<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1999
REGISTRATION NO. 333-71031
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NICHOLS TXEN CORPORATION
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8741 63-1182099
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
2500 CORPORATE DRIVE
BIRMINGHAM, ALABAMA 35242
(205) 437-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
PAUL D. REAVES
CHIEF EXECUTIVE OFFICER
NICHOLS TXEN CORPORATION
2500 CORPORATE DRIVE
BIRMINGHAM, ALABAMA 35242
(205) 437-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN R. WYNN, ESQ. J. VAUGHAN CURTIS, ESQ.
LANIER FORD SHAVER & PAYNE, P.C. ALSTON & BIRD LLP
P.O. BOX 2087 ONE ATLANTIC CENTER, 1201 WEST PEACHTREE ST.
HUNTSVILLE, ALABAMA 35804 ATLANTA, GEORGIA 30309-3424
(256) 535-1100 (404) 881-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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AMOUNT OF
TITLE OF EACH CLASS OF PROPOSED MAXIMUM REGISTRATION
SECURITIES TO BE REGISTERED AGGREGATE OFFERING AMOUNT(1) FEE(1)
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<S> <C> <C>
Common Stock, $0.01 par value.............. $39,000,000 $10,842*
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</TABLE>
* A registration fee of $9,730 was paid when the Registration Statement was
first filed on January 22, 1999.
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE , 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,625,000 SHARES
(NICHOLS TXEN LOGO)
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
This is an initial public offering of shares of common stock of Nichols TXEN
Corporation. Nichols Research Corporation, which currently owns all of the
common stock of Nichols TXEN, will own approximately 73% of the outstanding
shares of the common stock after the offering. Accordingly, Nichols Research
will be able to control the management and operation of Nichols TXEN. This is a
firm commitment underwriting.
Nichols TXEN expects that the price to the public in the offering will be
between $11.00 and $13.00 per share. The market price of the shares after the
offering may be higher or lower than the offering price.
The common stock will be listed on the Nasdaq National Market under the symbol
"NTXN."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public............................ $ $
Underwriting discount..........................
Proceeds to Nichols TXEN.......................
</TABLE>
Nichols TXEN has granted an over-allotment option to the underwriters. Under
this option, the underwriters may elect to purchase a maximum of 375,000
additional shares from Nichols TXEN within 30 days following the date of this
prospectus to cover over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
FRIEDMAN BILLINGS RAMSEY
THE ROBINSON-HUMPHREY COMPANY
The date of this prospectus is ______________ , ____.
<PAGE> 3
Inside Front Cover
Nichols TXEN
High Technology Driven Outsourcing Services
Software Application Services Administrative Services
Outsourcing Outsourcing
Our Technology & Customer's Personnel Our Technology & Our Personnel
TXENet
Secure Private Network / Intranet
- Internet Technology-based
Software Applications for
- Managed Care Organizations
- Physician Practices
- Portal Site Application
- 3rd Party Applications & Content
- Integrated Internet Connectivity
- E-commerce Applications
Value Proposition
- Timely access to sophisticated enterprise-level software applications
- Rapid delivery through an Internet-technology based network
- More efficient administrative functions
- Access to knowledge and experienced personnel
- Better cost control & variable rate operating cost structure
- Enhanced connectivity via Internet
- High degree of scalability
- Faster implementation of new business and technology
- Less technology risk
- Less capital expenditures for healthcare administrative technologies
(Background photo: healthcare and technology composite)
<PAGE> 4
Nichols TXEN Customers
Managed Care Software Application
Services Outsourcing
Our Technology & Customer's Personnel
Intranet Portal Site
Application
Managed Care Administrative
Services Outsourcing
Our Technology & Our Personnel
Physician Practice Software Application
Services Outsourcing
Our Technology & Customer's Personnel
Intranet Portal Site
Application
Physician Practice Administrative
Services Outsourcing
Our Technology & Our Personnel
TXENet
Nichols TXEN secure private network/intranet
Network Data Center Software Application Services
<TABLE>
<CAPTION>
Nichols TXEN E-commerce Software Nichols TXEN Software Applications 3rd Party Applications/Content
- -------------------------------- ---------------------------------- ------------------------------
<S> <C> <C>
- -Provider Claim Inquiry(*) -High-end Managed Care Administration -Medical Informatics
- -Eligibility Verification -Medical Utilization Management -Claim Edit
- -Benefit Inquiry(*) -Managed Care Decision Support -DRG Code Finder
- -Direct Employer Benefit/Enrollment(*) -Internet-based Reporting & Analysis(*) -Automated Medical Criteria
- -Member Inquiry/Update+ -Integrated Physician Practice Management -Automated Fee Schedules
-Medical Case Management(*) -Medical Informatics
-High-end Physician Practice Administration -Lab/Pharmacy Connectivity
-Insurance Collections -Eligibility Verification
-Appointment Scheduling -Claim Status
-Direct Payor Connects -Medical Records
-Internet-based Reporting & Analysis(*)
-Provider Enrollment
-Integrated Managed Care Administration
</TABLE>
Internet Protocols
Healthcare Participants
Health Plan Members
Government Remote Employees
Intermediaries
Employers
Physicians Internet
Connections
-Standard Internet Connections
-3rd Party Portal Sites*
TXENetlink - -Customer Internet Sites+
Labs
Suppliers
Pharmacy
Patients
Medical
Informatics
Hospitals
(Graphics: computer and network art work)
(Background photo: healthcare and technology composite)
* currently testing
+ under development
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 50
Certain Transactions........................................ 56
Principal Stockholders...................................... 58
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 61
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find More Information......................... 64
Index to Financial Statements............................... F-1
</TABLE>
------------------------------------
Nichols TXEN's principal executive offices are located at 2500 Corporate Drive,
Birmingham, Alabama 35242. Our telephone number is (205) 437-6000. Our Internet
address is www.nicholstxen.com. Information contained on our Web site is not a
part of this prospectus.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters and reflects a
7.5 to 7.0 reverse stock split which will become effective on the closing of
this offering.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.
MDr98(TM), MDrWEB(TM), Decision Manager 3.0(TM), TXEN-MHS(TM), TXENetlink(TM),
TXENet(TM), WebSTEPP(TM), Xtend(TM), Xtend/MHS(TM), Xtend/HEDIS(TM),
FirstSTEPP(TM), CaseSTEPP(TM), NextSTEPP(TM), InfoSTEPP(TM), MDr-STEPP(TM),
MDr-WebSTEPP(TM), MDr-InfoSTEPP(TM), TXEN MD.com(TM) and TXEN HR.com(TM) are
trademarks of Nichols TXEN. Trade names and trademarks of other companies
appearing in this prospectus are the property of their respective holders.
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in the shares. You should read the entire
prospectus carefully.
NICHOLS TXEN
OUR BUSINESS
We are a software application, connectivity and administrative outsourcing
services provider. We use Internet-based technology and TXENet, our secure
network, to deliver our software applications and services to managed care
organizations and physician practice groups to improve their operational
efficiency and quality of care. Managed care organizations manage risks,
benefits and costs under healthcare plans, and physician practice groups deliver
healthcare services. We offer a broad range of information technology and
services to perform healthcare administrative functions such as insurance claims
processing, physician billing and medical utilization management, which helps
control and coordinate medical services used by patients. Based on our fee
structure for these outsourcing solutions, approximately 77% of our total
revenues in fiscal year 1998 were recurring. We consider recurring revenue to be
monthly fees paid by our customers that are continuing in nature because they
are based on the number of enrolled health plan members per month, the number of
transactions processed, a fixed fee or a percentage of customer collections.
We are organized into two divisions, Managed Care Services and Physician
Practice Services. As of May 31, 1999, we had 96 managed care services customers
representing over 3.0 million lives and 279 physician practice services
customers representing over 3,000 physicians. Our applications and outsourcing
solutions enable customers to concentrate on providing quality healthcare rather
than focusing on administrative issues. We allow customers the flexibility to
perform administrative functions with their own staffs utilizing our technology,
or to outsource to us some or all of their administrative and processing
functions. We are able to rapidly implement our outsourcing services because of
our highly trained and knowledgeable personnel, secure intranet and flexible
outsourcing method. Our solutions provide the following benefits to our
customers:
- timely access to sophisticated enterprise-level, or company-wide, software
applications through a secure network;
- more efficient administrative functions;
- enhanced electronic communications, or connectivity, via Internet-based
technology or direct connections for transmittal and retrieval of information
among healthcare industry participants;
- better control of costs;
- high degree of scalability, or the ability to easily expand business
operations; and
- faster implementation of new business and technology.
A majority of our transactions are currently conducted over our intranet using
Internet communication protocols and we plan to migrate all of our customers to
Internet-based technologies. An intranet is a private network with many
characteristics of the Internet, but which is designed to be used within a
company or group of organizations. We are expanding our existing network
architecture to include additional Internet-based software application services.
These software applications, hosted on our network data center, are intended to
provide additional functionality and to improve our customers' connectivity with
participants in the healthcare industry. Our customers will be able to use this
expanded connectivity and new software application services to conduct
electronic business transactions, or e-commerce. We are also developing
WebSTEPP, our healthcare intranet portal site. WebSTEPP is designed to provide
easy access to TXENet software application services and additional Internet
applications and content offered through strategic relationships with some of
the leading Internet-based healthcare companies.
3
<PAGE> 7
OUR MARKET OPPORTUNITY
Healthcare costs in the United States have risen dramatically over the past two
decades. In response to these cost pressures, membership in all forms of managed
care plans is increasing, creating many new start-up organizations and fueling
rapid growth in existing organizations. These managed care programs are using a
variety of benefit and reimbursement models, which are expanding healthcare
administration complexities. These administrative complexities further intensify
healthcare costs. In fact, we estimate that between 30% to 40% of every
healthcare dollar is spent to cover administrative costs.
Managed care organizations and physician groups often lack the information
technology and operational resources to manage insurance risk and to function
efficiently within this more complex and sophisticated healthcare environment.
Traditional healthcare information technology systems do not adequately address
the new information demands caused by these administrative complexities. As a
result, an increasing number of healthcare companies are outsourcing their
healthcare information and administrative services. The market for healthcare
information technology and administrative services outsourcing is, according to
the Gartner Group, expected to increase to approximately $3.8 billion in 2001.
We believe that the Internet and Internet-based technology, such as TXENet, are
well suited to handle complex communications between healthcare providers and
payors and to improve administrative functions. The Internet's open
architecture, accessibility and acceptance make it a powerful communications
medium, overcoming many of the limitations inherent in legacy healthcare
information systems. In addition, we believe delivery of software applications
over a network using Internet-based technology is gaining acceptance.
OUR STRATEGY
Our objective is to develop and use Internet-based technology to become the
leading software applications provider and the leading administrative services
provider to managed care organizations and physician groups. Our strategy
includes the following key elements:
- focus on providing outsourcing solutions for the administrative and
information challenges of healthcare;
- expand our high recurring revenue model;
- increase efficiencies through expanded Internet-based connectivity,
additional Internet-based software applications and process automation;
- establish strategic relationships with additional leading Internet-based
healthcare participants; and
- acquire complementary businesses and technologies.
4
<PAGE> 8
OUR HISTORY
Our company is the result of several acquisitions made by our parent company,
Nichols Research Corporation. Nichols Research formed CSC Acquisition, Inc. as a
wholly owned subsidiary on June 6, 1995. On June 30, 1995, CSC Acquisition
acquired Computer Services Corporation. Since its incorporation in 1967,
Computer Services primarily performed information technology services for, and
sold turnkey computer systems to physician practices. Nichols Research formed
Nichols SELECT Corporation as a wholly owned subsidiary on September 17, 1996.
On September 23, 1996, CSC Acquisition was merged into Nichols SELECT. On
December 16, 1994, Nichols Research acquired 19.9% of the capital stock of TXEN,
Inc. with an option to acquire the remaining 80.1% of TXEN. Since its
incorporation in 1989, TXEN provided information technology outsourcing and
administrative services outsourcing for the managed care industry. On August 29,
1997, Nichols Research acquired the remaining 80.1% of TXEN through a merger of
TXEN into Nichols SELECT. After the merger Nichols SELECT continued to be wholly
owned by Nichols Research. Following the TXEN acquisition, Nichols SELECT
changed its name to Nichols TXEN Corporation.
THE OFFERING
Common stock offered by Nichols TXEN........ 2,625,000 shares
Common stock to be outstanding after the
offering(1)................................. 9,625,000 shares
Use of proceeds............................. For working capital, to fund
possible acquisitions, and other
general corporate purposes.
Proposed Nasdaq National Market symbol...... NTXN
- ---------------------------
(1) Excludes 746,000 shares of common stock issuable upon exercise of employee
and director stock options outstanding on May 31, 1999, pursuant to the
Nichols TXEN 1998 Stock Option Plan and the Non-Employee Director Stock
Option Plan. These options were granted subject to completion of the
offering at an exercise price equal to the initial public offering price.
5
<PAGE> 9
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The financial data presented below represents the historical operating
statements of Nichols TXEN and TXEN. TXEN was acquired by Nichols TXEN on August
29, 1997. The financial data for TXEN is presented because of the significance
of TXEN to the performance of the combined entity.
<TABLE>
<CAPTION>
NICHOLS TXEN CORPORATION
-------------------------------------------------------------------
NINE MONTHS
YEARS ENDED AUGUST 31, ENDED MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS):
Revenues...................... $ 8,357 $ 9,382 $10,370 $12,438 $43,480 $30,454 $38,086
Gross profit.................. 2,653 3,082 3,932 4,669 20,224 14,225 17,659
Selling, general and
administrative expenses.... 1,336 1,859 1,932 2,251 7,367 5,102 7,142
Research and development...... 634 762 710 1,155 2,771 1,948 2,289
Write-off of purchased
in-process research and
development................ -- -- -- 8,500 -- -- --
Intangible asset impairment... -- -- -- -- -- -- 4,297
Income (loss) from
operations................. 332 112 343 (8,222) 5,539 3,926 227
Net income (loss)............. 228 71 320 (7,673) 3,252 2,300 (302)
PER SHARE DATA(1):
Earnings (loss) per share..... $ 0.03 $ 0.01 $ 0.05 $ (1.10) $ 0.46 $ 0.33 $ (0.04)
Weighted average common shares
outstanding................ 7,000 7,000 7,000 7,000 7,000 7,000 7,000
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1999
---------------------
AS
ACTUAL ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 7,710 $36,005
Total assets............................................... 54,934 83,229
Long-term debt............................................. -- --
Total stockholders' equity................................. 48,779 77,074
</TABLE>
<TABLE>
<CAPTION>
TXEN, INC.
----------------------------------
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996 1997
------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS):
Revenues........................ $2,653 $4,706 $6,860 $14,980
Gross profit.................... 1,274 2,972 3,648 10,132
Selling, general and
administrative expenses...... 1,017 1,371 2,467 2,945
Research and development........ 126 624 926 1,069
Income (loss) from operations... (59) 631 (277) 5,409
Net income (loss)............... $ (105) $ 683 $ (153) $ 3,421
</TABLE>
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(1) The earnings per share data gives effect to the outstanding capital stock
of Nichols TXEN held by Nichols Research on a pro forma basis applied for
Nichols Research's proportionate share for all periods presented.
(2) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering based upon an assumed initial public offering price of $12.00
per share and the application of the net proceeds.
6
<PAGE> 10
The financial data presented below combines the historical statements of
operations and other statistical data for Nichols TXEN and TXEN. The combined
data presented below should not be viewed as a representation of what the actual
combined results would have been for the periods indicated before the
acquisition of TXEN. There are many variables which could change the combined
results presented if Nichols TXEN and TXEN had operated on a combined basis for
the periods indicated before the acquisition of TXEN.
<TABLE>
<CAPTION>
NICHOLS TXEN AND TXEN COMBINED
-------------------------------------------------------------------
NINE MONTHS
YEARS ENDED AUGUST 31, ENDED MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA (COMBINED BASIS):
Revenues(1).............. $11,551 $14,140 $18,274 $27,921 $43,480 $30,454 $38,086
Gross profit............. 4,179 6,122 6,886 14,787 20,224 14,225 17,659
OTHER STATISTICAL DATA
(COMBINED BASIS):
Growth of revenues....... 13.8% 22.4% 29.2% 52.8% 55.7% 38.7% 25.1%
Gross profit margin...... 36.2% 43.3% 37.7% 53.0% 46.5% 46.7% 46.3%
Revenue Mix (Percent of
Revenues):
Managed Care........... 27.7% 33.6% 43.3% 55.5% 66.4% 65.4% 66.4%
Physician Practice..... 72.3% 66.4% 56.7% 44.5% 33.6% 34.6% 33.6%
Recurring.............. 75.1% 76.4% 78.0% 71.6% 76.6% 76.8% 78.5%
Non-recurring.......... 24.9% 23.6% 22.0% 28.4% 23.4% 23.2% 21.5%
Customer Data:
Number of Managed Care
customers........... 24 33 50 70 87 87 96
Number of Physician
Practice
customers(2)........ 191 184 202 231 252 244 279
</TABLE>
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(1) Includes revenues from turnkey systems. Revenues from turnkey systems
decreased from approximately 8% of combined revenues in fiscal year 1994 to
less than 1% of combined revenues in fiscal year 1998.
