<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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>
<S> <C>
DELAWARE 04-3408450
(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 / /
------------------------
22,981,302 shares of the registrant's common shares, par value $0.001, were
outstanding as of October 31, 2000.
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<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets..................... 1
Condensed Consolidated Statements of Operations........... 2
Condensed Consolidated Statements of Cash Flows........... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 3. Quantitative and Qualitative Disclosure About Market
Risks..................................................... 15
Factors That May Affect Future Results.................... 16
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits............................................... 19
B. Reports on Form 8-K.................................... 19
Signatures.................................................. 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,640 $ 4,550
Accounts receivable, net.................................. 42,185 65,481
Inventories, net.......................................... 5,120 10,685
Unbilled percentage of completion revenues................ 2,410 4,730
Prepaid expenses and other current assets................. 7,396 11,289
Deferred income taxes..................................... 17,800 5,432
Net current assets of discontinued operations............. 2,721 --
-------- --------
Total current assets.................................... 79,272 102,167
Property and equipment, net............................... 6,807 10,386
Intangibles, net.......................................... 2,579 55,760
Deferred income taxes..................................... 9,593 2,476
Other assets.............................................. 1,560 1,908
Net noncurrent assets of discontinued operations.......... 12,927 --
-------- --------
Total assets............................................ $112,738 $172,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 41,724 $ 166
Accounts payable.......................................... 21,075 34,538
Accrued compensation...................................... 7,526 6,570
Deferred revenue.......................................... 4,402 10,140
Other accrued liabilities................................. 20,103 10,847
-------- --------
Total current liabilities............................... 94,830 62,261
Long-term debt.............................................. 92 74,544
Other long-term liabilities................................. 2,348 1,956
-------- --------
Total liabilities....................................... 97,270 138,761
-------- --------
Stockholders' equity:
Common stock -- $.001 par value, 150,000,000 shares
authorized, 22,981,302 and 22,428,837 shares issued and
outstanding, respectively............................... 23 22
Additional paid-in capital................................ 97,233 94,354
Retained deficit.......................................... (81,788) (60,440)
-------- --------
Total stockholders' equity.............................. 15,468 33,936
-------- --------
Total liabilities and stockholders' equity.............. $112,738 $172,697
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Products.............................. $40,618 $ 50,295 $115,885 $147,898
Services.............................. 20,246 19,411 59,383 63,238
------- -------- -------- --------
Total revenues...................... 60,864 69,706 175,268 211,136
------- -------- -------- --------
Gross profit:
Products.............................. 3,776 2,450 14,664 11,837
Services.............................. 7,255 9,517 19,707 27,617
------- -------- -------- --------
Total gross profit.................. 11,031 11,967 34,371 39,454
Selling, general and administrative
expenses.............................. 14,002 14,906 42,485 40,185
Amortization of intangibles............. -- 893 1,177 2,681
Write-off of goodwill................... 2,500 41,723 24,352 41,723
Strategic restructuring costs........... 530 3,988 530 3,643
------- -------- -------- --------
Operating loss...................... (6,001) (49,543) (34,173) (48,778)
Interest and other expense.............. 2,171 1,737 5,681 4,890
------- -------- -------- --------
Loss from continuing operations before
income taxes.......................... (8,172) (51,280) (39,854) (53,668)
Income tax benefit...................... (2,798) (17,003) (13,437) (17,908)
------- -------- -------- --------
Loss from continuing operations......... (5,374) (34,277) (26,417) (35,760)
Discontinued operations:
Income from operations of Voice & Data
segment (less applicable income
taxes of $0, $1,954, $1,806 and
$3,427, respectively)............... -- 1,190 1,622 3,101
Gain on disposal of Voice & Data
segment, including provision of $782
and $2,285 respectively for
operating income during phase-out
period (less applicable income taxes
of $409 and $3,556 respectively).... 622 -- 3,447 --
------- -------- -------- --------
Net loss................................ $(4,752) $(33,087) $(21,348) $(32,659)
======= ======== ======== ========
Weighted-average shares outstanding:
Basic and diluted..................... 22,842 22,197 22,652 22,077
Per share amounts:
Basic and diluted earnings per share:
Loss from continuing operations..... $ (0.24) $ (1.54) $ (1.16) $ (1.62)
Discontinued operations:
Income from operations of Voice &
Data segment.................... -- 0.05 0.07 0.14
Gain on disposal of Voice & Data
segment......................... 0.03 -- 0.15 --
------- -------- -------- --------
Net loss.............................. $ (0.21) $ (1.49) $ (0.94) $ (1.48)
======= ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(21,348) $(32,659)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Income from discontinued operations.................. (1,622) (3,101)
Gain on disposal of discontinued operations.......... (3,447) --
Depreciation and amortization expense................ 2,793 3,808
Write-off of goodwill................................ 24,352 41,723
Deferred income taxes................................ (19,485) (13,578)
Changes in operating assets and liabilities, net of
effects from dispositions.......................... 11,934 8,411
-------- --------
Net cash (used in) provided by continuing
operations....................................... (6,823) 4,604
Net cash provided by discontinued operations....... 4,190 11,535
-------- --------
Net cash (used in) provided by operating
activities....................................... (2,633) 16,139
-------- --------
Cash flows from investing activities:
Additions to property and equipment, net of disposals.... (1,488) (4,577)
Net cash proceeds from dispositions...................... 33,143 --
Other.................................................... (370) 406
-------- --------
Net cash provided by (used in) investing
activities....................................... 31,285 (4,171)
-------- --------
Cash flows from financing activities:
Payments of long-term debt............................... (32,717) (17,721)
Proceeds from issuance of common stock................... 1,155 448
-------- --------
Net cash used in financing activities.............. (31,562) (17,273)
-------- --------
Net decrease in cash and cash equivalents.................. (2,910) (5,305)
Cash and cash equivalents at beginning of period........... 4,550 8,763
-------- --------
Cash and cash equivalents at end of period................. $ 1,640 $ 3,458
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. NATURE OF BUSINESS
We are a provider of e-Solutions for our clients which permit them to
exploit Internet, intranet and extranet technologies for a competitive
advantage. In the past we have provided 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. We are in the process of selling and closing our
other subsidiaries, so that we may focus on maximizing the value of our
e-Solutions business through Blueflame, Inc. ("Blueflame") and on repaying, by
April 30, 2001, the debt outstanding under our credit facility. As part of this
process, we are combining certain e-Integration practices and consultants from
our subsidiary Digital Network Associates LLC ("DNA") with Blueflame and have
substantially completed our exit strategy from DNA's product business.
2. BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") 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 our Annual Report on Form 10-K/A filed
on 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
nine months ended September 30, 2000 are not necessarily indicative of results
expected for the full fiscal period or any other future periods.
3. CREDIT FACILITY
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, March 30, 2000, May 18, 2000, June 17 2000 and September 15, 2000. The
credit facility consists of a term portion, which was used to finance
acquisitions and a revolver portion which we use to fund our working capital
needs. During the nine months ended September 30, 2000, we reduced the amount
outstanding under the term portion of the credit facility from $69.3 million to
$37.7 million. During this same period, the revolver portion of the credit
facility decreased from $5 million to $4 million resulting in an $11 million
balance available to us at September 30, 2000. The total amount available to us
under the revolver portion of the credit facility is $15 million.
The September 15, 2000 amendment to the credit facility waived our
noncompliance, as of June 30, 2000, with one financial covenant requiring a
minimum debt service coverage. Under this amendment the lenders waived
compliance with the covenant through April 30, 2001, which is the maturity date
of the credit facility, and we agreed (i) to issue currently exercisable
warrants to purchase shares equal to 3% of our outstanding common stock on a
fully diluted basis, at an exercise price of $0.01 per share and to register the
shares issuable upon the exercise of the warrants so that they may be freely
sold; (ii) to pay interest on outstanding debt on a monthly basis; (iii) to
issue additional warrants to purchase a number of shares equal to 1% of our
outstanding common stock on a fully diluted basis, at $0.01 per share if the
outstanding loan commitment (as defined below) is not less than
4
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3. CREDIT FACILITY (CONTINUED)
$32 million by December 31, 2000; and (iv) to obtain lenders' approval of any
transaction involving a realization on our investment in our subsidiary
Blueflame will be conditioned upon the re-payment of all amounts outstanding
under the credit facility. "Loan commitment" means, the amount outstanding under
the term portion of our credit facility plus the amount of our lenders'
obligation to loan funds to us under the revolver portion of the credit
facility.
The terms of the amendment also required us to file with the SEC, by
October 10, 2000, a registration statement on Form S-3, or if Form S-3 is not
available, on Form S-1 or any other form that is available, with respect to the
shares issuable upon exercise of the warrants. No registration statement has
been filed. Aztec and the lenders are currently discussing a possible extension
of the October 10, 2000 deadline.
The warrants issued to the bank lenders in September 2000 have been assigned
a fair value of approximately $1.2 million using an option pricing model. The
warrants have been recorded as Additional paid-in capital and as Other assets
and are being amortized over the remaining period of the credit facility.
The loans due under the credit facility are to be repaid by April 30, 2001.
We intend to repay these loans through the sale of our subsidiaries and by
realizing the value of our investment in Blueflame. There can be no assurance
that the proceeds of such sales and realization will be sufficient to repay the
amounts due under the credit facility. In the March 30, 2000 amendment to the
credit facility, the lenders pre-approved the sale of our subsidiaries on the
condition that the proceeds from each sale are paid to the lenders and that the
proceeds are in excess of certain minimum amounts. We intend to seek the
approval from our lenders for the sales of certain of our subsidiaries where we
expect the proceeds to be less than the pre-approved amounts. There can be no
assurance that our lenders will approve such request or, if such request is
approved, that our lenders will not impose additional conditions on us,
including, among other items, the reduction of the amount available under the
revolver portion of the credit facility.
As a corporation organized under Delaware law, we must obtain the approval
of our stockholders if we sell substantially all of our assets. We anticipate
that we will file proxy materials with the SEC and hold a special stockholders
meeting to obtain approval for the proposed sales of certain of our
subsidiaries.
As of September 30, 2000, we had borrowed funds under the credit facility in
excess of our eligible accounts receivable. As a result, we incurred
over-advance fees of $.1 million and $.4 million for the three and nine months
ended September 30, 2000, respectively, which have been charged to results of
operations.
