Selling, general and administrative expenses 19.4 17.6 18.8 17.2
Amortization of intangibles 1.3 0.6 1.4 0.6
Strategic restructuring costs (0.4) 6.9 (0.2) 3.6
---------- ------- --------- -------
Operating income (loss) 2.4 (1.4) 2.2 2.1
Other expense, net 1.6 0.0 1.7 0.0
---------- ------- --------- -------
Income (loss) before income taxes 0.8 (1.4) 0.5 2.1
Provision for (benefit from) income taxes 0.5 (0.6) 0.3 1.3
---------- -------- --------- -------
Net income (loss) 0.3% (0.8)% 0.2% 0.8%
========== ======= ========= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998.
Consolidated revenues increased 32.4% from $71.6 million for the three
months ended June 30, 1998 to $94.8 million for the three months ended June 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
combined with product revenue from the Company's expanded customer base
resulting from an acquisition in July 1998. In addition, services revenue
increased modestly from staffing related services resulting from an acquisition
in September 1998 combined with an increase in network and application
development related services in the New England and Tri-State regions. This
increase was offset in part by a reduction in data communications revenue in the
Company's West region.
Gross profit increased 27.1% from $17.0 million, or 23.7% of revenues,
for the three months ended June 30, 1998 to $21.6 million, or 22.7% of revenues,
for the three months ended June 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 June 30, 1999
compared to the prior year
10
<PAGE>
period, combined with competitive pressures on product pricing. The decrease in
gross profit as a percentage of revenue was offset slightly by improved margins
from services due primarily to improved margins in web-based application
development related services in the Company's Tri-State region.
Selling, general and administrative expenses increased 46.0% from $12.6
million, or 17.6% of revenues, for the three months ended June 30, 1998 to $18.4
million, or 19.4% of revenues, for the three months ended June 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 $0.8 million.
Amortization of intangibles increased $0.9 million from $0.4 million
for the three months ended June 30, 1998 to $1.3 million for the three months
ended June 30, 1999 due to amortization expense related to companies acquired in
the second half of 1998.
Strategic restructuring costs of ($0.3) million for the three months
ended June 30, 1999 represent 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 three months ended June 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.
Interest and other expense of $0.03 million for the three months ended
June 30, 1998 increased to $1.5 million of interest and other expense in the
three months ended June 30, 1999 primarily due to the Company's financing of its
acquisitions in the second half of 1998 through its credit facility.
Benefit from income taxes was ($0.5) million in the three months ended
June 30, 1998 compared to a provision for income taxes of $0.5 million in the
three months ended June 30, 1999, reflecting effective tax rates of (45.0%) and
59.8%, respectively.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998.
Consolidated revenues increased 32.0% from $136.9 million for the six
months ended June 30, 1998 to $180.7 million for the six months ended June 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. In addition, services revenue increased modestly from 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. This increase was offset in part by a reduction
in data communications revenue in the Company's West region.
Gross profit increased 24.6% from $32.2 million, or 23.5% of revenues,
for the six months ended June 30, 1998 to $40.1 million, or 22.2% of revenues,
for the six months ended June 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 six months ended June 30, 1999
compared to the prior year period, combined with competitive pressures on
product pricing. The decrease in gross profit as a percentage of revenue was
offset slightly by improved margins from services due primarily to improved
margins in web-based application development related services in the Company's
Tri-State region.
11
<PAGE>
Selling, general and administrative expenses increased 44.1% from $23.5
million, or 17.2% of revenues, for the six months ended June 30, 1998 to $33.9
million, or 18.8% of revenues, for the six months ended June 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 $.8 million.
Amortization of intangibles increased $1.7 million from $0.8 million
for the six months ended June 30, 1998 to $2.5 million for the six months ended
June 30, 1999 due to amortization expense related to companies acquired in the
second half of 1998.
Strategic restructuring costs of ($0.3) million for the six months
ended June 30, 1999 represent 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 six months ended June 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.