(2) Excludes turnkey system customers. In November 1997, we decided to
discontinue sales of turnkey systems to physician practice customers.
7
<PAGE> 11
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares.
WE MAY NOT BE ABLE TO CONTINUE COMPETING SUCCESSFULLY WITH COMPANIES OFFERING
COMPETING PRODUCTS AND SERVICES.
Our business is highly competitive. If we are unable to successfully compete
with other companies in our industry, our business, financial condition or
results of operations could be adversely affected. The market for our technology
and services is rapidly changing and requires potentially expensive
technological advances. We believe our future success will depend, in part, upon
our ability to:
- enhance our current technology and services;
- respond effectively to technological changes;
- sell additional services to our existing client base;
- introduce new technologies; and
- meet the increasingly sophisticated needs of our customers.
Competitors may develop products or technologies that are better or more
attractive than those offered by us or that may render our technology and
services obsolete. We plan to expand our business using Internet-based
technology and will encounter significant competition from other companies
pursuing a similar strategy. In addition, we plan to significantly limit the
sale of turnkey computer systems to customers who desire to process their
transactions internally. Accordingly, we may be at a competitive disadvantage to
other vendors offering such systems. Many of our current and potential
competitors are larger and offer broader services and have significantly greater
financial, marketing and other competitive resources than us.
AFTER THIS OFFERING, WE WILL STILL BE CONTROLLED BY NICHOLS RESEARCH, WHICH
COULD MAKE IT MORE DIFFICULT FOR OTHERS TO ACQUIRE US.
Upon completion of this offering, Nichols Research will own approximately 73% of
our outstanding common stock, or 70% if the underwriters' over-allotment option
is exercised in full. Therefore, Nichols Research will control us and have the
power to elect all of our directors and appoint our management. In addition,
Nichols Research will be able to approve actions requiring the consent of our
stockholders. Such control by Nichols Research could limit the price that
investors might be willing to pay in the future for our shares and could make it
more difficult for a third party to acquire us.
CONTROL OF NICHOLS TXEN BY NICHOLS RESEARCH FOLLOWING THE OFFERING COULD PRESENT
CONFLICTS OF INTEREST.
The control by Nichols Research could also cause a conflict of interest.
Initially, one of our six directors will be an officer and director of Nichols
Research, one of our directors will be a director of Nichols Research and an
officer of Nichols TXEN, two of our directors will be officers of Nichols TXEN
and two of our directors will be independent directors who are not Nichols
Research affiliates or our employees. Our directors who are also directors of
Nichols Research may favor Nichols Research in decisions that affect both
companies. Nichols Research has entered into a Voting Agreement, a Corporate
Services Agreement and a Tax Sharing Agreement with us. These agreements were
negotiated while we were a wholly owned subsidiary of Nichols Research. As a
result, the terms of these agreements may be less favorable to us than the terms
we could have obtained from unaffiliated third parties. See "Certain
Transactions -- Corporate Services Agreement," "-- Voting Agreement" and "-- Tax
Sharing Agreement."
8
<PAGE> 12
IF CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS, IT COULD ADVERSELY AFFECT
OUR EARNINGS.
We believe that our long-term success largely depends upon our ability to retain
customers and generate recurring revenues from contracts. If we are unable to
retain customers and generate recurring revenues, our performance will be
adversely affected. We may lose customers if they are acquired by other
companies who have existing technology capabilities. We could also lose
customers or have customers transfer from higher revenue producing
administrative services to technology services if they consolidate or grow
sufficiently to perform their administrative services in house. Approximately
50% of our contracts do not contain penalty provisions for termination or are
outside of their initial term and may be terminated at any time. Five of our
contracts, representing approximately 4% of our revenues, specifically allow for
switching from administrative services outsourcing to information technology
outsourcing without penalties. For those contracts that contain financial
penalties for termination or transfers from administrative services to
technology services, the penalties are usually not sufficient to replace the
ongoing revenue that we would have received if the change had not occurred.
Typically our contracts have an initial term of two to five years. Termination
penalties range from a two months service fee to a six months service fee or,
for some physician practice customers, penalties are based on recouping
transaction price discounts included in long-term contracts. In general, these
penalties decrease over the initial term of the contract. We have recently
experienced early termination of technology outsourcing services by two
significant physician practice customers, and several of our managed care
customers have transferred their outsourcing requirements from administrative
services to technology services. Any termination, significant reduction or
modification of our business relationships with any of our significant customers
or with a number of smaller customers could have a material adverse effect on
our business, financial condition or results of operations.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.
Significant competition exists for employees with the skills we require, such as
the ability to program computers and understand the healthcare industry.
Qualified employees are in great demand and are likely to remain a limited
resource for the foreseeable future. We may not be successful in attracting and
retaining needed personnel. If we are not successful, our business may be
adversely affected.
WE MAY LOSE CUSTOMERS OR INCUR LIABILITY FOR ERRORS OR IMPROPER HANDLING OF
CUSTOMER TRANSACTIONS OR INFORMATION RETRIEVED FROM OUR NETWORK.
Our customers demand reliability and quality when their transactions are
processed, but errors may occur. Errors and mistakes in processing customer
transactions may result in loss of data, inaccurate information and delays. Such
errors could cause us to lose customers and could result in liability. In
addition, materials downloaded by our customers through Nichols TXEN's software
products may be subsequently distributed to others and it is possible that
claims could be made against us for defamation, negligence, copyright or
trademark infringement or other alleged infractions based on the nature and
content of such materials. The contractual protections included in our customer
contracts and our insurance coverage may not be sufficient to protect us against
such liability. In addition, appropriate insurance may be unavailable in the
future at commercially reasonable rates. A successful claim in excess of our
insurance coverage could have a material adverse effect on our business,
financial condition or results of operations. Even unsuccessful claims could
result in the expenditure of funds in litigation, as well as diversion of
management time and resources.
WE MAY INCUR LIABILITY AS A RESULT OF PROVIDING UTILIZATION REVIEW SERVICES.
We recommend to our customers whether a claim for payment or service should be
denied or existing coverage should be continued based on the customer's plan or
contract and industry standard clinical support criteria. Our customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of medical service or payment of medical claims. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability. If the
protections are not adequate, our business may be adversely affected. See
"Business -- Government Regulation."
9
<PAGE> 13
THE GOVERNMENT HAS INCREASED SCRUTINY OF BILLING AND CLAIMS ACTIVITIES AND ANY
VIOLATIONS COULD RESULT IN SIGNIFICANT PENALTIES OR OTHER PUNISHMENT.
We perform billing and claims services which are governed by numerous federal
and state civil and criminal laws, including the False Claims Act and the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. Violations of
such laws could significantly damage our business. The federal government in
recent years has placed increased scrutiny on billing and collection practices
of healthcare providers and related entities and, in particular, potentially
fraudulent billing practices such as submissions of inflated claims for payment
and upcoding. Violations of the laws regarding billing and coding may result in
civil monetary penalties, criminal fines, imprisonment or exclusion from
participation in Medicare, Medicaid and other federally funded healthcare
programs for us and our customers. See "Business -- Government Regulation."
MANY OF OUR INTERNET-BASED E-COMMERCE PRODUCTS ARE IN THE DEVELOPMENT STAGE AND
WE MAY EXPERIENCE DIFFICULTIES DEVELOPING AND COMMERCIALIZING THESE PRODUCTS.
We are currently developing new Internet-based e-commerce products and face all
of the risks, uncertainties, expenses, delays, problems and difficulties
typically encountered in developing and commercializing new products. We have
limited experience in developing and commercializing Internet-based e-commerce
products and it is possible that we will have unanticipated expenses, problems
or technical difficulties that could cause material delays in product
commercialization. As of the date of this prospectus, we have not realized any
revenues directly related to our e-commerce services. There can be no assurance
our e-commerce Internet products when developed will result in revenues or
profits.
IF WE ARE UNABLE TO MAKE FUTURE ACQUISITIONS, OUR RATE OF GROWTH MAY BE
ADVERSELY AFFECTED.
One aspect of our growth strategy involves making acquisitions. If we are unable
to make acquisitions, we may not meet our growth expectations and our business
and financial condition or results of operations could be materially and
adversely affected. We may be unable to identify suitable acquisition candidates
in the future. In addition, we compete with companies to acquire other
businesses. We expect this competition to continue to increase, making it more
difficult to acquire suitable companies on favorable terms.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED.
Even though we may acquire additional companies in the future, we may be unable
to successfully integrate the acquired businesses and realize anticipated
economies, operational and other benefits in a timely manner. If we are unable
to successfully integrate acquired businesses, any of the following may occur
which could have a negative impact on our profitability:
- substantial costs from trying to combine our operations with those of the
acquired business;
- delays in offering the acquired products or services;
- diversion of management's attention from our existing business; or
- damage to our relationships with our key customers and employees.
Integrating acquired companies generally involves combining management and
services, taking advantage of economies of scale and other economic benefits and
combining the two corporate cultures into one common culture. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours.
IF OUR ASSETS BECOME IMPAIRED, IT COULD ADVERSELY AFFECT OUR BUSINESS.
During the third quarter of fiscal year 1999, we recorded an intangible asset
impairment charge of $4.3 million to adjust the intangible assets of our
Physician Practice Services division. After giving effect to this impairment, we
still had $31.5 million of intangible assets at May 31, 1999. We cannot give
assurances
10
<PAGE> 14
that the recorded value of goodwill or other intangible assets will ever be
realized. Our future ability to realize the value of intangible assets is
determined based on undiscounted future operating cash flows. The future
write-off of additional unamortized intangible assets would have a material
effect on our earnings.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 CONCERNS, WE MAY LOSE REVENUE OR INCUR
ADDITIONAL COSTS.
Many computer programs were designed and developed without considering the
upcoming change in the century, which could lead to failure of computer
applications or create erroneous results by or at the year 2000. This issue is
referred to as the "Year 2000" problem. It is possible that our computer
systems, software products or other business systems, or those of our suppliers
or customers, could malfunction as a result of the Year 2000 problem. A
malfunction could cause us to lose revenue or incur substantial costs. In
addition, telecommunication and utility services, which are important to our
operations, could malfunction due to the Year 2000 problem. As a result of the
Year 2000 problem, many of our customers may suffer delays in reimbursement from
Medicare and Medicaid programs, other federal or state healthcare programs and
other third-party payors. Such delays may also damage us. We may not be able to
identify, successfully remedy or assess all date-handling problems in our
business systems or operations or those of our customers and suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
SYSTEM FAILURES OR PERFORMANCE PROBLEMS WITH OUR NETWORK DATA CENTER COULD
DAMAGE OUR BUSINESS.
Substantially all customer transactions are processed at our network data
center, which is located at a single site. We do not have a permanent mirror
processing site to which processing could be transferred in case of a
catastrophic event. As a result, any system failure or performance problems with
our network data center could damage our business. In order to operate without
interruption, we must guard against:
- telecommunications failures;
- equipment failures;
- power outages, fires, tornadoes and other natural disasters at the network
data center; and
- other potential interruptions.
Our customer contracts contain performance guarantees and any interruption could
require us to reduce fees charged to customers and reduce our revenues. A system
failure could require us to spend money replacing existing equipment or adding
redundant facilities. Any failure by us to adequately and promptly address the
problems could damage our reputation, or make it more difficult for us to
attract new customers.
OUR STRATEGIC RELATIONSHIPS MAY NOT PROVIDE ANTICIPATED BENEFITS.
We have entered into several strategic relationships and may enter into
additional strategic relationships in the future. Some of these relationships
are in the early stages of development and it is possible that these
relationships will not provide us with the ability to successfully develop or
sell our services. In addition, we may not be able to establish relationships
with or provide our services to key participants in the healthcare industry if
we have established relationships with their competitors. Also, some of our
current and potential partners may decide to compete with us. If any of our
current or future strategic relationships are disrupted, or if we do not realize
the expected benefits from these relationships, our business may be adversely
affected.
THERE ARE RESTRICTIONS RELATED TO THE LICENSING OF OUR CORE PROCESSING SOFTWARE
THAT MAY ADVERSELY IMPACT OUR BUSINESS.
Our core processing software for the Managed Care Services business, known as
MHS, was licensed in 1989 from CSC Healthcare Services, Inc. We currently hold
three perpetual, non-transferable and non-marketable source code and object code
MHS licenses. Since 1989, we have significantly enhanced and modified our
version of MHS, which is known as TXEN-MHS. We have not requested nor received
any
11
<PAGE> 15
updates or enhancements from CSC, and we are not dependent upon CSC for support
of TXEN-MHS. As a condition to the license grant from CSC, we are restricted
from offering TXEN-MHS or managed care administrative services to a CSC managed
care customer without written consent from CSC. We are also restricted from
selling turnkey versions of TXEN-MHS without written consent from CSC. These
limitations may reduce market opportunities and restrict our business growth. In
addition, if we violate the restriction or otherwise breach the licensing
agreement and do not cure such violation or breach, CSC could terminate the
licenses. Termination of the licensing arrangements with CSC could have a
material adverse effect on our business, financial condition or results of
operations.
WE RELY ON PROPRIETARY TECHNOLOGY WHICH WE MAY BE UNABLE TO PROTECT FROM
INFRINGEMENT OR WHICH MAY INFRINGE TECHNOLOGY OWNED BY OTHERS.
Our proprietary software and other confidential information are important to our
business. We do not own any patents and we have not registered any copyrights,
trademarks, service marks or trade names with the United States Patent and
Trademark Office. Instead, we rely on a combination of trade secrets, common law
intellectual property rights, license agreements, nondisclosure and other
contractual provisions which may not adequately protect our technology or
information. These actions do not prevent independent third-party development of
competitive products or services. Recently, we were contacted by legal counsel
representing the owner of patented technology allegedly possessing functionality
similar to that of our non-patented technology for electronic integrated
commerce and healthcare management systems. We were offered an opportunity to
obtain a license for the use of this patented technology. If it is determined
that the functionality of our technology overlaps this or other technology, we
may be subject to intellectual property infringement claims and we could be
required to enter into a license agreement or royalty arrangement with the party
asserting the claim or be forced to stop using some of our technology. We may
also be required to indemnify customers for claims made against them. These
consequences could have a material adverse effect on our business.
CHANGES IN THE HEALTHCARE INDUSTRY COULD REDUCE DEMAND FOR OUR TECHNOLOGY AND
SERVICES.
The healthcare industry in the United States is in a period of change and
uncertainty. As a result, healthcare organizations may alter the way they
operate and pay for services. Participants in the healthcare industry are also
rapidly consolidating, which can reduce our customer base and market
opportunities. Our transaction processing technology and services are designed
to function within the current healthcare financing and reimbursement system.
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and capital expenditures. Future legislation may further increase
government involvement in healthcare, lower reimbursement rates and otherwise
change the operating environment for our customers. As in the past, healthcare
organizations may react to these proposals and the uncertainty surrounding such
proposals in ways that could result in a reduction or deferral in the use of our
technologies and services. We cannot predict with any certainty what impact, if
any, healthcare reforms might have on our business, financial condition or
results of operations. See "Business -- Government Regulation."
NEW REGULATIONS REGARDING COMPUTER MEDICAL RECORDS COULD INCREASE OUR COSTS.
The United States Department of Health and Human Services has proposed
regulations regarding electronic signatures and the maintenance and transmission
of computer medical records. These regulations establish minimum required
standards for electronic record-keeping. We do not know if these regulations
will be adopted in their present form or a different form, or at all. However,
if these regulations or other similar laws are adopted, they may require
modifications to our computer software, Internet access and record-keeping
practices. These changes may require us to make substantial capital
expenditures. See "Business -- Government Regulation."
12
<PAGE> 16
WE MAY BE REQUIRED TO COMPLY WITH ADDITIONAL LICENSING REGULATIONS AND CONSUMER
PROTECTION LAWS.
Because we provide administrative and business services to health plans, we are
required to be licensed in many states as a third-party administrator or private
review agent and to meet state requirements for continued licensure. In
addition, federal and state consumer protection laws may apply to us when we
bill patients directly for the cost of physician services that are provided.
Failure to comply with any of these laws or regulations could result in a loss
of licensure, or other fines and penalties. Enactment of legislation expanding
the scope of medical practice to utilization review activities could require
additional licensure obligations, or require restructuring of physician
arrangements. See "Business -- Government Regulation."