5
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares outstanding used in
computing basic net loss per share.............. 22,842 22,197 22,652 22,077
Dilutive stock options............................ -- -- -- --
------ ------ ------ ------
Weighted average shares outstanding used in
computing diluted net income (loss) per share... 22,842 22,197 22,652 22,077
====== ====== ====== ======
</TABLE>
Options to purchase approximately .7 million and .1 million shares of common
stock were excluded from the computation of diluted EPS for the nine months
ended September 30, 2000 and 1999, respectively, as their effect would be
anti-dilutive. Options to purchase shares of common stock were excluded from the
computation of diluted EPS for the three months ended September 30, 2000 and
1999 and are not material.
5. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" subsequently updated by SAB 101A and SAB
101B ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are required to adopt SAB 101 no later than the fourth quarter of
calendar 2000. We believe our revenue recognition practices are in compliance
with SAB 101.
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
application of FIN 44 has not had a material effect on our financial position or
results of operations to date and we do not expect it to.
6. SEGMENT DATA
We are managing our business segments on an industry or market basis. Our
reportable segments have been comprised of e-Integration, e-Solutions, Voice and
Data and Other. Our Voice and Data segment is considered a discontinued
operation, due to the sale of three Voice and Data subsidiaries in June 2000 and
the contemplated sale of the remaining Voice and Data subsidiary in the fourth
quarter of 2000.
6
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. SEGMENT DATA (CONTINUED)
We evaluate the performance of our 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 and restructuring related costs. Segment assets
exclude corporate assets which primarily consist of cash and cash equivalents,
certain deferred assets, intangibles and investments in subsidiaries. Capital
expenditures for long-lived assets are not a significant activity of the
reportable operating segments and, as such, not a primary focus of management in
reviewing operating segment performance.
Summary information by segment for the three and nine months ended September
30, 2000 and September 30, 1999 is as follows:
<TABLE>
<CAPTION>
DISCONTINUED
E-INTEGRATION E-SOLUTIONS OTHER SUB-TOTAL OPERATIONS TOTAL
------------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenue:
Products.............................. $ 36,353 $ -- $ 4,265 $ 40,618 $ 2,763 $ 43,381
Services.............................. 7,706 9,238 3,302 $ 20,246 4,374 $ 24,620
-------- ------- ------- -------- ------- --------
Total............................... $ 44,059 $ 9,238 $ 7,567 $ 60,864 $ 7,137 $ 68,001
Gross profit............................ $ 4,093 $ 5,250 $ 1,688 $ 11,031 $ 2,503 $ 13,534
Operating income (loss)................. $ (1,351) $ 670 $ 500 $ (181) $ 1,024 $ 843
Depreciation............................ $ 316 $ 164 $ 15 $ 495 $ 60 $ 555
Assets.................................. $ 46,410 $ 9,627 $ 5,499 $ 61,536 $ 3,102 $ 64,638
</TABLE>
<TABLE>
<CAPTION>
DISCONTINUED
E-INTEGRATION E-SOLUTIONS OTHER SUB-TOTAL OPERATIONS TOTAL
------------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenue:
Products.............................. $ 43,103 $ -- $ 7,192 $ 50,295 $ 2,422 $ 52,717
Services.............................. 8,910 4,630 5,871 $ 19,411 23,103 $ 42,514
-------- ------- ------- -------- ------- --------
Total............................... $ 52,013 $ 4,630 $13,063 $ 69,706 $25,525 $ 95,231
Gross profit............................ $ 7,229 $ 1,654 $ 3,084 $ 11,967 $ 8,260 $ 20,227
Operating income (loss)................. $ (39) $ 47 $ 412 $ 420 $ 3,412 $ 3,832
Depreciation............................ $ 284 $ 91 $ 40 $ 415 $ 211 $ 626
Assets.................................. $ 60,365 $ 5,773 $11,172 $ 77,310 $32,912 $110,222
</TABLE>
<TABLE>
<CAPTION>
DISCONTINUED
E-INTEGRATION E-SOLUTIONS OTHER SUB-TOTAL OPERATIONS TOTAL
------------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue:
Products.............................. $102,298 $ -- $13,587 $115,885 $ 8,870 $124,755
Services.............................. 24,841 23,162 11,380 $ 59,383 46,189 $105,572
-------- ------- ------- -------- ------- --------
Total............................... $127,139 $23,162 $24,967 $175,268 $55,059 $230,327
Gross profit............................ $ 17,060 $11,887 $ 5,424 $ 34,371 $16,431 $ 50,802
Operating income (loss)................. $ (1,921) $ 490 $ 939 $ (492) $ 5,179 $ 4,687
Depreciation............................ $ 807 $ 419 $ 118 $ 1,344 $ 452 $ 1,796
Assets.................................. $ 46,410 $ 9,627 $ 5,499 $ 61,536 $ 3,102 $ 64,638
</TABLE>
7
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
DISCONTINUED
E-INTEGRATION E-SOLUTIONS OTHER SUB-TOTAL OPERATIONS TOTAL
------------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenue:
Products........................... $121,898 $ -- $26,000 $147,898 $ 6,027 $153,925
Services........................... 28,434 15,557 19,247 $ 63,238 58,753 $121,991
-------- ------- ------- -------- ------- --------