Interest and other expense (income) of ($0.02) million for the six
months ended June 30, 1998 increased to $3.0 million of interest and other
expense in the six months ended June 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 decreased from $1.8 million in the six
months ended June 30, 1998 to $0.6 million in the six months ended June 30,
1999, reflecting effective tax rates of 61.7% and 57.1%, respectively. The
higher effective tax rate for the six months ended June 30, 1998 is the result
of the fiscal 1998 fourth quarter tax provision adjustment to state tax expense
at the effective rate for the full fiscal year when the Company was still a
wholly-owned subsidiary of USOP.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, Aztec had cash of $3.2 million and working capital of
$45.5 million. Aztec's capitalization, defined as the sum of long-term debt and
stockholders' equity, at June 30, 1999 was $183.6 million.
During the six months ended June 30, 1999, net cash provided by
operating activities was $12.1 million. Net cash used in investing activities
was $3.4 million, which consisted primarily of $2.7 million of additions of
property and equipment. Net cash used in financing activities was $14.3 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 $4.0
million to reduce the working capital portion of the credit facility.
During the six months ended June 30, 1998, net cash used in operating
activities was $10.9 million. Net cash used in investing activities was $2.6
million , which consisted primarily of additions to property and equipment. Net
cash provided by financing activities was $13.2 million which consisted
primarily of capital contributed by USOP in anticipation of a strategic
restructuring.
As of June 30, 1999, Aztec had made $2.7 million in capital
expenditures against the $4.0 million budgeted for 1999. The largest items
include $0.8 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.
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The Company is closely monitoring its compliance with the financial
covenants under its credit facility. The Company's working capital line of
credit is a significant factor in the Company's ability to meet its liquidity
requirements. At June 30, 1999, the Company could borrow an additional $6.0
million based on its financial covenants under its credit facility, however
there can be no assurance that the Company will continue to have such ability to
borrow and remain in compliance with its financial covenants; however the
Company anticipates that its working capital line of credit and cash flow from
operations will be sufficient to meet the Company's liquidity requirements for
its existing operations through the end of calendar 1999.
YEAR 2000 READINESS DISCLOSURE STATEMENTS
Historically, many computer programs have been written using two digits
rather than four to define the applicable year. This could lead, in many cases,
to a computer recognizing a date ending in "00" as 1900 rather than the Year
2000. This phenomenon could result in major computer system failures or
miscalculations, and is generally referred to as the "Year 2000" problem.
The Company has 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.
IT RELATED SYSTEMS
The Company has initiated 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 the
implementation phase is in its final stages. The Company utilizes primarily
packaged software and expects that certain systems will be upgraded and others
will be replaced in order to meet Year 2000 requirements. The Company
anticipates that critical systems will be Year 2000 compliant during 1999.
NON-IT RELATED SYSTEMS
Major Non-IT systems utilized by the Company include telephone and
building security systems, as well as other equipment with "embedded chips". If
the Company determines that any Non-IT related systems are not Year 2000
compliant, it will be necessary to adjust the estimates of the cost of Year 2000
remediation and determine a Year 2000 plan including solution evaluation,
implementation, 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 its assessment of Year 2000 compliance for Non-IT related
systems in the first half of 1999 and expects to complete remediation during the
third quarter 1999.
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THIRD PARTIES
The Company is seeking assurances, as an ongoing process, from its
suppliers and customers that their systems and products are Year 2000 compliant.
The determination of compliance will include assessments by the Company of 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 Compan s results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that these
suppliers and customers will be Year 2000 ready, and the Company believes that
customers and prospective customers may defer non-critical IT projects in order
to devote necessary resources to fixing their own Year 2000 problems. The
inability of those parties to become Year 2000 compliant on a timely basis could
materially impact the Company.
COST OF REMEDIATION
The Company estimates that the total cost of remediation for all three
categories of Year 2000 problems will be approximately $2.8 million, of which,
to date, approximately $1.5 million has been incurred. The majority of costs
represent implementation of new systems and thus, have been capitalized as of
June 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.
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 neared completion of 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 third and fourth quarters 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.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL
RESULTS TO DIFFER FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS MADE IN
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.
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.
LISTING OF COMMON STOCK ON THE NASDAQ SMALLCAP MARKET
On June 24, 1999, the Company announced that Aztec's common stock would
be listed on the Nasdaq SmallCap Market effective June 25, 1999. The decision to
transfer the listing from the Nasdaq National Market was made following a Nasdaq
Listing Qualifications Panel's conclusion that the Company no longer satisfied
the National Market listing requirements. There can be no assurance that
investors will not have less liquidity in their shares as a result of the
transfer of listing from the Nasdaq National Market.