CHANGES IN LAWS REGARDING THE PROTECTION OF CONFIDENTIAL PATIENT INFORMATION
COULD PREVENT CUSTOMERS FROM USING OUR SERVICES.
The confidentiality of patient records is subject to substantial regulation by
state governments. Although compliance with these laws and regulations is at
present principally the responsibility of the physician or other healthcare
providers, regulations governing patient confidentiality rights are evolving
rapidly. Substantial additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. This legislation may require holders of medical information to implement
security measures and impose restrictions on the ability of third-party
processors, like us, to transmit patient data and make that information
available via the Internet without specific patient consent. Any change in
legislation could restrict healthcare providers from using our services. See
"Business -- Government Regulation."
GOVERNMENT REGULATION OF INTERNET-BASED HEALTHCARE SERVICES OR THE INTERNET
COULD ADVERSELY AFFECT OUR BUSINESS.
Our Internet-based services are subject to developing and changing regulation.
The Internet and its associated technologies are also subject to government
regulation. Many existing laws and regulations, when enacted, did not anticipate
the Internet-based healthcare services we are developing and it is possible that
these laws and regulations may be applied to our Internet-based healthcare
business. Accordingly, we may be adversely affected by current regulations as
well as future regulations specifically targeted to this new segment of the
healthcare industry.
BREACHES OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY AND DAMAGE TO OUR
REPUTATION.
To the extent that our activities involve the storage of confidential customer
and patient information at our network data center and its transmission over
private and public networks, including the Internet, security breaches could
result in liability and damage to our reputation. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors or similar disruptive problems. If our
security measures are circumvented, proprietary and confidential information
could be misappropriated or our operations interrupted. We may be required to
expend significant capital and other resources to protect against the threat of
security breaches.
Any costs or imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
business.
WE HAVE LARGE AMOUNTS OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
TECHNOLOGY WHICH MAY NEVER BE SUCCESSFULLY DEVELOPED.
In August 1997, Nichols Research acquired TXEN and allocated $8.5 million to
in-process technology. The purchased in-process technology may never be
successfully developed. To the extent the in-process technology is not
successfully developed, this failure could have a material adverse effect on our
business, financial condition or results of operations. The acquired in-process
technology consisted of ten software development projects to perform managed
care administrative functions and provide enhanced information reports. The fair
value of the acquired in-process technology was determined based on an analysis
of the markets, projected cash flows and risks associated with achieving such
cash flows. At the date of the acquisition, the technological feasibility of the
acquired technology had not been established and the
13
<PAGE> 17
acquired technology has no alternative future uses. We estimate that the cost to
complete these projects will be $1.8 million, of which $445,000 was spent in
fiscal year 1998 and of which $1.3 million is expected to be spent in fiscal
year 1999.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
There will be 9,625,000 shares of common stock outstanding immediately after the
offering, or 10,000,000 shares if the underwriters' over-allotment option is
exercised in full. Future sales of large amounts of our common stock could cause
our stock price to decline. The 7,000,000 shares of common stock held by Nichols
Research will be "restricted securities" as defined in Rule 144 under the
Securities Act. These shares may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or another
exemption under the Securities Act. In addition, at any time after this
offering, Nichols Research may cause us to register for sale any or all of its
shares of common stock. Also, up to an additional 746,000 shares of common stock
which may be issued upon exercise of options outstanding as of May 31, 1999,
under our stock-based compensation plans will become available for future sale
in the public market.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
You may not be able to resell your shares at or above the initial public
offering price. The market price of the common stock may fluctuate significantly
due to a variety of factors, including:
- announcements of technological innovations or new products or services by us
or our competitors;
- fluctuations in our results of operations;
- changes in the general condition of the economy or the healthcare or
information technology industries;
- changes in earnings estimates by public market analysts; and
- changes in our business strategies.
The stock market in general, and the market for technology-related and
healthcare-related stocks in particular, have experienced extreme volatility
often unrelated to the operating performance of particular companies.
14
<PAGE> 18
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. Forward-looking statements
typically are identified by use of terms such as "may," "will," "expect,"
"anticipate," "plan," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
Nichols TXEN's actual results could differ materially from those contained in
the forward-looking statements due to a number of factors, including
technological changes, increased competition, insufficient capital resources and
adverse economic conditions. You should also consider carefully the statements
under "Risk Factors" and other sections of this prospectus, which address
additional factors that could cause Nichols TXEN's actual results to differ from
those set forth in the forward-looking statements.
USE OF PROCEEDS
Nichols TXEN estimates that the net proceeds from the sale of the shares of
common stock in this offering will be approximately $28.3 million. If the
underwriters fully exercise the over-allotment option, the net proceeds of the
shares sold by Nichols TXEN will be approximately $32.5 million. "Net Proceeds"
is what Nichols TXEN expects to receive after paying the underwriting discount
and other expenses of the offering. For the purpose of estimating net proceeds,
Nichols TXEN is assuming that the public offering price will be $12.00 per
share.
Nichols TXEN will use the net proceeds for general corporate purposes, including
working capital. Some of the net proceeds may be used to fund acquisitions of
complementary products, technologies or businesses. We have discussions on an
ongoing basis regarding possible acquisitions of or investments in businesses or
technologies that are complementary to our business. Although we may use a
portion of the net proceeds for these kinds of possible acquisitions, no
agreements or commitments in this regard currently exist. We may, however,
change the allocation of these proceeds in response to developments or changes
that affect our business or our industry. Our management may spend the proceeds
from this offering in ways that the stockholders may not deem desirable. Pending
use of the net proceeds for the above purposes, we plan to invest such funds in
short-term, investment grade, interest-bearing securities. We cannot predict
that the proceeds will be invested to yield a favorable return.
DIVIDEND POLICY
Currently we intend to retain our earnings to finance future growth, and
therefore, we do not anticipate paying cash dividends in the foreseeable future.
The Board of Directors may review our dividend policy from time to time to
determine the desirability and feasibility of paying dividends after giving
consideration to our capital requirements, operating results and financial
condition and other factors as the Board of Directors deems relevant.
15
<PAGE> 19
CAPITALIZATION
The following table shows:
- The capitalization of Nichols TXEN on May 31, 1999.
- The capitalization of Nichols TXEN on May 31, 1999, assuming the completion
of the offering at an assumed public offering price of $12.00 per share and
the use of the net proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MAY 31, 1999
---------------------
AS
ACTUAL ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ -- $ --
======= =======
Stockholders' equity:
Common stock; $0.01 par value, 30,000,000 shares
authorized, 7,000,000 shares issued and outstanding,
actual; 9,625,000 shares issued and outstanding, as
adjusted(1)............................................. 70 96
Additional paid-in capital................................. 52,838 81,107
Retained earnings (deficit)................................ (4,129) (4,129)
------- -------
Total stockholders' equity............................... 48,779 77,074
------- -------
Total capitalization................................... $48,779 $77,074
======= =======
</TABLE>
- ---------------------------
(1) The adjusted number of shares issued and outstanding at May 31, 1999, does
not include employee and director stock options to purchase 746,000 shares
of common stock at the initial public offering price per share.
16
<PAGE> 20
DILUTION
Nichols TXEN's net tangible book value on May 31, 1999, was approximately $17.3
million, or $2.47 per share. "Net tangible book value" is total assets minus the
sum of liabilities and intangible assets. "Net tangible book value per share" is
net tangible book value divided by the total number of shares outstanding before
the offering.
After giving effect to adjustments relating to the offering, Nichols TXEN's pro
forma net tangible book value on May 31, 1999, would have been $45.6 million or
$4.73 per share. The adjustments made to determine the pro forma net tangible
book value per share are as follows:
- An increase in total assets to reflect the net proceeds of the offering as
described under "Use of Proceeds" (assuming that the public offering price
will be $12.00 per share); and
- The addition of the number of shares offered by this prospectus to the number
of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $2.52 per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Net tangible book value per share as of May 31, 1999 (1).... $2.47
Increase in net tangible book value per share attributable
to the offering........................................... 2.26
-----
Pro forma net tangible book value per share after giving
effect to the offering.................................... 4.73
------
Dilution per share to new investors in the offering(2)...... $ 7.27
======
</TABLE>
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from Nichols TXEN, the
total consideration paid and the average price paid per share. The table assumes
that the public offering price will be $12.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 7,000,000 72.7% $52,908,000(3) 62.7% $ 7.56
New stockholders............... 2,625,000 27.3 31,500,000 37.3 12.00
--------- ----- ----------- -----
Total....................... 9,625,000 100.0% $84,408,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------------------
(1) The adjusted number of shares issued and outstanding at May 31, 1999, does
not include employee and director stock options to purchase 746,000 shares
of common stock at the initial public offering price per share.
(2) Dilution is determined, after giving effect of this offering, by
subtracting net tangible book value per share from the assumed initial
public offering price of $12.00 per share. Dilution to new investors will
be $7.03 per share if the underwriters' over-allotment option is exercised
in full.
(3) Represents the book value of the net assets transferred by Nichols Research
to Nichols TXEN.
17
<PAGE> 21
SELECTED FINANCIAL DATA
This section presents selected historical data of Nichols TXEN. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
The statement of operations data set forth below, for the years ended August 31,
1996, 1997 and 1998, and the balance sheet data at August 31, 1997 and 1998,
have been audited by Ernst & Young LLP, independent auditors. The statement of
operations data for the years ended August 31, 1994 and 1995, the nine-month
periods ended May 31, 1998 and 1999, and the balance sheet data at August 31,
1994, 1995 1996, and at May 31, 1998 and 1999, are derived from the unaudited
financial statements of Nichols TXEN. We believe that the unaudited financial
data fairly reflects the results of operations and the financial condition of
Nichols TXEN for the respective periods.
<TABLE>
<CAPTION>
NICHOLS TXEN CORPORATION
-------------------------------------------------------------------
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS):
Revenues..................... $ 8,357 $ 9,382 $10,370 $12,438 $43,480 $30,454 $38,086
Cost of revenues............. 5,704 6,300 6,438 7,769 23,256 16,229 20,427
------- ------- ------- ------- ------- ------- -------
Gross profit................. 2,653 3,082 3,932 4,669 20,224 14,225 17,659
Selling, general and
administrative expenses... 1,336 1,859 1,932 2,251 7,367 5,102 7,142
Research and development..... 634 762 710 1,155 2,771 1,948 2,289
Depreciation and
amortization.............. 351 349 947 985 4,547 3,249 3,704
Write-off of purchased in-
process research and
development(1)............ -- -- -- 8,500 -- -- --
Intangible asset
impairment................ -- -- -- -- -- -- 4,297
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................ 332 112 343 (8,222) 5,539 3,926 227
Other income (expense)(2).... 9 -- 94 656 (4) (3) (21)
Income tax expense........... 113 41 117 107 2,283 1,623 508
------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $ 228 $ 71 $ 320 $(7,673) $ 3,252 $ 2,300 $ (302)
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share(3).................. $ 0.03 $ 0.01 $ 0.05 $ (1.10) $ 0.46 $ .33 $ (.04)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding(3)..... 7,000 7,000 7,000 7,000 7,000 7,000 7,000
======= ======= ======= ======= ======= ======= =======
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........... $ 872 $ 2,224 $ 900 $ 2,223 $ 5,780 $ 4,464 $ 7,710
Total assets.............. 2,059 8,349 10,497 52,052 57,715 62,143 54,934
Long-term debt............ -- -- -- -- -- -- --
Total stockholder's
equity................. 1,497 9,382 9,702 45,829 49,081 48,129 48,779
</TABLE>
- ---------------------------
(1) The total purchase price of TXEN was allocated to net assets acquired of
which $8.5 million was allocated to in-process research and development and
was expensed in the fourth quarter of fiscal year 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- TXEN Acquisition."
(2) Includes Nichols Research's 19.9% proportional share of income for TXEN in
fiscal years 1996 and 1997, recorded using the equity method of accounting,
and other miscellaneous items.
(3) The earnings (loss) per share data gives effect to the outstanding capital
stock of Nichols TXEN held by Nichols Research on a pro forma basis applied
for Nichols Research's proportionate share for all periods presented.
19
<PAGE> 23
On August 29, 1997, TXEN was merged with Nichols TXEN. Due to the significance
of TXEN, we have included selected financial data related to TXEN which should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The following table summarizes selected
financial data for TXEN which should be read in conjunction with the financial
statements of TXEN appearing elsewhere in this prospectus. The statement of
operations data set forth below, for the years ended June 30, 1995, 1996 and
1997, and the balance sheet data at June 30, 1995, 1996 and 1997, have been
derived from financial statements audited by Ernst & Young LLP, independent
auditors. The statement of operations data for the year ended June 30, 1994, and
the balance sheet data at June 30, 1994, are derived from the unaudited
financial statements of TXEN. We believe that the unaudited financial data
fairly reflects the results of operations and the financial condition of TXEN
for the respective periods.
<TABLE>
<CAPTION>
TXEN, INC.
-------------------------------------
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (HISTORICAL BASIS):
Revenues.......................................... $ 2,653 $ 4,706 $ 6,860 $14,980
Cost of revenues.................................. 1,379 1,734 3,212 4,848
------- ------- ------- -------
Gross profit...................................... 1,274 2,972 3,648 10,132
Selling, general and administrative expenses...... 1,017 1,371 2,467 2,945
Research and development.......................... 126 624 926 1,069
Depreciation and amortization..................... 190 346 532 709
------- ------- ------- -------
Income (loss) from operations..................... (59) 631 (277) 5,409
Other income (expense)............................ (97) (60) 31 (9)
Income tax expense (benefit)...................... (51) (112) (93) 1,979
------- ------- ------- -------
Net income (loss)................................. $ (105) $ 683 $ (153) $ 3,421
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ (293) $ 197 $ 176 $ 1,846
Total assets...................................... 1,873 4,147 4,431 9,833
Long-term debt.................................... 1,072 204 1,150 916
Total stockholders' equity........................ 497 1,103 939 4,390
</TABLE>
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this discussion together with the financial statements and other
financial information included in this prospectus.
OVERVIEW
Nichols TXEN is a software application services provider and an administrative
services provider to managed care organizations and physician groups in the
healthcare industry. By offering customers a broad range of medical billing and
claims processing solutions, our outsourcing services help clients to enhance
quality and lower costs by reducing the time and personnel needed to process
healthcare transactions. Our services are delivered to customers through our
secure private network. Over the last two years, we have converted our network
architecture to Internet-based technology. We are organized into two business
divisions. Both divisions earn revenue under one to five-year contracts which
are primarily based on the number of transactions processed or the number of
enrolled health plan members per month. As a result, 76.6% of our total revenues
in fiscal year 1998 were recurring.
Our Managed Care Services division provides technology and services to managed
care customers, such as:
<TABLE>
<S> <C>
- health maintenance organizations, or HMOs; - integrated delivery systems, or IDSs;
- physician-hospital organizations, or PHOs; - Medicare and Medicaid HMOs;
- independent practice associations, or IPAs; - insurance carriers; and
- provider sponsored organizations, or PSOs; - third-party administrators, or TPAs.
</TABLE>
Our Physician Practice Services division provides technology and services to
physician practice customers, such as:
<TABLE>
<S> <C>
- hospital-based physicians; - hospital emergency departments; and
- physician groups; - physician networks.
</TABLE>
As of May 31, 1999, Nichols TXEN had 96 managed care services customers
representing over 3.0 million lives and 279 physician practice services
customers representing approximately 3,000 physicians.
Background
Nichols Research formed CSC Acquisition, Inc. as a wholly owned subsidiary on
June 6, 1995. On June 30, 1995, CSC Acquisition acquired Computer Services
Corporation. Since its incorporation in 1967, Computer Services primarily
performed information technology services for, and sold turnkey computer systems
to, physician practices. Nichols Research formed Nichols SELECT Corporation as a
wholly owned subsidiary on September 17, 1996. On September 23, 1996, CSC
Acquisition was merged into Nichols SELECT. On December 16, 1994, Nichols
Research acquired 19.9% of the capital stock of TXEN, Inc. with an option to
acquire the remaining 80.1% of TXEN. Since its incorporation in 1989, TXEN
provided information technology outsourcing and administrative services
outsourcing for the managed healthcare industry. On August 29, 1997, Nichols
Research acquired the remaining 80.1% of TXEN through a merger of TXEN into
Nichols SELECT, which after the merger continued to be wholly owned by Nichols
Research. After the TXEN merger, Nichols SELECT changed its name to Nichols TXEN
Corporation.