Total............................ $150,332 $15,557 $45,247 $211,136 $64,780 $275,916
Gross profit......................... $ 22,153 $ 6,430 $10,871 $ 39,454 $20,847 $ 60,301
Operating income..................... $ 1,884 $ 1,651 $ 3,823 $ 7,358 $ 7,390 $ 14,748
Depreciation......................... $ 602 $ 242 $ 113 $ 957 $ 580 $ 1,537
Assets............................... $ 60,365 $ 5,773 $11,172 $ 77,310 $32,912 $110,222
</TABLE>
A reconciliation of our reportable segment operating income and segment
assets to the corresponding consolidated amounts as of and for the three and
nine months ended September 30, 2000 and September 30, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Segment operating income (loss)... $ (181) $ 420 $ (492) $ 7,358
Corporate expenses................ 2,790 3,358 7,622 8,089
Amortization of intangibles....... -- 894 1,177 2,681
Strategic restructuring costs..... 530 3,988 530 3,643
Write-off of goodwill............. 2,500 41,723 24,352 41,723
-------- -------- -------- --------
Operating loss.................... $ (6,001) $(49,543) $(34,173) $(48,778)
======== ======== ======== ========
Segment assets.................... $ 61,536 $ 77,310 $ 61,536 $ 77,310
Discontinued operations, net
assets.......................... 3,102 32,912 3,102 32,912
Corporate assets.................. 32,975 19,979 32,975 19,979
Intangible assets................. 2,579 28,797 2,579 28,797
Intangible assets discontinued
operations...................... 12,546 55,418 12,546 55,418
-------- -------- -------- --------
Consolidated assets............... $112,738 $214,416 $112,738 $214,416
======== ======== ======== ========
</TABLE>
7. DISCONTINUED OPERATIONS
In June 2000, we completed the sale of three Voice and Data subsidiaries to
Morganthaler Partners VI, L.P. for $34.5 million, with $2.0 million of that
amount placed in escrow to satisfy potential future indemnification and other
obligations, of which $1.25 million was released from escrow on September 5,
2000 and $.7 million remains in escrow. We expect to sell the remaining Voice
and Data subsidiary in the fourth quarter of 2000. As a result, we have recorded
a net after tax gain of $.6 million and $3.4 million for the three and nine
months ended September 30, 2000, respectively, reflecting these activities as
part of discontinued operations. The Voice and Data segment has been reported as
a discontinued operation in the Condensed Consolidated Statements of Operations
and prior period results of operations have been restated accordingly.
8
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7. DISCONTINUED OPERATIONS (CONTINUED)
At September 30, 2000, the remaining net assets of the Voice and Data
segment were valued at approximately $15.0 million and consisted of
$7.0 million of current assets, primarily accounts receivable and inventory,
$12.9 million of intangibles and equipment, and $4.9 million of current
liabilities, primarily accounts payable and other accrued liabilities.
8. IMPAIRMENT OF INTANGIBLE ASSETS
We recorded a non-cash accounting charge of $21.9 million in the second
quarter of 2000 and $2.5 million in the third quarter of 2000 related to the
impairment of certain intangible assets based on our review of future operating
cashflows and estimated proceeds from divestiture of subsidiaries to which they
relate.
9. TAXES
Deferred taxes increased as a result of the recognition of a tax benefit
resulting from our operating losses for the nine months ended September 30,
2000. Taxes payable of $10.9 million (included in other accrued liabilities)
increased as a result of taxes payable on the sale of the subsidiaries in our
Voice and Data segment described in Note 7.
10. STRATEGIC RESTRUCTURING COSTS
During the third quarter, we initiated a restructuring plan to improve
operational efficiencies and close non-profitable operations. The plan included
the closing of our Trumbell, Connecticut location, as well as, staff reductions
at certain of our operating locations primarily related to our decision to exit
the product business in New York. We recorded a strategic restructuring charge
of $1.5 million which included employee severance costs, asset impairments and
other costs associated with personnel reductions and facility closures, as well
as, $.7 million of inventory write-offs, which are included in cost of product
revenues. In addition, we reversed $1.0 million of our third quarter 1999
restructuring provision reflecting finalization of the related restructuring
plan.
9
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AZTEC TECHNOLOGY PARTNERS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 CASH FLOW, AND TO FUTURE ACTIONS SUCH AS SALE OF ASSETS OR
SUBSIDIARIES, FUTURE PERFORMANCE, OR RESULTS OF CURRENT AND ANTICIPATED SALES
AND MARKETING EFFORTS, EXPENSES, THE OUTCOME OF CONTINGENCIES, THE NEED FOR BANK
APPROVALS OF CERTAIN TRANSACTIONS, AND LIQUIDITY ISSUES.
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 TO THOSE REPORTS, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ALSO NOTE THAT WE PROVIDE A CAUTIONARY DISCUSSION OF
RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR
BUSINESS UNDER THE SECTIONS TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 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.