Low trading prices of the Company's Common Stock may have an adverse
impact upon the efficient operation of the trading market in the securities. In
particular, brokerage firms often charge a greater percentage commission on
low-priced shares than that which would be charged on a transaction in the same
dollar amount of securities with a higher per share price. A number of brokerage
firms will not recommend purchases of low-priced stock to their clients or make
a market in such shares, which tendencies may adversely affect the Company.
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
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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 June 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 James E.
Claypoole, its Chairman and Chief Executive Officer, Benjamin Tandowski, its
Chief Technology Officer, Ira Cohen, its Chief Operating Officer, Ross
Weintraub, its Chief Financial Officer, its operating company presidents, and
the senior management of certain of its operating companies. If any of these
people becomes unable to continue in his or her present role, or if Aztec is
unable to attract and retain other skilled professionals, Aztec's business could
be adversely affected. Aztec does not currently maintain key man life insurance
policies for any of its officers or other personnel.
RAPID TECHNOLOGICAL CHANGE
As with all IT solutions companies, Aztec's success will depend in part
on its ability to develop IT solutions that keep pace with continuing changes in
IT, evolving industry standards, and changing client preferences. There can be
no assurance that Aztec will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed,
Aztec will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render
Aztec's services uncompetitive or obsolete. Aztec's failure to address these
developments could have a material adverse effect on Aztec's operating results
and financial condition.
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.
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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 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.
POSSIBLE TAX LIABILITY IN EVENT OF A SALE OF THE COMPANY OR IN THE EVENT OF
ISSUANCES OF COMMON STOCK
As previously announced, the Company has retained Donaldson, Lufkin &
Jenrette Securities Corporation to explore strategic alternatives for maximizing
shareholder value. One of these options includes the possible sale of the
Company. Section 355(e) of the Internal Revenue Code of 1986, as amended,
generally provides that a company that distributes shares of a subsidiary in a
spin-off that is otherwise tax-free will incur federal income tax liability if
50% or more, by vote or value, of the capital stock of either the company making
the distribution or the spun-off subsidiary is acquired by one or more persons
acting
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pursuant to a plan or series of related transactions that include the spin-off.
Stock acquired by certain related persons is aggregated in determining whether
the 50% test is met. There is a presumption that any acquisition occurring two
years before or after the spin-off is pursuant to a plan that includes the
spin-off. However, the presumption may be rebutted by establishing that the
spin-off and such acquisition are not part of a plan or series of related
transactions. As a result of the provisions of Section 355(e), there can be no
assurance that issuances of stock by Aztec, or a sale of the Company, will not
create a tax liability for the Company pursuant to a tax allocation agreement
and a tax indemnification agreement described above.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES IN THE DISTRIBUTION
Under the Distribution Agreement, Aztec is liable to USOP for (i) any
liabilities arising out of or in connection with the business conducted by it or
its subsidiaries, (ii) its liabilities under the employee benefits agreement,
tax allocation agreement and related agreements, and (iii) certain liabilities
under the securities laws related to the Distribution. Each of the other
Spin-Off Companies is similarly obligated to USOP. Aztec and the other Spin-Off
Companies have also agreed to bear a pro rata portion of (i) USOP liabilities
under the securities laws (other than claims relating solely to a specific
Spin-Off Company or relating specifically to the continuing businesses of USOP)
and (ii) USOP's general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distribution (i.e., liabilities not related to the conduct of a particular
distributed or retained subsidiary's business) (the "Shared Liabilities"). If
one of the other Spin-Off Companies defaults on an obligation owed to USOP, the
other non-defaulting Spin-Off Companies will be obligated on a pro rata basis to
pay such obligation ("Default Liability"). As a result of the Shared Liabilities
and Default Liability, Aztec could be obligated to USOP in respect of
obligations and liabilities not related to its business or operations and over
which neither it, nor its management, has or has had any control or
responsibility. The aggregate of the Shared Liabilities and Default Liability
for which any Spin-Off Company may be liable is, however, limited to $1.75
million.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations accounted for under the pooling-of-interests method. As a result of
Aztec being a wholly-owned subsidiary of USOP prior to the Distribution, Aztec
is precluded from completing business combinations accounted for under the
pooling-of-interests method for a period of two years and any business
combinations involving Aztec during such period will be accounted for under the
purchase method resulting in the recording of goodwill.