TXEN Acquisition
In fiscal year 1995, Nichols Research purchased 19.9% of the capital stock of
TXEN, for approximately $1.5 million. In August 1997, Nichols Research exercised
its option to acquire the remaining 80.1% of the capital stock of TXEN for
aggregate consideration of approximately $43.8 million. The total purchase price
for the TXEN acquisition was allocated to the TXEN assets and liabilities. The
excess of the purchase price over the fair market value of the tangible assets
acquired, $42.8 million, was allocated to the following intangibles: $8.5
million to in-process research and development, $17.4 million to goodwill,
21
<PAGE> 25
$14.1 million to other intangibles and $2.8 million to capitalized software
development. In-process research and development of $8.5 million was expensed in
the fourth quarter of fiscal year 1997. The fair value of the acquired
in-process technology was determined based on an analysis of the markets, cash
flows and risk of achieving such cash flows. Goodwill and other intangibles of
$30.7 million are being amortized using the straight-line method over an
estimated useful life of 20 years.
Of the total purchase price for the acquisition of TXEN, $8.5 million was
allocated to ten software programs and systems constituting in-process
technology. At the date of acquisition, the technological feasibility of the
acquired technology had not been established and the acquired technology has no
alternative future uses. Assurances cannot be given that the purchased
in-process technology will be successfully developed. The acquired in-process
technology consisted of ten software and systems development projects to reduce
the time and personnel needed to perform managed care administrative functions
and provide enhanced information reports. At the date of acquisition, the
estimated cost to complete the projects was $1.8 million, of which $0.4 million
was spent in fiscal year 1998 and of which $1.3 million is expected to be spent
in fiscal year 1999. To the extent the in-process technology is not successfully
developed, this could have a material adverse impact on Nichols TXEN's operating
results and financial condition.
Nichols Research Corporate Services Agreement
Nichols TXEN is currently a wholly owned subsidiary of Nichols Research. After
the offering, Nichols Research will retain a controlling equity interest in
Nichols TXEN. Nichols Research will furnish administrative services to us
pursuant to a Corporate Services Agreement. Under the services agreement,
Nichols Research will provide or assist with various administrative services,
including public reporting compliance, corporate record keeping, risk
management, employee benefit administration, investor and media relations
administration, preparation of tax returns, centralized cash management and
financial and other services for an annual fee. In fiscal year 1999, the fee
will be 2.4% of operating expenses less costs of goods sold, which are defined
as direct materials and purchased labor. We believe that the charges under the
services agreement are reasonable. For additional items, such as software
development services or administrative services that create unusual demands for
resources, Nichols Research will charge Nichols TXEN based upon costs actually
incurred in performing the services, plus a reasonable fee as agreed to by
Nichols Research and Nichols TXEN. We are not obligated to use Nichols Research
for these additional services. The services agreement has an initial term of one
year and automatically renews for successive one-year terms, unless canceled by
either Nichols Research or Nichols TXEN upon 90 days prior written notice.
Corporate administrative expenses paid by Nichols TXEN to Nichols Research were
$192,000 in fiscal year 1996, $250,000 in fiscal year 1997 and $696,000 in
fiscal year 1998. The increase in such expenses in fiscal years 1996 and 1997
was a result of growth by Nichols TXEN. The increase in such expenses in fiscal
year 1998 was the result of the TXEN acquisition and continued growth of the
combined companies. We expect that administrative expenses paid to Nichols
Research will continue to increase as we continue to experience growth in
revenues.
Physician Practice Reorganization
Historically, we have offered software application outsourcing services and
turnkey systems to potential physician practice customers. Nichols TXEN made a
strategic decision to discontinue turnkey computer systems sales to physician
practice customers. On November 3, 1997, when Nichols TXEN announced it would
discontinue sales of turnkey systems to physician practice customers, we had 84
physician practice customers with turnkey systems. Nichols TXEN offered
technical support to these customers through December 31, 1998. Revenues related
to the support of these physician practice turnkey customers for fiscal year
1998 were approximately $0.4 million, or less than 1.0% of Nichols TXEN's total
revenues for fiscal year 1998.
The conversion of our physician practice customers from turnkey systems to
outsourcing services reduced our revenues and increased costs during the
transition period which began in November 1997 and ended in December 1998. Since
November 1997, Nichols TXEN has not received any revenues from turnkey
22
<PAGE> 26
system sales to physician practice customers. Prior to our announcement, turnkey
system sales for physician practice customers were approximately $0.5 million in
each of fiscal years 1997 and 1996. Revenues associated with turnkey sales
typically have higher margins in the year installed than outsourcing services
revenues; however, turnkey revenues are non-recurring and less predictable. We
believe that by offering only outsourcing services to physician practice
customers, we will achieve a predictable, recurring revenue stream which over
time will exceed the operating margins attained through turnkey system sales. In
order to offer only outsourcing services to physician practice customers, we
have increased support staff and infrastructure.
The Physician Practice Services division also experienced a reduction in
technology outsourcing revenues from physician practice customers. This
reduction was caused primarily because two significant customers elected to
perform their administrative services with turnkey systems utilizing their own
administrative staffs.
We have concentrated our marketing resources toward physician practice customers
that will utilize our complete administrative outsourcing services. We believe
administrative outsourcing provides a greater amount of gross profit
contribution than technology outsourcing. However, the margin percentage related
to administrative outsourcing is less than technology outsourcing due to the
significantly greater amount of cost of revenues required. We also believe that
customers utilizing our administrative outsourcing services will be less likely
to convert to a turnkey system because typically the customer does not have a
large administrative staff.
As a result of the discontinuance of turnkey sales, the reduction in technology
outsourcing, and the emphasis on administrative outsourcing, we took a charge of
$4.3 million in the quarter ended February 28, 1999, which represents all of the
goodwill related to the 1995 purchase of the physician practice business of
Computer Services Corporation. The impairment charge reflects our assessment
based on a discounted cash flow analysis that the goodwill was unrecoverable.
NINE MONTHS ENDED MAY 31, 1999, COMPARED TO NINE MONTHS ENDED MAY 31, 1998
Revenues. Revenues increased 25.1% to $38.1 million in the first nine months of
fiscal year 1999 from $30.5 million in the corresponding period of fiscal year
1998. The increase in revenues resulted from the addition of new customers
during the first nine months of fiscal year 1999 representing $3.4 million in
revenues and 44.9% of the revenues increase, as well as a net increase in the
utilization of Nichols TXEN's services by existing customers representing $4.2
million in revenues or 55.1% of the revenues increase.
Cost of Revenues. Cost of revenues increased 26.0% to $20.4 million in the
first nine months of fiscal year 1999 from $16.2 million in the corresponding
period of fiscal year 1998. As a percent of revenues, cost of revenues increased
to 53.7% in the first nine months of fiscal year 1999 from 53.3% in the
corresponding period of fiscal year 1998. The dollar and percentage increase was
due primarily to the employment of additional support staff required by the
increase in our new customer business as well as an increase in our existing
customer business. The increase was also attributable to the emphasis on
administrative outsourcing in the Physician Practice Services division resulting
in greater cost of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40.0% to $7.1 million in the first nine months
of fiscal year 1999 from $5.1 million in the corresponding period of fiscal year
1998. As a percent of revenues, selling, general and administrative expenses
increased to 18.8% in the first nine months of fiscal year 1999 from 16.8% in
the corresponding period of fiscal year 1998. The dollar and percentage increase
was due primarily to the employment of additional staff resulting from the
increase in our new customer business as well as an increase in our existing
customer business.
Research and Development. Research and development expenses increased 17.5% to
$2.3 million in the first nine months of fiscal year 1999 from $1.9 million in
the corresponding period of fiscal year 1998. As a percent of revenues, research
and development expenses decreased to 6.0% in the first nine months of fiscal
year 1999 from 6.4% in the corresponding period of fiscal year 1998. The dollar
increase was due
23
<PAGE> 27
primarily to the hiring of staff to develop additional software. The percentage
decrease was due primarily to our ability to leverage our research and
development infrastructure.
Depreciation and Amortization. Depreciation and amortization expenses increased
14.0% to $3.7 million in the first nine months of fiscal year 1999 from $3.2
million in the corresponding period of fiscal year 1998. As a percent of
revenues, depreciation and amortization expenses decreased to 9.7% in the first
nine months of fiscal year 1999 from 10.7% in the corresponding period of fiscal
year 1998. The dollar increase was due primarily to additional capital
expenditures required by the increase in our business. The percentage decrease
was primarily due to the increase in revenues.
Intangible Asset Impairment. In the second quarter of fiscal year 1999, Nichols
TXEN recorded an intangible asset impairment charge of $4.3 million to adjust
the intangible assets of the Physician Practice Services division to their fair
value. Management regularly monitors results of operations and other
developments within the industry to adjust its cash flow forecast, as necessary,
to determine if an adjustment is necessary to the carrying value of our
intangible assets.
Income Taxes. A tax expense of $0.5 million was recorded in the first nine
months of fiscal year 1999 compared to $1.6 million tax provision in the
corresponding period of fiscal year 1998. The tax expense was due primarily to
the $4.3 million intangible asset impairment charge taken during the second
quarter of fiscal year 1999.
FISCAL YEAR ENDED AUGUST 31, 1998, COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
The principal reason for the change in Nichols TXEN's historical operating data
from fiscal year 1998 compared to fiscal year 1997 was the effect on results of
operations of the TXEN acquisition in August 1997. The fiscal year ended 1998
contains a full year of operating results with TXEN, compared to an equity
adjustment which reflects 19.9% of the results of operations of TXEN in fiscal
year 1997.
Revenues. Revenues increased 249.6% to $43.5 million in fiscal year 1998 from
$12.4 million in fiscal year 1997. The primary reason for this increase in our
revenues was the inclusion of TXEN's operations for 12 months in fiscal year
1998 which included revenues of $28.9 million and represented 93.0% of the
revenues increase. The increase in revenues was also a result of the addition of
new physician practice customers during fiscal year 1998 as well as a net
increase in utilization of our services by existing physician practice
customers.
Cost of Revenues. Cost of revenues increased 199.3% to $23.3 million in fiscal
year 1998 compared to $7.8 million in fiscal year 1997. As a percent of
revenues, cost of revenues decreased to 53.5% in fiscal year 1998 from 62.5% in
fiscal year 1997. The dollar increase was primarily due to the inclusion of
TXEN's operations for 12 months in fiscal year 1998 which included cost of
revenues of $12.7 million and represented 81.9% of the cost of revenues
increase. The dollar increase was also a result of our decision to transition
the physician practice business solely to outsourcing which required an initial
investment in infrastructure and support staff in order to acquire and maintain
those customers. The decrease as a percentage of revenues was attributable to
the inclusion of TXEN's operations in fiscal year 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 227.3% to $7.4 million in fiscal year 1998
from $2.3 million in fiscal year 1997. As a percent of revenues, selling,
general and administrative expenses decreased to 16.9% in fiscal year 1998 from
18.1% in fiscal year 1997. The dollar increase was due to the inclusion of
TXEN's operations for 12 months in fiscal year 1998 which included selling,
general and administrative expenses of $4.6 million and represented 90.2% of the
selling, general and administrative expenses increase. The dollar increase was
also a result of an increase in the staff necessary to support our increase in
revenues for Physician Practice Services. The decrease as a percentage of
revenues was attributable to our ability to generate synergies resulting from
the TXEN acquisition.
Research and Development. Research and development expenses increased 139.9% to
$2.8 million in fiscal year 1998 from $1.2 million in fiscal year 1997. As a
percent of revenues, research and development expenses decreased to 6.4% in
fiscal year 1998 from 9.3% in fiscal year 1997. The dollar increase was due
24
<PAGE> 28
primarily to the inclusion of TXEN's operations for 12 months in fiscal year
1998 which included research and development expenses of $2.0 million. Research
and development expenses incurred by the Physician Practice Services division
decreased by $0.4 million due primarily to discontinued turnkey development. The
decrease as a percentage of revenues was attributable to our ability to leverage
our research and development infrastructure resulting from the TXEN acquisition.
Depreciation and Amortization. Depreciation and amortization expenses increased
361.6% to $4.5 million in fiscal year 1998 from $1.0 million in fiscal year
1997. As a percent of revenues, depreciation and amortization expenses increased
to 10.5% in fiscal year 1998 from 7.9% in fiscal year 1997. The dollar and
percentage increase was due to the inclusion of TXEN's operations for 12 months
in fiscal year 1998 which included depreciation and amortization expenses of
$3.3 million and represented 94.3% of the depreciation and amortization expenses
increase.
Write-off of Purchased In-Process Research and Development. The acquisition of
TXEN was accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the individual TXEN assets acquired and
liabilities assumed based upon their respective fair values at the date of
acquisition. The transaction resulted in the allocation of $42.8 million of
acquisition costs to intangible assets, of which $8.5 million was allocated to
in-process research and development and charged to expense in the fourth quarter
of fiscal year 1997.
Other Income (Expense). Other expense in fiscal year 1998 was $(0.01) million
compared to other income of $0.7 million in 1997. The change was due to the
inclusion of TXEN's operations for 12 months in fiscal year 1998 in the
statements of operations compared to the 19.9% investment in TXEN reflected in
other income in fiscal year 1997.
Income Taxes. A tax provision of $2.3 million was recorded in fiscal year 1998
compared to $0.1 million in fiscal year 1997. The effective tax rate was 41.2%
in fiscal year 1998. A tax provision was recorded for the loss before income
taxes in fiscal year 1997 as a result of the difference between financial and
taxable income. This difference was primarily attributable to the $8.5 million
write-off of purchased in-process research and development in fiscal year 1997
which was not deductible for tax purposes.
FISCAL YEAR ENDED AUGUST 31, 1997, COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
The discussion and analysis below includes information on a historical basis for
Nichols TXEN prior to the acquisition of TXEN. The acquisition of TXEN
materially affected our results of operations after the acquisition and the
information presented below should be considered in light of the acquisition.
Revenues. Revenues increased 19.9% to $12.4 million in fiscal year 1997 from
$10.4 million in fiscal year 1996. The primary reason for this increase in our
revenues was attributable to outsourcing services generated from new customers
during fiscal year 1997.
Cost of Revenues. Cost of revenues increased 20.7% to $7.8 million in fiscal
year 1997 from $6.4 million in fiscal year 1996. As a percent of revenues, cost
of revenues increased to 62.5% in fiscal year 1997 from 62.1% in fiscal year
1996. The dollar and percentage increase was due primarily to the employment of
additional support staff required by the increase in our new customer business
as well as an increase in our existing customer business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.5% to $2.3 million in fiscal year 1997 from
$1.9 million in fiscal year 1996. As a percent of revenues, selling, general and
administrative expenses decreased to 18.1% in fiscal year 1997 from 18.6% in
fiscal year 1996. The dollar increase was due primarily to the employment of
additional staff resulting from the increase in our new customer business as
well as an increase in our existing customer business. The decrease as a
percentage of revenues was attributable to our ability to leverage our selling,
general and administrative infrastructure.
Research and Development. Research and development expenses increased 62.7% to
$1.2 million in fiscal year 1997 from $0.7 million in fiscal year 1996. As a
percent of revenues, research and development
25
<PAGE> 29
expenses increased to 9.3% in fiscal year 1997 from 6.8% in fiscal year 1996.
The dollar and percentage increase was due primarily to the hiring of staff to
develop additional software.
Depreciation and Amortization. Depreciation and amortization expenses increased
4.0% to $1.0 million in fiscal year 1997 from $0.9 million in fiscal year 1996.
As a percent of revenues, combined depreciation and amortization expense
decreased to 7.9% in fiscal year 1997 from 9.1% in fiscal year 1996. The dollar
increase was due primarily to completion of development projects, whose costs
were amortized beginning in fiscal year 1997 over a useful life of five years.
The decrease as a percentage of revenues was attributable to a reduction in
fixed capital expenditures.
Write-off of Purchased In-Process Research and Development. The acquisition of
TXEN was accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the individual TXEN assets acquired and
liabilities assumed based upon their respective fair values at the date of
acquisition. The transaction resulted in the allocation of $42.8 million of
acquisition costs to intangible assets, of which $8.5 million was allocated to
in-process research and development and charged to expense in the fourth quarter
of fiscal year 1997.
Other Income. Other income increased to $0.7 million in fiscal year 1997 from
$0.1 million in fiscal year 1996. As a percent of revenues, other income
increased to 5.3% in fiscal year 1997 from 0.9% in fiscal year 1996. The dollar
and percentage increase was due primarily to the 19.9% investment in TXEN.