OVERVIEW
We are a provider of e-Solutions for our clients which permit them to
exploit Internet, intranet and extranet technologies for a competitive
advantage. In the past, we have provided 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. We are in the process of selling and closing our
subsidiaries other than Blueflame, so that we may focus on maximizing the value
of our e-Solutions business through Blueflame and on repaying by April 30, 2001
the debt outstanding under our credit facility. As part of this process, we are
combining certain e-Integration practices and consultants from our subsidiary
Digital Network Associates LLC ("DNA") with Blueflame and have substantially
completed our exit strategy from DNA's product business.
We have retained financial advisors to assist us in the sale of PCM, Inc.
and McDowell, Tucker & Co. and to advise us on realizing our investment in
Blueflame.
10
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AZTEC TECHNOLOGY PARTNERS, INC.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the three and nine months ended September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............ 81.9 82.8 80.4 81.3
----- ----- ----- -----
Gross profit.............. 18.1 17.2 19.6 18.7
Selling, general and
administrative expenses... 23.0 21.4 24.2 19.0
Amortization of
intangibles............... 0.0 1.3 0.7 1.3
Write-off of goodwill....... 4.1 59.9 13.9 19.8
Strategic restructuring
costs..................... 0.8 5.7 0.3 1.7
----- ----- ----- -----
Operating loss............ (9.8) (71.1) (19.5) (23.1)
Other expense, net.......... 3.6 2.5 3.2 2.3
----- ----- ----- -----
Loss before income
taxes................... (13.4) (73.6) (22.7) (25.4)
Benefit from income taxes... (4.6) (24.4) (7.6) (8.4)
----- ----- ----- -----
Net loss.................. (8.8)% (49.2)% (15.1)% (17.0)%
Income from discontinued
operations (net of tax)... 0.0 1.7 0.9 1.5
Gain on disposal of Voice
and Data Segment (net of
tax)...................... 1.0 0.0 2.0 0.0
----- ----- ----- -----
Net loss.................... (7.8)% (47.5)% (12.2)% (15.5)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
Consolidated revenues from continuing operations decreased 12.7% from
$69.7 million in the three months ended September 30, 1999 to $60.9 million for
the three months ended September 30, 2000. This decrease was due primarily to a
decrease in product revenues in our e-Integration business of approximately
$6.7 million as this business segment attempts to move towards a higher
concentration of service sales. In addition, revenues decreased by approximately
$5.5 million in our Other segment, primarily attributable to a downturn in
performance of PCM, Inc.'s delivery of hardware and network integration
services.
The decrease in revenues for the three months ended September 30, 2000
compared to the prior year period was offset in part by an increase in our
e-Solutions revenues of $4.6 million or 99.5%. This increase can be attributed
to Blueflame's significant investment in technical, sales and marketing
personnel and related activities as well as, to $1.5 million in recognized
revenue which had been deferred in prior periods.
Gross profit from continuing operations decreased 7.8% from $12.0 million,
or 17.2% of revenues, for the three months ended September 30, 1999 to
$11.0 million, or 18.1% of revenues, for the three months ended September 30,
2000. The increase in gross profit as a percentage of revenues was due primarily
to an increase in margin on product sales from 4.9% to 9.3% for the three months
ended September 30, 1999 and 2000, respectively. This increase was due primarily
to increased product margins in the e-Integration segment and to lower profit
margins in 1999 attributable to disposed or
11
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AZTEC TECHNOLOGY PARTNERS, INC.
closed businesses. Service margins increased in our e-Solutions segment from
35.7% to 56.8% of revenues for the three months ended September 30, 1999 and
2000, respectively, due to recognition of deferred revenue in the current period
for which costs had been recorded in previous periods. This offset the decrease
in service margins in our e-Integration and Other segments from 53.1% to 18.2%
for the three months ended September 30, 1999 and 2000 respectively. This
decrease in service margins has been due to lower productivity of service
personnel in operations designated for disposition.
Selling, general and administrative expenses from continuing operations
decreased 6.1% from $14.9 million, or 21.4% of revenues, for the three months
ended September 30, 1999 to $14.0 million, or 23.0% of revenues, for the three
months ended September 30, 2000. The increase in selling, general and
administrative expenses as a percentage of revenues was due primarily to the
cost of our significant investments in our Blueflame subsidiary in the area of
technical, selling, marketing, and other related administrative activities
combined with the costs incurred to support our divestiture of businesses not
classified as discontinued operations. The increase was offset in part by the
impact of cost reduction actions we took in the second half of 1999 and third
quarter of 2000.
Amortization of intangibles from continuing operations decreased
$.9 million from $.9 million for the three months ended September 30, 1999 to $0
for the three months ended September 30, 2000 due to lower intangible asset
balances at September 30, 2000 as compared with September 30, 1999 resulting
from the write-off of goodwill in prior periods. In addition, intangibles
related to certain entities classified as assets held for sale are carried at
net realizable value and therefore, are no longer amortized.
Write-off of goodwill for the three months ended September 30, 2000 of
$2.5 million represents the write-down of intangible assets to their estimated
fair value.
Interest and other expense from continuing operations of $1.7 million for
the three months ended September 30, 1999 increased to $2.2 million in the three
months ended September 30, 2000 primarily due to increased interest rates on our
credit facility in the fourth quarter of 1999 and at the beginning of the second
quarter of 2000. In addition, interest expense increased in the comparable
period because of increased bank fees associated with amendments to our credit
facility completed during the first half of 2000.