MATERIAL AMOUNT OF GOODWILL AND INTANGIBLES
As of June 30, 1999, approximately $128.1 million, or 53.5% of Aztec's
total assets and 118.8% of Aztec's stockholders' equity, constituted goodwill
and intangibles. Goodwill represents the excess of cost over the fair market
value of net tangible and identified intangible assets acquired in business
combinations accounted for under the purchase method of accounting. Aztec
currently amortizes goodwill on a straight line method over a period ranging
from 15-40 years and identified intangible assets are amortized on a straight
line basis, generally over four years with the amount amortized in a particular
period constituting a non-cash expense that reduces Aztec's operating results.
Amortization of goodwill resulting from certain past acquisitions, and
additional goodwill recorded in certain future acquisitions, may not be
deductible for tax purposes. In addition, Aztec will be required to periodically
evaluate the recoverability of goodwill by reviewing the anticipated
undiscounted future cash flows from the operations of the acquired companies and
comparing such cash flows to the carrying value of the associated goodwill. If
goodwill becomes impaired, Aztec would be required to write down the carrying
value of the goodwill and incur a related charge to its income. A reduction in
net income resulting from the amortization or write down of goodwill could have
a material and adverse impact upon the market price of Aztec Common Stock.
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EFFECT OF ANTI-TAKEOVER PROVISIONS
The Aztec Board has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by Aztec stockholders. The
rights of the holders of Aztec Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of preferred stock. While Aztec
has no present intention to issue shares of preferred stock, such issuance,
while providing desired flexibility in connection with possible acquisitions or
other corporate purposes, could have the effect of delaying, deferring, or
preventing a change in control of Aztec and entrenching current management. In
addition, such preferred stock may have other rights, including economic rights
senior to those of the Aztec Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Aztec
Common Stock.
A number of provisions of Aztec's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws and the Delaware General
Corporation Law relating to matters of corporate governance, certain rights of
directors and the issuance of preferred stock without stockholder approval, may
be deemed to have and may have the effect of making more difficult, and thereby
discourage, a merger, tender offer, proxy contest or assumption of control and
change of incumbent management, even when stockholders other than Aztec's
principal stockholders consider such a transaction to be in their best interest.
INTELLECTUAL PROPERTY RIGHTS
The success of certain of Aztec's operating companies within Aztec is
dependent in part on certain methodologies these companies use in designing,
installing, and integrating computer software and systems and other proprietary
intellectual property rights. These operating companies rely on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties, enter into confidentiality agreements with their key
employees, and limit distribution of proprietary information. There can be no
assurance that the steps taken by these operating companies in this regard will
be adequate to deter misappropriation of proprietary information or that these
operating companies will be able to detect unauthorized use and take appropriate
steps to enforce their intellectual property rights.
Although Aztec believes that its services do not infringe the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, Aztec is subject to
the risk of claims alleging infringement of third-party intellectual property
rights. Any such claims could require Aztec to spend significant sums in
litigation, pay damages, develop non-infringing intellectual property, or
acquire licenses to the intellectual property that is the subject of an asserted
infringement claim.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is exposed to interest rate change market risk principally
with respect to its credit facility, which is priced based on certain interest
rate alternatives. At June 30, 1999, $75.3 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 5. OTHER INFORMATION
On June 25, 1999, the Company's Common Stock began trading on the
Nasdaq SmallCap Market System under the ticker symbol "AZTC". The
stock had previously traded under the same symbol on the Nasdaq
National Market System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.11* Employment Agreement between Aztec and Ross J. Weintraub
10.12* Employment Agreement between Aztec and Ira Cohen
10.16* Employment Agreement between PCSI and Benjamin Tandowski
27. Financial Data Schedule
-----------------------------
* (Incorporated by reference from the Registrant's Quarterly Report
on Form 10-Q dated August 13, 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 14, 2000 BY: /s/ ROSS J. WEINTRAUB
------------------- --------------------------------
Ross J. Weintraub
Chief Financial Officer
Duly Authorized Officer and
Principal Accounting Officer
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