Income Taxes. An income tax provision of $0.1 million was recorded in fiscal
year 1997, compared to a $0.1 million tax provision in fiscal year 1996. The tax
provision in fiscal year 1997 was affected by the non-deductible $8.5 million
write-off of purchased in-process research and development in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, we have financed our operations primarily through a combination of
cash from operations and capital contributions on an as-needed basis from
Nichols Research. Working capital was $7.7 million at May 31, 1999, compared to
$4.5 million at May 31, 1998. Included in working capital are cash and cash
equivalents of $0.7 million at May 31, 1999, compared to $0.6 million at May 31,
1998. During the nine months ended May 31, 1999, operating activities provided
$3.3 million in cash. Investing activities used $4.4 million for the nine months
ended May 31, 1999, of which $4.0 million was used to acquire property, plant
and equipment. Accounts receivable from customers were outstanding on average
approximately 81 days during the nine months ended May 31, 1999, compared to
approximately 139 days during the nine months ended May 31, 1998. The decrease
in payment time for the nine months ended May 31, 1999, compared to the nine
months ended May 31, 1998, was due primarily to the enhancement of collection
procedures for the Managed Care Services division.
Working capital was $5.8 million at August 31, 1998, compared to $2.2 million at
August 31, 1997. Included in working capital are cash and cash equivalents of
$1.8 million at August 31, 1998, compared to $0.2 million at August 31, 1997.
During fiscal year 1998 operating activities provided $6.3 million of cash.
Investing activities used $4.8 million for the fiscal year ended August 31,
1998, of which $4.2 million was used to acquire property, plant and equipment.
Accounts receivable from customers were outstanding on average approximately 82
days during fiscal year 1998 compared to approximately 52 days during fiscal
year 1997, excluding the TXEN accounts receivable. The increase in payment time
in fiscal year 1998 compared to fiscal year 1997 was due primarily to the
addition of the managed care business where customers typically take longer to
pay their invoices. Historically, the Physician Practice Services division has
experienced collections within 60 days of billing. We believe that by continuing
to apply the collection procedures used in the Physician Practice Services
division to the Managed Care Services division, delays in payments on accounts
receivable will be further reduced because of active management of outstanding
accounts.
We believe that the net proceeds from this offering, together with other
available funds, will be sufficient to meet our capital requirements for the
next 24 months. We may also utilize cash to acquire or invest in complementary
products, technologies or businesses. Nichols TXEN continually evaluates
acquisition
26
<PAGE> 30
opportunities. Although we generally expect to have positive cash flow from our
existing operations, we may require additional amounts of cash for acquisitions
of complementary businesses. Nichols TXEN expects to finance any acquisitions
through a combination of the net proceeds from this offering, internally-
generated funds, additional debt or equity financing from capital markets and
short-term or long-term borrowings from Nichols Research. We have no agreement
with Nichols Research to ensure that funds will be available on acceptable terms
or available at all. Nichols TXEN does not have an independent credit facility.
REVENUE COMPOSITION -- COMBINED BASIS
We are organized into two divisions. Our Managed Care Services division
represents the business conducted by TXEN prior to the acquisition of TXEN by
Nichols TXEN in August 1997. The Physician Practice Services division represents
the business conducted by Computer Services Corporation prior to its acquisition
by Nichols Research in 1995. The information set forth in the tables below is
presented by combining the historical data of Nichols TXEN with the historical
data of TXEN for the periods prior to the TXEN acquisition conformed to the
12-month period ended August 31. Significant intercompany transactions have been
eliminated. Due to the significance of TXEN, we believe that the presentation of
revenues on a combined basis presents a more meaningful and complete discussion
of our business because it demonstrates revenue trends of the historic
businesses of Nichols TXEN. The combined data presented below should not be
viewed as a representation of what the actual combined results would have been
for the periods indicated before the acquisition. Many variables exist,
including market presence and management composition, that could have changed
the combined results presented if Nichols TXEN and TXEN had operated on a
combined basis for the periods indicated before the acquisition.
Combined revenue growth has been primarily driven by market acceptance of
Nichols TXEN's outsourcing solutions for information technology and
administrative services by larger managed care and physician practice entities
resulting in an increase in average contract size. The significant growth in
revenues in the Managed Care Services division versus the growth in revenues in
the Physician Practice Services division was the result of a more mature sales
and marketing infrastructure. In conjunction with the TXEN acquisition, the
current management team has formed, and continues to develop, a stronger sales
and marketing infrastructure for the Physician Practice Services division. The
following table summarizes our revenues by division for the periods indicated on
a combined basis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Managed Care.......... $ 3,194 $ 4,758 $ 7,904 $15,483 $28,861 $19,928 $25,276
Physician Practice.... 8,357 9,382 10,370 12,438 14,619 10,526 12,810
------- ------- ------- ------- ------- ------- -------
Total............... $11,551 $14,140 $18,274 $27,921 $43,480 $30,454 $38,086
======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF REVENUES:
Managed Care.......... 27.7% 33.6% 43.3% 55.5% 66.4% 65.4% 66.4%
Physician Practice.... 72.3 66.4 56.7 44.5 33.6 34.6 33.6
------- ------- ------- ------- ------- ------- -------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
</TABLE>
One of our principal objectives is to increase recurring revenue. We define
recurring revenue to be monthly fees paid by our customers which are continuing
in nature because they are based on the number of enrolled health plan members
per month, the number of transactions processed, a fixed fee or a percentage of
customer collections. Revenues from transaction-based or membership-based fees
are recognized as the services are provided. Recurring revenues as a percentage
of total revenues decreased in fiscal year 1997 compared to fiscal year 1996 as
a result of an increase in software sales in fiscal year 1997. We consider
27
<PAGE> 31
our non-recurring revenues to be revenues based on sales of computer hardware
and software and professional services based on time and materials, such as
programming and implementation fees. Revenues from professional services are
recognized when the services are performed. The table below summarizes
information related to our recurring and non-recurring revenues for the periods
indicated on a combined basis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Recurring............ $ 8,675 $10,801 $14,261 $19,985 $33,320 $23,374 $29,894
Non-recurring........ 2,876 3,339 4,013 7,936 10,160 7,080 8,192
------- ------- ------- ------- ------- ------- -------
Total.............. $11,551 $14,140 $18,274 $27,921 $43,480 $30,454 $38,086
======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF
REVENUES:
Recurring............ 75.1% 76.4% 78.0% 71.6% 76.6% 76.8% 78.5%
Non-recurring........ 24.9 23.6 22.0 28.4 23.4 23.2 21.5
------- ------- ------- ------- ------- ------- -------
Total.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
</TABLE>
YEAR 2000
Overview
Historically, some computerized systems have had two digits rather than four
digits to define the applicable year, which could result in recognizing a date
using "00" as the year 1900 rather than the year 2000. This could cause
significant software failures or miscalculations and is generally referred to as
the "Year 2000" problem.
We recognize that the impact of the Year 2000 problem extends beyond our
computer hardware and software and may affect utility and telecommunication
services, as well as the systems of customers and suppliers. The Year 2000
problem is being addressed within Nichols TXEN by the individual business
divisions and progress is reported periodically to management. We have committed
resources to conduct extensive risk assessments and to take corrective action,
where appropriate.
Managed Care. The core managed care applications, consisting of TXEN-MHS and
FirstSTEPP, were designed with a century date field. As a result, these
applications have no pervasive architectural problems with dates spanning the
Year 2000. To ensure no minor programming related issues exist, we have
dedicated an IBM AS/400 server for testing and have set its internal clock for
the middle of the Year 2000. As a result of Year 2000 testing, we identified
minor server and processing issues related to Year 2000 problems that required
approximately 1,500 hours to correct and 300 hours to test. Year 2000 upgrades
and testing of the managed care applications were completed in December 1998. We
have made our test AS/400 available to customers to perform their own Year 2000
simulations.
Physician Practice. Nichols TXEN has identified all of the active applications
specific to the Physician Practice Services division including MDr98, a
transaction-based medical practice management application. These applications
are processed by an IBM mainframe computer. We designed a comprehensive plan to
analyze each of these active applications, determine any Year 2000 problems,
implement appropriate modifications and validate the final changes. Year 2000
upgrades, modification and testing of the Physician Practice applications were
completed in April 1999. The compliance program required approximately 1,320
hours of programming and 1,160 hours of testing. We believe that our decision
support application, Decision Manager 3.0, is Year 2000 compliant.
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<PAGE> 32
Internal Information Systems
Nichols TXEN's internal information systems utilize hardware and software from
several commercial suppliers. We have investigated our internal information
systems for Year 2000 compliance and have not identified any hardware or
software applications that require modification. Our accounting software is
installed in an IBM AS/400 and was designed to be Year 2000 compliant.
Third Parties
We have had communications with our significant suppliers and customers to
evaluate their Year 2000 compliance plans and states of readiness and to
determine the extent to which our systems may be affected by the failure of
others to remedy their own Year 2000 issues. However, we have not independently
confirmed all information received from other parties with respect to Year 2000
issues. As such, there can be no assurance that such other parties will complete
their Year 2000 conversion in a timely fashion or will not suffer a Year 2000
business disruption.
Contingency Plans
Because our Year 2000 conversions are expected to be completed prior to any
potential disruption to our business, we have not yet completed the development
of a comprehensive Year 2000 specific contingency plan. However, we have
minimized our exposure to Year 2000 failure of significant third-party suppliers
by purchasing electronic data interchange software and database resources from
multiple suppliers of these products and services. In addition, we have the
ability to manually replicate many of the electronic services provided by
significant suppliers. If we determine that our business is at material risk of
disruption due to the Year 2000 problem, or discover that our Year 2000
conversions are not adequate, we will work to enhance our contingency plan. If
our Year 2000 conversions fail to perform as anticipated, then we would hire
additional staff to manually process our customers' data. In addition,
disruptions in electronic communications would cause us to rely on traditional
communication methods such as the United States Postal Service and private
delivery companies. While inconvenient, we believe that we could meet our
business obligations under the above-described worst case scenario. The costs of
slower response and processing times, combined with additional staff salaries
may, however, be substantial and may materially affect our financial condition.
Cost for Year 2000 Compliance
We believe that the total cost of Year 2000 compliance activity will not be
material to our operations, liquidity and capital resources. The total cost for
Year 2000 compliance was $256,800, which represents 4,280 hours of analysis,
modification and testing. We do not anticipate any additional costs to maintain
our level of Year 2000 readiness.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income, which
requires changes in comprehensive income to be shown in a financial statement
that is displayed with the same prominence as other financial statements. This
statement is effective for fiscal year 1999. Management does not believe that
Nichols TXEN has material other comprehensive income which would require such
separate disclosure.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. Statement No. 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. Statement No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker
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<PAGE> 33
in deciding how to allocate resources and in assessing performance. Statement
No. 131 was adopted in 1998, but had no effect on Nichols TXEN's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because of Nichols TXEN's
minimal use of derivatives, management does not anticipate that the adoption of
the new statement will have a significant effect on earnings or the financial
position of Nichols TXEN.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position, or SOP, 98-1, Accounting for the Costs to Develop or
Obtain Software for Internal Use. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Nichols TXEN believes that it is
substantially in compliance with this pronouncement and that the implementation
of this pronouncement will not have a material adverse effect on our financial
statements.
FORWARD-LOOKING STATEMENTS
Statements made in Management's Discussion and Analysis of Financial Condition
and Results of Operations which look forward in time involve risks and
uncertainties. Such risks and uncertainties include the following:
- Nichols TXEN's assessment of the state of its Year 2000 readiness;
- anticipated expenditures and potential risks;
- the adequacy of Nichols TXEN's current working capital and other available
sources of funds;
- the ability of Nichols TXEN to successfully implement its operating strategy;
- changes in economic cycles;
- competition from other companies;
- changes in laws and governmental regulations applicable to Nichols TXEN; and
- other risk factors detailed in this prospectus.
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<PAGE> 34
BUSINESS
NICHOLS TXEN
We are a software application services provider and an administrative services
provider to managed care organizations and physician practice groups within the
healthcare industry. Customers access these outsourcing services through our
secure networks connected to our network data center. A majority of our
transactions are currently conducted over our intranet using Internet
communication protocols and we plan to migrate all of our customers to
Internet-based technologies. Our outsourcing services improve quality and reduce
costs by minimizing the time and personnel needed to process healthcare
transactions by offering customers a broad range of medical billing, claims
processing and connectivity solutions. As a result of our fee structure for
these outsourcing solutions, approximately 77% of our revenues for fiscal year
1998 were recurring.
We offer a broad range of products and services that allow customers the
flexibility to perform administrative functions with their own staffs utilizing
our software application services and technology or to outsource to us some or
all of their administrative and technology processing functions. Each customer
contracts with us for the level of outsourcing service needed. Our outsourcing
solutions provide customers with significant benefits, including:
- timely access to sophisticated enterprise-level application software;
- more efficient administrative functions;
- variable rate operating cost structure;
- faster implementation of new business and technology;
- enhanced connectivity via Internet-based technology or direct connections for
transmittal and retrieval of information between healthcare industry
participants;
- reduced capital expenditures for administrative and operational healthcare
technologies;
- less risk of customers' technology becoming obsolete;
- access to knowledgeable and experienced personnel; and
- easy-to-use decision support software designed to enhance operational
analysis.
As a result, our services enable customers to concentrate on providing quality
healthcare by focusing on core competencies. We believe that our ability to
offer both software application services and administrative services through
Internet-based technology differentiates us from competitors that offer only
turnkey software solutions, only administrative services or only healthcare
connectivity solutions.
Nichols TXEN is organized into two divisions. Our Managed Care Services division
provides technology and services to:
<TABLE>
<S> <C> <C>
- HMOs; - IDSs; - Medicaid HMOs;
- PHOs; - PSOs; - insurance carriers; and
- IPAs; - Medicare HMOs; - TPAs.
</TABLE>
Our Physician Practice Services division provides technology and services to:
<TABLE>
<S> <C>
- hospital-based physicians; - physician groups; and
- hospital emergency departments; - physician networks.
</TABLE>
As of May 31, 1999, we had 96 managed care services customers representing over
3.0 million lives and 279 physician practice services customers representing
over 3,000 physicians.
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<PAGE> 35
INDUSTRY BACKGROUND
Healthcare costs in the United States have risen dramatically over the past two
decades and, according to the Health Care Financing Administration, or HCFA,
represented approximately $1.1 trillion in 1997, or approximately 14% of the
gross domestic product, and are projected to increase to $2.1 trillion in 2007.
Pressures from both the private and public sectors to reduce costs have caused
significant changes in the healthcare industry. Although reimbursement for
healthcare has historically been fee-for-service reimbursement, federal and
state governments, corporations and other payors are increasingly using
alternative reimbursement models. A fixed-fee payment system, such as capitation
in which a hospital, clinic or doctor is paid a fixed amount per individual
without regard to the actual number or nature of services provided, shifts the
financial risk of delivering healthcare from payors to providers of healthcare.
Risk shifting and other cost reduction factors have resulted in complex
arrangements among employers, providers, and public and private payors. For
example, a point-of-service plan is one of the most complex benefit and
contractual arrangements in health insurance. Point-of-service plans, which have
experienced rapid growth, provide different levels of benefits based on how a
plan participant selects a provider. Physician groups and managed care
organizations often lack the technical and operational resources to function
within this more complex and sophisticated healthcare environment.
According to a 1998 survey conducted by InterStudy, membership in commercial
HMOs is expected to rise from approximately 66 million members in 1997 to
approximately 105 million members in 2001. InterStudy also reported that
membership in point-of-service plans increased 36.9%, from 8.5 million lives in
1997, to 11.7 million lives in 1998. HCFA estimates that enrollment in Medicare
and Medicaid managed care arrangements will double by 2003. This increase in
membership in managed care, especially Medicaid and Medicare, is creating many
new start-up organizations and fueling rapid growth in existing organizations.
For example, according to the January 1999 Health Trends Report, from 1997 to
1998, membership in Medicaid HMOs grew 39.5%. Many of these managed care
organizations lack capital to acquire the needed technology or lack the
expertise to perform increasingly complex administrative functions. This shift
to managed care has also increased the level of review and audit by government
and other payors. Regulatory changes and increased scrutiny result in
information and administrative requirements outside the capabilities of many
healthcare organizations.
The complexity and change in healthcare has created an increased dependence and
need for information. Physician groups and managed care organizations need
access to a greater spectrum of information related to the cost and quality of
healthcare. The financing and delivery of healthcare requires that consistent,
accurate information be shared confidentially across a large and fragmented
industry. Inefficiencies within the healthcare system consume enormous amounts
of time, resources and money. Nichols TXEN estimates that 30% to 40% of every
healthcare dollar spent covers administrative costs. Much of this inefficiency
and waste is a direct result of poor information exchange among healthcare
participants. For example, a 1997 Towers Perrin Integrated Healthcare Services
Group study indicates approximately 30% to 40% of claim forms are either
incomplete or inaccurate. This study also estimates that by automating the
movement of administrative information, healthcare administrative expenses could
be reduced by 20%.