Income tax benefit from continuing operations decreased from $17.0 million
in the three months ended September 30, 1999 to $2.8 million in the three months
ended September 30, 2000, reflecting effective tax rates of 33.2% and 34.2%,
respectively.
Discontinued operations represent the results of our Voice and Data segment
for the comparable periods, including the expected after tax gain on the
completed disposal of the segment.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Consolidated revenues from continuing operations decreased 17.0% from
$211.1 million in the nine months ended September 30, 1999 to $175.3 million for
the nine months ended September 30, 2000. This decrease was due primarily to a
decrease in product revenues in our e-Integration business of approximately
$19.6 million as this business segment attempts to move towards a higher
concentration of service sales. In addition, product revenues decreased by
approximately $12.4 million in our Other segment primarily attributable to a
downturn in performance of PCM, Inc.'s delivery of hardware and network
integration services.
The decrease in revenues for the nine months ended September 30, 2000
compared to the prior year period was offset in part by an increase in our
e-Solutions revenues of $7.6 million or 48.9%. This increase can be attributed
to Blueflame's significant investment in technical, sales and marketing
12
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
personnel and related activities, as well as, to $2.6 million in recognized
revenue which had been deferred in prior periods.
Gross profit from continuing operations decreased 12.9% from $39.5 million,
or 18.7% of revenues, for the nine months ended September 30, 1999 to
$34.4 million, or 19.6% of revenues, for the nine months ended September 30,
2000. The increase in gross profit as a percentage of revenues was due primarily
to an increase in margin on product sales from 8.0% to 12.7% for the nine months
ended September 30, 1999 and 2000, respectively. This increase was due primarily
to increased product margins in the e-Integration segment and to lower profit
margins in 1999 attributable to disposed or closed businesses. Service margins
increased in our e-Solutions segment from 41.3% to 51.3% of revenues for the
nine months ended September 30, 1999 and 2000, respectively, due to recognition
of deferred revenue in the current period for which costs had been recorded in
previous periods. This offset the decrease in service margins in our
e-Integration and Other segments from 44.4% to 21.6% for the nine months ended
September 30, 1999 and 2000, respectively. This decrease in service margins has
been due to lower productivity of service personnel in operations designated for
disposition.
Selling, general and administrative expenses from continuing operations
increased 5.7% from $40.2 million, or 19.0% of revenues, for the nine months
ended September 30, 1999 to $42.5 million, or 24.2% of revenues, for the nine
months ended September 30, 2000. The increase in selling, general and
administrative expenses as a percentage of revenues was due primarily to the
cost of our significant investments in our Blueflame subsidiary in the area of
technical, selling, marketing, and other related administrative activities
combined with the costs incurred to support our divestiture of businesses not
classified as discontinued operations. The increase was offset in part by the
impact of cost reduction actions we took in the second half of 1999 and third
quarter of 2000.
Amortization of intangibles from continuing operations decreased
$1.5 million from $2.7 million for the nine months ended September 30, 1999 to
$1.2 million for the nine months ended September 30, 2000 due to lower
intangible asset balances at September 30, 2000 as compared with September 30,
1999 resulting from the write-off of goodwill in prior periods. In addition,
intangibles related to certain entities classified as assets held for sale are
carried at net realizable value and therefore, are no longer amortized.
Write-off of goodwill for the nine months ended September 30, 2000 of
$24.4 million represents the write-down of intangible assets to their estimated
fair value.
Interest and other expense from continuing operations of $4.9 million for
the nine months ended September 30, 1999 increased to $5.7 million in the nine
months ended September 30, 2000 primarily due to increased interest rates on our
credit facility in the fourth quarter of 1999 and at the beginning of the second
quarter of 2000. In addition, interest expense increased in the comparable
period because of increased bank fees associated with amendments made to our
credit facility in the first half of 2000.
Income tax benefit decreased from $17.9 million in the nine months ended
September 30, 1999 to $13.4 million in the nine months ended September 30, 2000,
reflecting effective tax rates of 33.4% and 33.7%, respectively.
Discontinued operations represent the results of our Voice and Data segment
for the comparable periods, including the expected after tax gain on the
completed disposal of the segment.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash of $1.6 million and a working capital
deficit of ($15.6) million resulting from the classification of the amount
outstanding under the credit facility of $41.7 million as a current liability.
13
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
During the nine months ended September 30, 2000, net cash used in continuing
operating activities was $6.8 million. Net cash provided by investing activities
was $31.3 million, which consisted primarily of $33.1 million of net cash
proceeds from disposal of four of our subsidiaries. Net cash used in financing
activities was $31.6 million, which consisted of a $31.6 million paydown of the
term portion of our credit facility and a $1.0 million paydown of the working
capital portion of the credit facility, offset by approximately $1.0 million in
proceeds from issuance of common stock.
During the nine months ended September 30, 1999, net cash provided by
continuing operating activities was $4.6 million. Net cash used in investing
activities was $4.2 million, which consisted primarily of $4.6 million of
additions of property and equipment. Net cash used in financing activities was
$17.3 million, reflecting the $10.6 million recovery from Solutions, E.T.C. used
to pay down long-term debt on the credit facility, as well as payment of
approximately $7.0 million to reduce the working capital portion of the credit
facility.
We will rely primarily on the revolver portion of our line of credit and, to
a lesser extent, on cash from operating activities to meet our cash flow needs
through March 31, 2001. For a description of the line of credit, see Note 3 to
Item 1--Financial Statements. We expect that as we sell certain subsidiaries,
our cash flow from operations will decline. We anticipate, however, that we will
have adequate funds available under the revolver portion of our line of credit
to fund our divestiture strategy and to sustain our remaining operations through
March 31, 2001. In the event that we are unable to recognize tax losses
generated by the dispositions of our subsidiaries, we will incur a tax
obligation due in March 2001 in the amount of approximately $12.0 million
relating to the prior sale of our Voice and Data subsidiaries. Due to this and
other uncertainties and the timing of, and the amounts received from, the sale
of our subsidiaries and our realization on Blueflame, we are unable to forecast
our cash flow needs beyond March 31, 2001. Our cash flow requirements beyond
March 31, 2001 will be affected by our obligation to pay $3.3 million related to
Blueflame compensation commitments during April 2001.
As our line of credit expires on April 30, 2001, we will be required to have
repaid all amounts outstanding under that facility by that date. We estimate
that we will be able to do so through the sale of subsidiaries and by realizing
on the value of Blueflame. There are, however, significant uncertainties that
may effect our ability to obtain cash from these sources. These include the
price at which we sell or dispose of our subsidiaries other than Blueflame and
the terms upon which we may realize on our investment in Blueflame. In
October 2000, Blueflame issued options to purchase approximately 20% of its
issued shares of common stock to its employees, and certain employees of Aztec.
Upon any sale or disposition of Blueflame, these option holders may be entitled
to up to approximately 20% of the value of Blueflame.
We have made progress during the year in the sale of our subsidiaries and in
reducing the amount due under the credit facility. In June 2000, we completed
the sale of three of our Voice and Data subsidiaries for $34.5 million and used
substantially all of those proceeds to reduce our obligations under the term
portion of the credit facility. In July 2000, we completed the sale of Office
Equipment Services, Inc. for $1.7 million and used substantially all of those
proceeds to reduce debt. We have entered into negotiations for the sale of our
remaining Voice and Data subsidiary, Aztec International, as well as, for the
sale of McDowell, Tucker & Co., PCM, Inc. and Aztec Technology Partners of New
England LLC. We anticipate that proceeds of these sales will also be used to
further reduce our obligations under the term portion of the credit facility.
Upon completion of these sales our remaining operating subsidiary will consist
of Blueflame.
As a corporation organized under Delaware law, we must obtain the approval
of our stockholders if we sell substantially all of our assets. We anticipate
that we will file proxy materials with the SEC
14
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
and hold a special stockholders meeting to obtain approval for the proposed
sales of certain of our subsidiaries.
In the March 30, 2000 amendment to the credit facility, we committed to
proceed on a commercially reasonable basis with the initial public offering of
Blueflame. Subsequent market conditions and other considerations have caused us
to delay the public offering of Blueflame stock. We are pursuing alternatives to
realize on our investment in Blueflame, and we have retained a financial advisor
to assist us in those alternatives.
There can be no assurance that we will be able to successfully complete the
sale of our remaining subsidiaries and realize on our investment in Blueflame,
or that the sale of these subsidiaries and such realization will raise
sufficient proceeds to satisfy our outstanding obligations to our lenders.
Proceeds received upon the sale of the subsidiaries will be primarily used to
reduce the amount outstanding under the credit facility and will not, therefore,
be available for operating cash flow purposes.
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 September 30, 2000, approximately $41.7 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
have performed a sensitivity analysis that indicates a hypothetical 10%
effective change in interest rates would not have a material affect on the
results of operations and financial position. 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.
15
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE MAY NOT BE ABLE TO REPAY THE LOANS UNDER THE CREDIT FACILITY BY APRIL 2001.
We currently estimate that we will be able to repay the amounts outstanding
under the credit facility by its maturity on April 30, 2001 through the sale of
subsidiaries and by realizing on the value of our investment in Blueflame. There
can be no assurance, however, that we will be able to successfully complete the
sale of our subsidiaries, or that the sale of these subsidiaries and realizing
on Blueflame will raise sufficient proceeds to satisfy our obligations under the
credit facility. If we are unable to satisfy the obligations under our credit
facility by April 30, 2001, we would be in default under our credit facility and
our lenders could take a number of actions that would adversely affect our
operations.
OUR ABILITY TO SATISFY OUR CASH FLOW NEEDS MAY BE AFFECTED BY THE SALE OF OUR
SUBSIDIARIES OR A REDUCTION BY OUR LENDERS OF THE AMOUNT AVAILABLE UNDER THE
CREDIT FACILITY.
The continued sale of our remaining subsidiaries could result in our not
having adequate cash flow to sustain operations. While our current projections
indicate that we will be able to continue to divest subsidiaries and maintain
adequate cash flow until March 31, 2001, there can be no assurance that these
forecasts will be realized. Additionally, in connection with the sale of our
subsidiaries, our lenders may impose additional conditions on us, including the
reduction of the amount available under the revolver portion of the credit
facility. A significant reduction of the amount available under the revolver
portion of the credit facility could materially adversely affect our ability to
satisfy our cash flow needs.