Private networks and public networks, such as the Internet, enable rapid
communication of data among participants in the healthcare industry. The
Internet's open architecture, universal accessibility and growing acceptance
make it an increasingly important environment for business-to-business and
business-to-consumer interaction. For many industries, the Internet is
connecting previously disconnected business processes and allowing companies to
automate workflows, lower distribution costs and extend their market reach. We
believe the healthcare industry, because of its size, fragmentation and
dependence on information exchange, is particularly well suited to benefit from
greater use of the Internet. In addition, we believe that HCFA's recent approval
of the secure transmission of medical data over the Internet will increase the
utilization of electronic healthcare transactions.
The increasing costs related to administrative complexities, the growing demand
for connectivity and the continued growth in managed care are driving healthcare
industry participants to outsource their information technology and
administrative services. A 1998 HIMSS survey indicates that healthcare
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<PAGE> 36
organizations are poorly equipped to support managed care. Less than 10% of the
companies surveyed indicated they had the software capability to perform
utilization management, risk management, benefits management, claims management
and health outcomes reporting. The HIMSS survey also indicates an increasing
demand for healthcare information technology outsourcing solutions, with
approximately 59% of healthcare organizations surveyed outsourcing some portion
of their information technology services. According to the Gartner Group, the
market for healthcare information technology and administrative services
outsourcing is expected to be $3.8 billion in 2001.
STRATEGY
Nichols TXEN's objective is to use Internet-based technology to become the
leading software application services provider and the leading administrative
services provider to managed care organizations and to physician practices. Our
strategy includes the following key elements:
- Focus on providing outsourcing solutions for the administrative and
information challenges of healthcare. We believe contractual complexity and
an increase in the volume of healthcare transactions caused by managed care
will continue to force healthcare companies to outsource information
technology, especially administrative services. We plan to focus additional
resources on providing administrative services using our Internet-based
technology to meet the increased demand for complete solutions versus
information technology outsourcing only. Our outsourcing solutions provide a
faster and more efficient response to the needs of payors and providers than
the alternative of buying a turnkey system and expanding in-house
administrative infrastructure. We believe that we have an advantage over
companies that provide only administrative services because we develop our
own solutions and operate our own network data center and can directly and
more quickly address the new, changing information demands of the healthcare
industry. Furthermore, we believe that our history of effectively
distributing software through our network data center positions us to
capitalize on the improved distribution and access provided by the Internet.
- Expand high recurring revenue model. We currently have a significant
recurring revenue stream which is comprised of long-term, transaction-based
and membership-based contracts. In addition, our focus on quality and
customer satisfaction results in high customer retention rates enabling our
revenues to increase as customers grow their businesses. We have identified
many opportunities to provide additional solutions to new and existing
customers. We believe that the continued development and enhancement of our
Internet-based software application services and administrative outsourcing
services will create additional recurring revenue opportunities through new
fees, revenue sharing partnerships and e-commerce.
- Increase efficiencies through expanded Internet-based connectivity,
additional Internet-based software applications and process
automation. Because we control the core processing software, technology,
intranets, network data center and communications connectivity, we have the
ability to rapidly make efficiency improvements. Nichols TXEN believes that
planned improvements in automatic claim filing, automatic claim adjudication
and automatic generation of payments will increase operating efficiencies and
improve customer services. We plan to continue to invest in our Internet
capabilities to enhance communication efficiencies. In addition, we invest in
high-speed peripheral technology in the areas of document imaging, mail room
operations and direct electronic data interchange. Because we actually
perform administrative functions using our own technology, we maintain a
dedicated team focused on reengineering processes for maximum efficiency. We
have the ability to link physician practice processing software and managed
care processing software to integrate claims and billing activities between
our managed care clients and our physician practice clients providing for
increased efficiency, quality and customer satisfaction. Increasing
efficiency through automation and expanded connectivity enables us to realize
economies of scale.
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<PAGE> 37
- Establish additional strategic relationships with leading Internet-based
healthcare companies. We are pursuing additional strategic relationships
with leaders in key Internet-based healthcare industry segments to broaden
our portfolio of applications and services, and increase the number of
managed care and physician practice services customers. We believe our
existing connectivity with our customer base can be leveraged through
additional product offerings provided through strategic relationships.
- Acquire complementary businesses and technologies. We will focus on
acquisitions of businesses, product lines, or technologies that can increase
our customer base or enhance our capabilities. We intend to acquire other
companies whose customer base, product lines or technologies would be
complementary to our outsourcing model.
NETWORK TECHNOLOGY ARCHITECTURE
Our outsourcing services are delivered to customers through TXENet, our secure
private network. Over the last two years, we have converted our network
architecture to Internet-based technology. As of May 1999, approximately 50% of
our managed care customers and 30% of our physician practice customers process
their transactions using Internet protocols. We expect that most of our
customers will be converted to Internet-based technology by December 2000.
TXENet
Our customers and our employees may access our application services through
TXENet. We expect that by December 1999, our customers will be able to use a
standard Internet browser to access our internally developed software
applications and complementary third-party software to process transactions and
manage business operations. The applications will be accessed through WebSTEPP,
which is our intranet portal site application that will consolidate and provide
easy access and organization of software application services.
TXENetlink
Our customers may access additional products and services by purchasing
TXENetlink, which connects TXENet to the Internet. Customers using WebSTEPP will
be able to obtain additional complimentary Internet applications and Internet
content through our strategic relationships. TXENet users will be able to extend
to their customers, suppliers and employees at remote locations access to
Internet applications and content. We believe that this ability to extend our
software application services will add significant value for a TXENet user.
These extended services will be a focus of our e-commerce activities. TXENetlink
customers will also receive basic Internet services, such as e-mail, web site
hosting and general Internet access.
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<PAGE> 38
MANAGED CARE SERVICES DIVISION
The Managed Care Services division's goal is to reduce the time and personnel
needed to perform managed care administrative tasks through an optimized
combination of technology, process automation and well-trained personnel. Our
Managed Care Services customers access needed application services through
TXENet to improve efficiency, automation connectivity and decision support. Our
solutions help clients to:
- increase operational efficiencies and reduce administrative expenses;
- expand connectivity and automation utilizing Internet-based applications and
services, or direct connections;
- manage sophisticated benefit plans and complex provider contracts;
- increase automatic claims processing and administrative workflow;
- improve decision making through in-depth information analysis; and
- focus on providing quality healthcare.
Customers contract for services on a per enrolled health plan member per month
basis which provides predictable administrative costs and enables customers to
expand their business quickly without the need for additional infrastructure.
These services lower the start-up costs and barriers to entry facing managed
care organizations, enabling large organizations to enter niche markets easily
and enabling small organizations to gain market entry. We have identified over
9,000 organizations that may benefit from our outsourcing services. The chart on
the following page illustrates our Managed Care Services division.
35
<PAGE> 39
MANAGED CARE SERVICES
Nichols TXEN Customers
Managed Care Software Application Managed Care Administrative
Services Outsourcing Services Outsourcing
Our Technology & Customer's Personnel Our Technology & Our Personnel
| |
| |
------Intranet Portal Site Application-------
|
|
|
TXENet
Nichols TXEN secure private network/intranet
Network Data Center Software Applications Services
<TABLE>
<CAPTION>
Nichols TXEN E-commerce Software Nichols TXEN Software Applications 3rd Party Applications/Content
- -------------------------------- ---------------------------------- ------------------------------
<S> <C> <C>
- -Provider Claim Inquiry* -High-end Managed Care Administration -Medical Informatics
- -Eligibility Verification -Medical Utilization Management -Claim Edit
- -Benefit Inquiry* -Managed Care Decision Support -DRG Code Finder
- -Direct Employer Benefit/Enrollment* -Internet-based Reporting & Analysis* -Automated Medical Criteria
- -Member Inquiry/Update+ -Integrated Physician Practice Management -Automated Fee Schedules
-Medical Case Management*
</TABLE>
Internet Protocols
|
|
|
TXENetlink
|
|
Government Remote Employees
Intermediaries Connections Health Plan Members
------------
Physicians -Standard Internet Connections* Employers
-Internet Portal Site Applications*
Labs -3rd Party Portal Sites* Suppliers
-Customer Internet Sites*
Pharmacy Patients
Medical Informatics Hospitals
Healthcare Participants
* Currently Testing
+ In Development
36
<PAGE> 40
Managed Care Technology Services
Managed Care Technology Services, or MCT, customers outsource their technology
functions to us but use their own administrative staff. Using high-speed
connections, customers access software application services through our secure
network. The primary applications that our customers use are internally
developed, high-end software systems for managed care administration, decision
support and medical management. Other applications include integrated
third-party software. MCT customers are able to use the following software
applications of Nichols TXEN:
- TXEN-MHS -- to manage and control premium billing, capitation, benefit plans,
membership data, eligibility, provider contracts, referrals, authorizations,
claims and accounts payable;
- Xtend -- to analyze transaction data and evaluate performance and quality;
and
- FirstSTEPP -- to automate functions previously performed manually, such as
the approval of surgical procedures, hospital admissions, utilization review
and specialist referrals.
We also provide software application support, implementation, consulting and
software development services. As of May 31, 1999, we provided MCT services to
61 customers, of which 13 were turnkey customers.
We plan to make the following software generally available to our managed care
customers by December 1999:
- CaseSTEPP -- to automate functions associated with in-patient case
management, such as patient case tracking, allocation and billing of staff
time, cost tracking, supplier negotiation and concurrent review;
- NextSTEPP -- to provide an Internet-enabled version of TXEN-MHS;
- InfoSTEPP -- to provide Internet and intranet access to information directly
from TXEN-MHS and Xtend;
- WebSTEPP -- to serve as our intranet portal site that provides consolidated,
easy access to TXENet application services, Internet content, and Internet
applications;
- TXEN MD.Com -- to provide physicians with the ability to use the Internet to
access information regarding eligibility status, membership, benefits,
patient payment responsibility, claim status, paid claim information and
explanation of payments; and
- TXEN HR.Com -- to provide human resources departments with the ability to use
the Internet to access information regarding employment status, claim status,
enrollment and benefits.
Managed Care Administrative Services
Managed Care Administrative Services, or MCA, customers outsource all of their
information technology and some or all of their administrative functions to our
Managed Care Services division. Through Nichols TXEN's administrative services
center, customers utilize our personnel and technology to perform:
<TABLE>
<S> <C> <C>
- claims processing; - check processing;
- eligibility management; - mailroom operations;
- capitation risk management; - automated data entry; and
- premium billing; - other related administrative services.
</TABLE>
For our MCA customers, we use TXEN-MHS, FirstSTEPP and Xtend software
applications to perform administrative functions. We create and maintain
membership and eligibility data and provider and employer databases for
customers. We enter claim information which is furnished by customers
electronically or on paper. Our specialized software processes the claim based
upon the applicable plan rules or the provider benefit contract rules. The claim
is then paid or held for further examination. Depending on the nature of the
claim, this adjudication process may be performed automatically by our
specialized software or manually by our trained personnel. As part of our
strategy, we intend to increase our ability to offer automatic claims
adjudication to improve efficiency. Nichols TXEN also performs
37
<PAGE> 41
utilization review services based on customer approval criteria which include
determining the necessity of medical procedures and issuing certificates of
admission or specialists referrals when appropriate. All denial recommendations
are forwarded to the customer for final decision. We also offer customers
in-patient care management services to monitor quality of care and length of
stay. Many of the managed care organizations in our selected markets do not
possess the resources to initiate a comprehensive utilization review program. We
offer this capability with our internal professional medical staff consisting of
physicians and nurses. As of May 31, 1999, we provided MCA services to 35
customers.
Managed Care Services Supporting Software
TXEN-MHS Managed Care Administration System. TXEN-MHS is the core software
supporting our MCT and MCA services. Over the past nine years, we have modified
and enhanced our licensed core software for managed care transaction processing
in order to offer a comprehensive solution to the entire spectrum of managed
care companies. We have combined TXEN-MHS with third-party products to provide
integrated processing of related transactions. This provides our customers a
single point of access to imaging and workflow management, clinical editing,
provider credentialing and other functions. TXEN-MHS has electronic data
interchange features that permit electronic transmission of information. The
modular design and integrated database of TXEN-MHS provide the user with
flexibility in system configuration for efficient operation without programmer
intervention. We believe TXEN-MHS offers higher rates of automatic adjudication,
automation and administrative efficiencies than competitive systems.
FirstSTEPP Medical Management System. FirstSTEPP, our medical management
system, improves the efficiency of utilization review services. FirstSTEPP,
which is fully integrated with TXEN-MHS, supports pre-certification,
authorization and utilization management requirements. FirstSTEPP is a
distributed client-server system with "point and click" functionality for ease
of use. User-defined medical treatment protocols assist medical management
staffs to comply with the terms of individual benefit plans. In the FirstSTEPP
application, menus are work driven, with most functions employing "drag and
drop" functionality. Because FirstSTEPP is integrated with TXEN-MHS, information
is instantly accessible concerning provider contracts, fee schedules, current
enrollment, eligibility and member demographic data. FirstSTEPP allows
utilization review nurses and physicians to perform quality outcomes management
and assign patterns of treatment criteria. FirstSTEPP guides users through a
predetermined task list of integrated functions that include:
<TABLE>
<S> <C>
- - pre-certifications; - document templates;
- - admission processing; - incidents of care templates;
- - review and discharge processing; - correspondence processing; and
- - authorization templates; - staff and workgroup management.
- - inpatient hospitalization case management;
</TABLE>
FirstSTEPP eliminates paperwork, minimizes compliance issues, eliminates double
data entries and reduces administrative problems. FirstSTEPP features automated
data storage and retrieval as well as internal and external correspondence
capabilities.
Xtend Decision Support Application Suite. The Xtend decision support
application suite assists users in finding, analyzing and interpreting
mission-critical information from managed care transaction data. The Xtend
architecture is divided into two key components. The first component, Xtend/MHS,
is a powerful transaction data replication engine and customized report writer.
Xtend/MHS offers the following features:
<TABLE>
<S> <C>
- - integration with TXEN-MHS; - transaction data replication; and
- - easy information retrieval; - reporting templates.
- - "point and click" visual interface;
</TABLE>
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<PAGE> 42
The second component of Xtend is an executive information system, or EIS, into
which specific modules may be connected. The first module available for the EIS
system is the Xtend/HEDIS module which is based on industry standards for
quality comparisons as published by NCQA. Xtend/HEDIS offers the following
features:
- easy manipulation of HEDIS reporting measures and other benchmarking
measures;
- quality of care analysis;
- utilization and member analysis; and
- integration with industry-standard spreadsheet and word processing software.
PHYSICIAN PRACTICE SERVICES DIVISION
The Physician Practice Services division's goal is to reduce the time and
personnel needed to perform physician practice administrative tasks through an
optimized combination of technology, process automation and well-trained
personnel. Our Physician Practice Services customers can access needed
application services through TXENet to improve efficiency, automation
connectivity and decision support. Customers contract for services on a per
transaction or percentage of revenues basis which provides customers with
predictable administrative costs and enables them to expand their businesses
quickly without the need for additional infrastructure. Our solutions help
clients to:
<TABLE>
<S> <C>
- accelerate collections; - improve compliance; and
- reduce fixed expenses; - provide administrative efficiencies and
timely data through electronic connectivity.
- perform eligibility checks;
- query claims status;
</TABLE>
The Physician Practice Services division targets hospital-based and other
physician groups, hospital emergency departments and physician networks. As of
May 31, 1999, Nichols TXEN had 279 physician practice customers representing
approximately 3,000 physicians. The chart on the following page illustrates our
Physician Practice Services division.
39
<PAGE> 43
PHYSICIAN PRACTICE SERVICES
Nichols TXEN Customers
Physician Practice Software Application Physician Practice Administrative
Services Outsourcing Services Outsourcing
Our Technology & Customer's Personnel Our Technology & Our Personnel
| |
| |
------Intranet Portal Site Application-------
|
|
|
TXENet
Nichols TXEN secure private network/intranet
Network Data Center Software Application Services
<TABLE>
<CAPTION>
Nichols TXEN Software Applications 3rd Party Applications/Content
- ---------------------------------- ------------------------------
<S> <C>
- -High-end Physician Practice Administration -Medical Informatics
- -Insurance Collections -Lab/Pharmacy Connectivity
- -Appointment Scheduling -Eligibility Verification
- -Direct Payor Connects -Claim Status
- -Internet-based Reporting & Analysis* -Medical Records
- -Provider Enrollment
- -Integrated Managed Care Administration
</TABLE>
Internet Protocols
|
|
|
TXENetlink
|
|
Government Remote Employees
Internet
Intermediaries Connections Health Plan Members
------------
Physicians -Standard Internet Connections* Employers
-Internet Portal Site Application*
Labs -3rd Party Portal Sites* Suppliers
-Customer Internet Sites*
Pharmacy Patients
Medical Informatics Hospitals
Healthcare Participants
* Currently Testing
+ In Development
40
<PAGE> 44
Physician Practice Technology Services
Physician Practice Technology Services, or PPT, customers outsource their
software applications and system functions to Nichols TXEN, but use their own
administrative staff. Through high-speed connections customers access
application services from our secure network. The primary applications that our
customers use are our internally developed, high-end software applications for
physician practice administration, decision support and financial management. In
addition, we offer integrated third-party supporting software applications. We
differentiate our physician practice solutions by enabling customers to connect
directly to payors, hospitals and other providers. PPT customers are able to use
the following software applications of Nichols TXEN:
- MDr98 -- to manage and control appointment scheduling, medical billing,
electronic remittance, payment processing, electronic claims submission and
insurance follow-up; and
- Decision Manager 3.0 -- to analyze billing and practice information to detect
trends regarding payments, utilization, costs and demographics.