OUR BUSINESS STRATEGY WILL FOCUS ON THE SUCCESS OF BLUEFLAME AND COULD BE
AFFECTED BY RISKS ASSOCIATED WITH BLUEFLAME'S BUSINESS.
As we sell our other subsidiaries, our success increasingly becomes
dependant on the success of Blueflame. Risks associated with Blueflame's
business include a reliance, under short term contracts, on a small number of
clients that comprise a substantial portion of its e-Solutions revenues. During
the first nine months of 2000, Blueflame's five largest clients accounted for
approximately 70% of its revenue. Additionally, Blueflame has experienced
operating losses in the first half of 2000 as it made significant investments in
recruiting technical, sales and marketing personnel and related expenses to
expand its business. Blueflame's ability to generate operating profits in the
future will depend heavily on its ability to grow its service revenues and to
fully utilize its technical personnel. The market for providing e-Solutions
professional services is continuously evolving and intensely competitive. We
expect competition to intensify even further. Some of Blueflame's competitors
have longer operating histories and many competitors have more clients, longer
client relationships, greater brand or name recognition and significantly
greater financial, technical, marketing and public relations resources. As a
result, Blueflame's competitors may be in a stronger position to respond quickly
to emerging technologies and changes in client requirements. They may also
develop and promote their products and services more effectively than Blueflame.
WE ARE NOT IN COMPLIANCE WITH THE LISTING REQUIREMENTS FOR NASDAQ SMALLCAP
MARKET AND IF OUR COMMON STOCK IS DELISTED THE PRICE OF OUR COMMON STOCK MAY
BECOME DEPRESSED AND YOU MAY HAVE DIFFICULTIES RESELLING THE STOCK.
As of November 10, 2000, we failed to meet some of the continued listing
requirements for the Nasdaq SmallCap Market. It is possible that, if these
conditions continue, Nasdaq may initiate proceedings to delist our common stock
from trading on the Nasdaq SmallCap Market. In such event, we would seek to have
our common stock quoted on the OTC Bulletin Board. Many institutional and
16
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
other investors do not invest in stocks that are traded at levels below the
Nasdaq SmallCap Market which could make our efforts to raise capital more
difficult. In addition, the firms that currently make a market for our common
stock could discontinue that role. OTC Bulletin Board stocks are often lightly
traded or not traded at all on any given day. Our inability to continue to list
our common stock on the Nasdaq SmallCap Market or any other stock exchange will
negatively affect the liquidity and marketability of the common stock and will
make us ineligible to use Form S-3 for the required registration of our
securities under the amendment to our credit facility.
WE MAY BE REQUIRED TO MAKE SIGNIFICANT TAX PAYMENTS IN MARCH OF 2001 FOR WHICH
WE MAY NOT HAVE FUNDS AVAILABLE.
As the result of the sale of our Voice and Data subsidiaries and anticipated
sale of our remaining Voice and Data subsidiary in the fourth quarter, we expect
to have realized a taxable gain of approximately $30.0 million in 2000. We will
be required to pay taxes of approximately $12.0 million by March 15, 2001 on
this taxable gain if we do not generate offsetting tax losses prior to
December 31, 2000. Unless we are able to offset this taxable gain through tax
losses generated by dispositions of other subsidiaries and/or losses from
operations in the current or prior year, we would not be able to satisfy this
obligation.
WE MAY BE UNABLE TO ATTRACT AND RETAIN OUR EMPLOYEES WHICH MAY RESULT IN OUR
INABILITY TO SUCCESSFULLY COMPETE.
Aztec's 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 September 30, 2000,
approximately 66% of Aztec 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 we will be
able to attract and retain sufficient numbers of technical professionals in the
future. Our proposed sale of our remaining subsidiaries may make it more
difficult to retain employees. An increase in turnover rates could have a
material adverse effect on our business and on our ability to sell remaining
subsidiaries.
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, particularly Benjamin Tandowski, the president of
Blueflame, 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
17
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AZTEC TECHNOLOGY PARTNERS, INC.
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 FROM OUR PREDECESSOR MAY RESULT IN CONTINGENT LIABILITIES.
In June 1998, we were part of a spin-off of subsidiaries from U.S. Office
Products and entered into a number of contractual arrangements which provide
for, among other things, that we indemnify our predecessor corporation from tax
and other liabilities relating to our businesses prior to and following the
spin-off. For a discussion of the risk factors related to the spin-off,
reference is made to the risk factors in our Annual Report on Form 10-K/A for
the year ended December 31, 1999.
18
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AZTEC TECHNOLOGY PARTNERS, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<S> <C>
4.3 Form of Warrant
4.4 Amendment to the Registration Rights Agreement dated
September 15, 2000 by and among the Company and the Banks
named therein.
10.18 Amendment to the Revolving Credit Agreement by and among the
Company and Fleet National Bank, N.A. as agent, dated
September 15, 2000.
27. Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
None
19
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AZTEC TECHNOLOGY PARTNERS, INC.
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>
Date: November 14, 2000 AZTEC TECHNOLOGY PARTNERS, INC.
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BY: /s/ Ross J. Weintraub
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Ross J. Weintraub
CHIEF FINANCIAL OFFICER
DULY AUTHORIZED OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
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