In addition, we offer PPT customers access to our automated mailroom and
customized statement processing capabilities. We also provide software support,
implementation, consulting and software development services. As of May 31,
1999, we provided PPT services to 218 customers.
We plan to make the following software generally available to our customers by
December 1999:
- MDr-STEPP -- to provide an Internet-enabled version of MDr98;
- MDr-WebSTEPP -- to serve as our intranet portal site that provides
consolidated, easy access to TXENet physician practice applications; and
- MDr-InfoSTEPP -- to provide intranet and Internet access to information
directly from MDr98 and Decision Manager 3.0.
Physician Practice Administrative Services
Physician Practice Administrative Services, or PPA, customers outsource all of
their information technology systems and some or all administrative functions to
the Physician Practice Services division. Through our back office service
centers, customers utilize our personnel and technology to perform:
<TABLE>
<S> <C>
- - billing; - data entry;
- - chart development; - coding;
- - claims submission; - statement processing;
- - insurance follow-up; - payment posting; and
- - first level collections; - operational analysis.
</TABLE>
For PPA customers, we use MDr98 and Decision Manager 3.0 to perform
administrative functions. We create and maintain patient, medical chart,
physician credentials, insurance and referral data bases for customers. Nichols
TXEN enters billing information that is furnished by customers electronically or
on paper. Our specialized software processes the bills based upon payor plan
rules, current procedural technology, or CPT, guidelines and applicable provider
fee schedules. In addition, our specialized software edits the bill to ensure
accuracy based on predetermined rules. The bill is then submitted electronically
or mailed to the appropriate payor. As part of our strategy, we intend to
increase our ability to automate billing submissions and remittances
electronically to improve efficiency. Nichols TXEN also performs physician
procedure and diagnosis coding based on CPT guidelines, international
classification of disease guidelines, commonly known as ICD-9 codes, and public
and private payor guidelines. In addition, we provide trained temporary staffing
for physician offices for administrative work and billing-oriented tasks. As of
May 31, 1999, we provided PPA services to 61 customers.
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<PAGE> 45
Physician Practice Services Supporting Software
MDr98 Physician Practice Administration System. MDr98 is the core software
supporting our PPT and PPA services. Over the past 30 years, Nichols TXEN has
modified and enhanced our core software for physician practice transaction
processing. We believe MDr98 is the only software product that offers physician
practice groups the complete functionality and market place connectivity
necessary to succeed in today's complex healthcare environment. Our MDr98 is a
comprehensive medical practice management system consisting of one or more
terminals and printers installed in medical offices and linked by dedicated
communication lines to our network data center. MDr98 is a complete medical
practice administration system for large physician networks, hospital-based
physicians, hospital emergency departments and management services
organizations. MDr98 is integrated with the Managed Care Services division's
transaction processing software so customers may receive real-time eligibility
verification, preliminary claims editing, online claims submission and
electronic remittance. MDr98 capabilities include the following functions:
<TABLE>
<S> <C>
- - billing management; - insurance processing and tracking;
- - appointment scheduling; - windows and text based screens;
- - payments and statement management; - electronic claim filing and remittance;
- - secondary filing; - decision management; and
- - master patient index; - medical records interfaces.
- - claims submission management;
</TABLE>
We can file claims electronically from our network data center to more than 300
insurance carriers, Medicare and Medicaid. Explanation of benefits or payments
information appears on-screen for medical office staff to review, adjust and
post with a single keystroke. A claim screening system using edits and error
checking techniques helps assure that the claim has the correct information
before it is transmitted for payment. MDr98 also provides on-line access to
selected payors and hospitals through our network data center. This capability
affords customers the ability to obtain information regarding claim status,
patient eligibility, benefit plan, referring physician, pre-certification and
other data which reduces errors that delay payments. Customers can also access
hospital admission data to apply charges to patient accounts. We added a master
patient index that enables any physician to securely share information with any
other physician on the network and facilitates integration with hospital
systems.
Decision Manager 3.0. Decision Manager 3.0 support application assists users in
finding, analyzing and interpreting mission-critical information from physician
practice transaction data. Decision Manager 3.0 has a powerful transaction data
replication engine and customized report writer. Decision Manager 3.0 offers the
following features: integration with MDr98, transaction data replication, easy
information retrieval, reporting templates and "point and click" visual
interface. Decision Manager 3.0 is a Microsoft Windows-based decision support
application designed for Microsoft Access. Options available with Decision
Manager 3.0 include activity-based cost analysis, procedure analysis and
diagnosis, reimbursement analysis and referral summary. Decision Manager 3.0
offers improved control over data selection and sorting, along with greater
flexibility to customize reports.
STRATEGIC RELATIONSHIPS
In addition to outsourcing application technology developed by Nichols TXEN, our
managed care and physician practice customers may also access additional
integrated applications offered by our strategic partners. These partners
include:
Beech Street/CAPP Care Corporation. Provides online electronic access to Beech
Street/CAPP Care, one of the largest physician practice organization networks.
The Beech Street/CAPP Care network has over 4,300 hospitals and healthcare
facilities and over 320,000 provider locations under contract and serves more
than 15 million individuals in the United States.
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<PAGE> 46
HealthGate Data Corporation. Provides over 27 million pages of health and
medical information over the Internet. HealthGate helps healthcare
professionals, patients and health conscious consumers make better informed
healthcare decisions.
HealthStream, Inc. Provides a comprehensive library of online real-time
continuing education courses for physicians, nurses and allied healthcare
professionals.
Medicode. Medicode develops and markets medical claims editing and bill review
software, healthcare pricing databases, disease management and utilization
analysis products and coding publications, and software for payors, providers
and employees.
The Potomac Group. Provides online electronic access to the eligibility
databases of over 40 commercial and government payors.
ENVOY Corporation. Provides electronic data interchange services to the
healthcare industry and offers batch claims submission and online eligibility
verification, claims, status, and referral processing to managed care
organizations.
OPERATIONS
Network Data Center
We believe that our method of delivering software applications and
administrative services using Internet-based technology delivered through our
network data center is superior to that offered by turnkey system vendors. The
accessibility of network resources from a central location gives us the ability
to implement systemwide software upgrades without the delay experienced by
typical turnkey system vendors. Customers connect to TXENet and the underlying
network data center directly through their own local area networks, or LANs,
utilizing high-speed digital communications. The network data center presently
processes over 500 million transactions per year. The network uses IBM AS/400
midrange and IBM S/390 massively parallel servers as the core transaction
servers. The servers currently have over 2.5 terabytes of disk space with
approximately 7,000 devices attached.
We believe that our network connection with customers adds value to the
technology and services we offer. The cost of computer systems necessary to
process healthcare related transactions is substantial. Our network data center
model eliminates or reduces costs associated with the following: hardware and
software upgrades and maintenance, performance monitoring, floor space, system
training, insurance, computer operations, electrical power, security
administration, climate control, back-up processes and off-site storage. The
centralized network data center enables Nichols TXEN to achieve economies of
scale utilizing a single system for many customers. The centralized network data
center allows us to offer efficiencies in transaction processing and the ability
to supplement our basic services with more advanced technologies, such as
decision support information, Internet connectivity and higher quality
peripheral and supporting technology. Because our strategy has been to deploy
our technology over a wide-area network, we expect that continued integration
with the Internet should be easier, more cost effective and more comprehensive.
Customers using our network data center have immediate access to new software
products developed by Nichols TXEN, upgrades of existing products and
third-party software connected to the network. In addition, enhancements made to
address issues for one customer may be shared by all users of our network. The
center also facilitates customer support because customer representatives can
access software and customer data while answering customer inquiries.
Nichols TXEN has an extensive disaster recovery plan for our network data
center, which is located in Birmingham, Alabama. Our data center is protected
from power outages and all data is backed up daily to a remote location. It is
possible, however, that a disaster, such as a tornado or fire, could disable or
destroy our equipment and facilities. As a contingency plan for such disasters,
Nichols TXEN has contracted with a third party to provide temporary computer
facilities, utilizing our data back-ups and software. We should be able to
resume network data center operations within 72 hours of major damage.
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<PAGE> 47
Sales and Marketing
We market and sell our services through our own direct sales force. We divide
our sales and marketing activities between obtaining new customers and expanding
services offered to existing customers. As of May 31, 1999, Nichols TXEN
employed 17 sales representatives with geographic and market segment assignments
to market our services and technology to new customers, and we employed five
account managers to sell additional services and technology to existing
customers. These representatives also support existing customers in obtaining
new business by assisting their marketing programs.
We consider our approach to sales and marketing a competitive advantage. Nichols
TXEN utilizes specialized software to manage marketing and sales activities. The
software helps manage market research, sales management reports, forecasting and
sales-cycle tracking. At the core of all sales and marketing efforts is a
strategic, internally-developed database with detailed records of each prospect
in target markets. Sales prospects are generated through customer references,
requests for proposals, direct mail, trade shows and our internal telemarketing
efforts. As of May 31, 1999, we employed seven marketing representatives whose
primary function is to generate sales leads from activities that include
telephone calls, Internet searches, market research and direct mail
solicitations. We estimate that we will make telemarketing calls to
approximately 17,000 potential customers in fiscal year 1999.
Implementation, Support and Training Services
We believe that a close and active service and support relationship is important
to customer satisfaction and provides us with important information regarding
customer requirements and additional sales opportunities. Proper implementation,
training and on-going technical support are necessary for the solutions to
operate effectively and efficiently. Each customer goes through a detailed
implementation process which includes the set-up of business rules and
databases, the conversion of historical data and classroom training conducted at
our training facilities. Nichols TXEN supports each customer with technical
support analysts and account coordinators who oversee customer software and
business issues and answer questions. In addition to on-going support, the
customer receives software updates. Customers may also request custom software
modifications to meet specific customer requirements. These custom modifications
are implemented into our regular upgrades and can, therefore, be shared with all
customers. We provide on-line and printed documentation for software and
implementation information.
Research and Development
Software product vendors primarily rely on customer comments regarding their
products in order to decide upon software enhancements. In addition to this
approach, because we control the software, we have a unique insight into
enhancements that will improve productivity. These enhancements improve
automation and, therefore, contribute to the efficiency of all users. Nichols
TXEN also leverages customer-funded modifications by making them available to
all network users. Research and development costs were $1.0 million in fiscal
year 1996, $1.6 million in fiscal year 1997 and $3.3 million in fiscal year
1998, of which 3% in fiscal year 1996, 4% in fiscal year 1997 and 19% in fiscal
year 1998, respectively, were customer-sponsored research and development
related to the modification and development of software products. As of May 31,
1999, our research and development staff consisted of 65 employees. To enhance
the usability of TXENet and TXENetlink applications, our software developers use
graphical user interface tools, primarily Java and Internet-browser technology.
The graphical interface makes data entry, information review, integration and
workflow on software systems faster, easier and more intuitive. Planned
enhancements for our core Internet-based applications include a visually
enhanced customer service module, a benefit plan building assistant to navigate
users through the data entry process, and Internet-based reporting and decision
support. We focus a substantial part of our research and development effort on
improving automatic claim filing and automatic claim adjudication. Planned
enhancements to achieve this goal include computer-aided claims classification,
enhanced MDr98 pre-claim submission audits, increased integration between
TXEN-MHS and MDr98, optical character recognition, improved mail room
capabilities and enhanced electronic verifications, submissions and receipts. In
addition to the basic applications, we currently offer two primary decision
support products, Xtend for managed care and
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<PAGE> 48
Decision Manager 3.0 for physicians. We are expanding the Internet connectivity
of our core decision support software applications to more fully integrate with
Internet publishing of key decision support information. In addition, we have
adopted ORACLE as the fully scalable Xtend database.
COMPETITION
The business of providing software application services and administrative
services to managed care organizations and medical practices is highly
competitive. The market for our transaction processing technology and services
is characterized by rapid change and technological advances requiring ongoing
expenditures for research and development and the timely introduction of new
technology and enhancements of existing technology. Our future success will
depend, in part, upon our ability to enhance our current technology and
services, respond effectively to technological changes, sell additional services
to our existing customer base, introduce new technologies and meet the
increasingly sophisticated needs of our customers. In general, we compete based
on price, the performance of our products and the quality of our service with
competitors that vary in the size, scope and breadth of the products and
services they offer. We compete with a number of companies that serve various
segments of the healthcare industry, including:
- administrative outsourcing providers;
- software application service providers;
- vendors of turnkey software systems; and
- Internet healthcare connectivity solutions providers.
We believe that we have numerous competitors for our administrative outsourcing
solutions with no single competitor having a dominant position, except for
Medaphis Inc. with respect to physician practice services. We believe the
software application service provider market is relatively new, quickly evolving
and without a clearly established market leader. We believe that there are
numerous turnkey system vendors including McKesson HBOC, Inc., Medical Manager
Corp. and IDX Systems Corporation. We believe that Internet healthcare solutions
providers are numerous and include CareInsite, Inc., Healtheon Corporation and
Cybear, Inc. In addition, the ability of potential customers to perform
administrative services in-house is a competitive factor. Potential customers
may be influenced to select a turnkey system by the customer's management
information systems department who may believe that our service solutions will
reduce the department's internal staff and equipment requirements. Many of our
current and potential competitors have significantly greater financial,
marketing and other competitive resources than Nichols TXEN. Current and
potential competitors, including providers of information technology to other
segments of the healthcare industry, may establish joint marketing arrangements
or other relationships to compete more effectively against us and new
competitors may emerge.
INTELLECTUAL PROPERTY
Our success is dependent, in part, on our ability to protect our proprietary
software and confidential information from unauthorized use and disclosure. We
do not own any patents and have not registered any copyrights, trademarks,
service marks or trade names with the United States Patent and Trademark Office.
We rely on a combination of trade secrets, common law intellectual property
rights, license agreements, nondisclosure and other contractual provisions and
technical measures to establish and protect our proprietary rights in our
intellectual property and confidential information. There can be no assurance
that the legal protections afforded to us or the steps taken by us will be
adequate to prevent misappropriation of our technology and confidential
information. In addition, these protections do not prevent independent
third-party development of competitive products or services. Although we believe
that our proprietary rights do not infringe upon the proprietary rights of third
parties, we were recently contacted by legal counsel representing the owner of
patented technology allegedly possessing functionality similar to that of our
non-patented technology for electronic integrated commerce and health care
management systems. We were offered an opportunity to obtain a license for the
use of this patented technology. If it is determined that the functionality of
our technology overlaps this or other technology, we may be subject to
intellectual
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<PAGE> 49
property infringement claims and we could be required to enter into a license
agreement or royalty arrangement with the party asserting the claim or be forced
to stop using some of our technology. We may also be required to indemnify
customers for claims made against them. While we intend to vigorously defend any
claims, these consequences could have a material adverse effect on our business.
FACILITIES
We currently occupy approximately 109,000 square feet in two leased facilities
in Birmingham, Alabama. In addition, we have leased approximately 25,000 square
feet in Birmingham that is scheduled to be occupied by April 2000.
We currently lease approximately 5,000 square feet in Gadsden, Alabama and
Huntsville, Alabama, to house a portion of our PPA operations.
EMPLOYEES
Nichols TXEN had 586 employees as of May 31, 1999, of which 332 were in the
Managed Care Services division, 202 were in the Physician Practice Services
division, and 52 were in corporate support services such as finance,
administration, marketing and internal information technology support.
We believe our relationship with our employees is good. None of our employees
are governed by a collective bargaining agreement. In order to augment our
hiring of ready-to-work skilled individuals, we have employed several programs
to educate and train our work force.
We offer our employees extensive training courses covering:
<TABLE>
<S> <C>
- - software; - managed care and physician practice operations;
- - management; - claims examination; and
- - project management; - human resources.
</TABLE>
We augment our regular recruiting efforts of university visits, job fairs and
employee referral programs with a special recruiting and training program for
college graduates from a variety of disciplines with high grade point averages.
These college graduates are placed in an intense sixteen-week training program.
The training program educates these new employees on the managed care market and
also provides concentrated training on business division products and service.
During fiscal year 1998, we conducted fall, spring and summer classes training
48 new employees. At the end of the training program, these new employees were
assigned positions with Nichols TXEN.
To recruit and train additional personnel, Nichols TXEN participates in a
six-week pre-employment screening program developed and funded primarily by the
State of Alabama. Instruction provides participants with the basic skills
necessary for a position with us. The State of Alabama screens and selects
applicants expressing an interest in the program. Individuals are not paid for
participation in the program and we are not obligated to hire any of the
participants at the end of the program. We use a database of scanned resumes and
specialized software to manage our recruiting and hiring efforts.
GOVERNMENT REGULATION
The healthcare industry is subject to intensive regulation by both the federal
and state governments. One of Nichols TXEN's services, the preparation and
submission of claims for payment, has been subject to periodic and continuing
scrutiny for compliance with laws and regulations regarding, among other things,
inducements for patients referrals or services which are government-reimbursed,
incentives to improperly code for procedures, and licensure. This regulatory
framework is complex and the laws are very broad in scope, subject to differing
interpretations and lack substantive court decisions addressing many
arrangements under which we have conducted and expect to conduct our business.
Any failure to comply, or alleged failure to comply, with applicable laws and
regulations could have a material adverse effect on our business, financial
condition or results of operations.
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<PAGE> 50
Licensure, Registration and Consumer Protection
In general, Nichols TXEN's third party administration and utilization review
operations are regulated by statutes and regulations of various states. We are
currently licensed as a Third Party Administrator or Private Review Agent, or
have been deemed to have achieved licensure by virtue of our URAC accreditation
by the American Accreditation Health Care Commission, in all states in which we
provide these services. We believe that we are in substantial compliance with
the licensing laws of each state in which we conduct business. In addition,
federal and state consumer protection laws may apply to our billing activities
in which we bill patients directly for the cost of physician services provided.
We believe that we are in substantial compliance with the consumer protection
laws of each state in which we conduct business.
Professional Practice
Persons engaged in the practice of medicine and nursing must be licensed in
various states. The professional practice of each profession is regulated by its
respective professional board. Professional practice rules and regulations are
comprehensive and generally set forth various activities which constitute
professional misconduct, or for which a professional may be subject to
sanctions, including loss of professional license. We believe that all of our
physicians and nurses are in substantial compliance with all applicable
professional regulations. However, legislative efforts are underway in certain
states which, if implemented, could impose additional professional practice
obligations on our physicians conducting utilization reviews.
Anti-Kickback Statute
Under Medicare, Medicaid and other government funded healthcare programs,
federal and state governments enforce a federal statute that prohibits the
offer, payment, solicitation or receipt of any remuneration, directly or
indirectly, overtly or covertly, in cash or in kind to induce or in exchange for
(1) referring patients covered by the programs, or (2) leasing, purchasing,
ordering or arranging for or recommending the lease, purchase or order of any
item, good, facility or service covered by the programs. Prohibited remuneration
includes any kickbacks, bribes or rebates. The statute is commonly referred to
as the Anti-Kickback Statute.
A person or entity that violates the Anti-Kickback Statute may be penalized.
These penalties include criminal fines of up to $25,000 per violation and
imprisonment. In addition, civil penalties can be imposed up to $50,000 per
violation, plus three times the actual damages. Further, the Secretary of the
Department of Health and Human Services has the authority to exclude or bar
individuals or entities who violate the Anti-Kickback Statute from participating
in Medicare and Medicaid. Exclusion may be imposed even if participation is
indirect. If Nichols TXEN, our personnel, or any significant customer is
penalized under the Anti-Kickback Statute, for whatever reason, there may be a
significant loss in our revenue.
The Anti-Kickback Statute is broad in scope and courts have not been consistent
in their interpretations of the law. To clarify what acts or arrangements will
not be subject to prosecution by the Department of Health and Human Services, or
DHHS, Office of Inspector General or the United States Attorney, DHHS adopted a
set of safe harbor regulations. DHHS continues to publish clarifications to such
safe harbors. Arrangements that meet all the requirements of an applicable safe
harbor are considered not to violate the Anti-Kickback Statute. The activities
covered by the safe harbors include the following:
<TABLE>
<S> <C>
- investment interests; - rental of space, land, or equipment;
- personal services and management - sales of physician practices;
contracts; - warranties;
- physician referral services; - payments to employees; and
- discounts; - waivers of beneficiary deductibles and
- group purchasing organizations; co-payments.
</TABLE>
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<PAGE> 51
Failure to fit within a safe harbor provision does not necessarily mean that the
structure of a transaction is illegal or that it will be prosecuted under the
Anti-Kickback Statute.
We do not believe that the final regulations contain a safe harbor which covers
all the arrangements under which we provide billing services to our customers.
However, we believe that our billing arrangements with physicians and other
customers do not violate the federal Anti-Kickback Statute, or similar state
laws.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat healthcare fraud, Congress included several anti-fraud
measures in HIPAA. HIPAA broadened the scope of fraud and abuse laws, such as
the Anti-Kickback Statute, to include all healthcare services, whether or not
they are reimbursed under a federal program. Federal healthcare offenses include
healthcare fraud and making false statements relative to healthcare matters. Any
person or entity that knowingly and willfully defrauds or attempts to defraud a
healthcare benefit program or obtains by means of false or fraudulent pretenses,
representations or promises, any of the money or property of any healthcare
benefit program in connection with the delivery of healthcare services is
subject to a fine and/or imprisonment. In addition, any person or entity that
knowingly and willfully falsifies or conceals or covers up a material fact or
makes any materially false or fraudulent statements in connection with the
delivery of or payment of healthcare services by a healthcare benefit plan is
subject to a fine and/or imprisonment. Civil fines and exclusion may be imposed
on individuals who retain an ownership or control interest in a Medicare or
Medicaid participating entity after such individuals have been excluded from
participating in the Medicare or Medicaid program. In particular, civil monetary
penalties or exclusion may be imposed on any person who engages in a pattern or
practice of presenting or causing to be presented a claim for an item or
services that is based on a code that the person knows or should know will
result in a greater payment to the person than the code the person knows or
should know is applicable to the item or service actually provided. We believe
that all of our operations comply with HIPAA.
False Claims Act
Under the Federal False Claims Act, liability may be imposed on any person who
knowingly submits or participates in submitting claims for payment to the
federal government which are false or fraudulent, or which contain false or
misleading information. Liability may also be imposed on persons who knowingly
make or use a false record or statement to avoid an obligation to pay the
federal government. "Person" includes an individual, company or corporation.
Various state laws impose liability for similar acts. Claims under the Federal
False Claims Act may be brought by the federal government or private
"whistleblowers." If we are found liable for a violation of the Federal False
Claims Act, or any similar state law, it may result in substantial civil and
criminal penalties. In addition, Nichols TXEN could be prohibited from
processing Medicaid or Medicare claims for payment.
The Federal Food, Drug and Cosmetic Act
The United States Food and Drug Administration, or FDA, is responsible for
assuring the safety and effectiveness of medical devices under the Federal Food,
Drug and Cosmetic Act. Computer applications and software are considered medical
devices and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. We do not believe that any of our current
applications or services are subject to FDA jurisdiction or regulation; however,
as we expand our application and service offerings into new areas, we may become
subject to FDA regulation. Nichols TXEN has no experience in complying with FDA
regulations and compliance with FDA regulations could prove to be time
consuming, burdensome and expensive.
Prompt Payment Laws
Various states have passed laws regarding the prompt payment of medical claims
by health plans. If a claim is brought against us, and we are found to have
violated a law regarding the prompt processing of claims for payment, we may
incur civil or other penalties.
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Government Investigations
There is increasing scrutiny by law enforcement authorities, the DHHS Office of
Inspector General, the courts and Congress of arrangements between healthcare
providers and suppliers or other contractors which have a potential to increase
utilization of government healthcare resources. In particular, scrutiny has been
placed on coding of claims for payment and contracted billing arrangements.
Investigators have demonstrated a willingness to look beyond the formalities of
business arrangements to determine the underlying purposes of payments between
healthcare providers and suppliers and contractors. Although, to our knowledge,
neither Nichols TXEN nor any of its customers is the subject of any
investigation, we cannot tell whether Nichols TXEN, or its customers, will be
the target of governmental investigations in the future.
Confidentiality
Various federal and state laws establish minimum standards for the maintenance
of medical records to protect the confidentiality of patient medical
information. In the course of our business, we receive medical records for
various patients of our customers. As a result, Nichols TXEN is subject to one
or more of these medical records and confidentiality laws. In addition, the
applicability to the Internet of existing laws in various jurisdictions
governing personal privacy is uncertain and demand for our services may be
affected by additional regulation of the Internet. For example, until recently
HCFA guidelines prohibited transmission of Medicare eligibility information over
the Internet. Any new legislation or regulation regarding the Internet, such as
the new rules recently mandated by federal law and proposed by the HCFA to
ensure the integrity and confidentiality of patient data by creating mandatory
security standards for entities which maintain or transmit health information
electronically, could have an adverse effect on our business.
LEGAL PROCEEDINGS
We are involved in various lawsuits and claims arising in the normal course of
business. In our opinion, although the outcomes of these suits and claims are
uncertain, in the aggregate they should not have a material adverse effect on
our business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning each of Nichols TXEN's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas L. Patterson(1)............... 56 Chairman of the Board
Paul D. Reaves(1).................... 42 Chief Executive Officer and Director
H. Grey Wood......................... 43 President, Chief Operating Officer and Director
John D. McKay........................ 37 Chief Financial Officer
W. Sanders Pitman.................... 37 Vice President and General Manager, Managed Care
W. Luckey Crocker.................... 44 Vice President and General Manager, Physician
Practice
Chris H. Horgen(1)................... 52 Director
James D. Kever(2)(3)................. 46 Director
James I. Harrison, Jr.(2)(3)......... 66 Director
Patsy L. Hattox...................... 50 Secretary
Allen E. Dillard..................... 39 Treasurer
</TABLE>
- ---------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
All directors of Nichols TXEN hold office until the next annual meeting of the
stockholders and the election and qualification of their successors. Officers
serve at the discretion of the Board of Directors.
Thomas L. Patterson has been Chairman of the Board of Nichols TXEN since the
acquisition of TXEN, Inc. in August 1997. Since May 1998, Mr. Patterson has been
employed part-time in the capacity of Chairman of the Board. From 1989 to August
1997, Mr. Patterson served as Chief Executive Officer and President of TXEN,
Inc., one of our predecessors, which he co-founded. In 1980, Mr. Patterson
founded SEAKO, Inc., an information technology company for practice management
and managed care systems. From 1980 to 1989, Mr. Patterson served as President
of SEAKO, Inc. He also serves on the Board of Directors of Nichols Research.
Paul D. Reaves has served as our Chief Executive Officer since May 1998. Mr.
Reaves was a co-founder of TXEN, Inc. and he served as Executive Vice President
of TXEN, Inc. from 1989 to 1997. From 1981 to 1989, Mr. Reaves was employed by
SEAKO, Inc. in programming, implementation, customer support and sales and
marketing. Mr. Reaves served as Vice President of SEAKO, Inc. from 1985 to 1989.
H. Grey Wood has served as our President since January 1998 and as our Chief
Operating Officer since August 1997. Mr. Wood served as Vice President and
General Manager of TXEN, Inc. from 1995 to 1997. From 1993 to 1995, he was
Director and General Manager of the physician Practice Management Group of CSC
Healthcare Systems, Inc., a vendor of turnkey practice management and managed
care software.
John D. McKay has served as our Chief Financial Officer since 1997. From 1988 to
1996, he served as Controller of one of our predecessors, Computer Services
Corporation. From 1982 to 1988, Mr. McKay held various staff and management
positions with Ernst & Young LLP, focusing on healthcare related companies,
including HMOs, hospitals and large physician groups. Mr. McKay is a Certified
Public Accountant.
W. Sanders Pitman has served as Vice President and General Manager of the
Managed Care Services division since May 1997. In 1990, Mr. Pitman assisted in
the formation of MACESS Corporation, a supplier of imaging and workflow
solutions for the managed care industry. From 1990 to 1997, Mr. Pitman
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<PAGE> 54
served in various positions with MACESS, most recently as Chief Operating
Officer. From 1986 until 1990, Mr. Pitman held practice management and managed
care sales positions with SEAKO, Inc.
W. Luckey Crocker has served as Vice President and General Manager of the
Physician Practice Services division since September 1998. Mr. Crocker served as
Vice President of existing account sales from June 1998 to September 1998. Mr.
Crocker was Director of Existing Account Sales from 1996 to June 1998. Mr.
Crocker worked in sales for International Business Machines from 1993 to 1996.
He was Director of the Practice Management Division for CSC Healthcare Systems,
Inc., from 1989 to 1993, Vice President for Special Projects for SEAKO, Inc.
from 1988 to 1989, and Vice President of Sales and Customer Support for Computer
Services Corporation from 1987 to 1988.
Chris H. Horgen became a director of Nichols TXEN in 1998. Mr. Horgen served as
a director of TXEN, Inc., from 1992 to 1994. Mr. Horgen is a co-founder of
Nichols Research and has served as its Chairman of the Board since 1991 and as
its Chief Executive Officer since March 16, 1999. Mr. Horgen also served as
Chief Executive Officer of Nichols Research from 1983 to 1997. Mr. Horgen was
Co-Chairman of the Board of Nichols Research from 1984 to 1991 and its Executive
Vice President from 1976 to 1983. Mr. Horgen also serves as a director of
SouthTrust Bank of Alabama, N.A.
James D. Kever became a director of Nichols TXEN in 1998. Mr. Kever has served
as President and Co-Chief Executive Officer of ENVOY Corporation, an electronics
data interchange company, since 1995. He has served as a director of ENVOY
Corporation since 1991. Mr. Kever joined ENVOY Corporation as Treasurer and
General Counsel in 1981. From 1984 to 1995, he served as Executive Vice
President of ENVOY. Mr. Kever is a Certified Public Accountant and an attorney.
James I. Harrison, Jr. became a director of Nichols TXEN in 1998. Mr. Harrison
is the owner of Carport, Incorporated, a retail automotive parts store chain,
and has served as its Chairman of the Board and Chief Executive Officer since
1983. Mr. Harrison founded Harco Drug, Inc., a retail drug-store chain, in 1961
and served as its Chairman of the Board and Chief Executive Officer from 1961 to
1997, at which time it was merged with the RiteAid Corporation. Mr. Harrison
serves as a director of AmSouth Bank Corporation and ALFA, Inc.
Patsy L. Hattox became Nichols TXEN's Secretary in 1998. Ms. Hattox has been
employed by Nichols Research since 1976, and has served as the Secretary and
Chief Administrative Officer of Nichols Research since 1991. Ms. Hattox serves
on the Board of Directors of Nichols Research. Ms. Hattox's compensation is paid
by Nichols Research.
Allen E. Dillard became Nichols TXEN's Treasurer in 1998. Mr. Dillard has been
employed by Nichols Research since 1992 and has served as the Chief Financial
Officer of Nichols Research since 1994. Mr. Dillard's compensation is paid by
Nichols Research.
COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee is empowered to exercise all authority of the Board of
Directors of Nichols TXEN except as limited by the Delaware General Corporation
Law. Under Delaware law, an executive committee may not, among other things,
recommend to stockholders actions required to be approved by stockholders, fill
vacancies on the Board of Directors, amend the bylaws or approve the
reacquisition or issuance of shares of the corporation's capital stock.
The Compensation Committee is responsible for reviewing and recommending
salaries, bonuses and other compensation for our executive officers. The
Compensation Committee also is responsible for administering our stock option
plans and for establishing the terms and conditions of all stock options granted
under these plans, unless these functions have been retained by the Board of
Directors.
The Audit Committee is responsible for recommending independent auditors,
reviewing with the independent auditors the scope and results of the audit
engagement, monitoring our financial policies and control procedures and
reviewing and monitoring the provisions of non-audit services performed by our
auditors.
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<PAGE> 55
DIRECTOR COMPENSATION
Prior to completion of this offering, non-employee directors received no
compensation for service on the Board of Directors. Following completion of this
offering, directors not employed by Nichols TXEN or Nichols Research will
receive a fee of $2,500 for each board meeting attended and $500 for each
committee meeting attended which is held independently of a board meeting.
After completion of this offering, the non-employee directors will be eligible
to receive options pursuant to Nichols TXEN's Non-Employee Director Stock Option
Plan. The Director Stock Option Plan will become effective upon consummation of
this offering. Under the Director Stock Option Plan, each director who is not an
officer or employee of Nichols TXEN, Nichols Research or an officer or employee
of a majority-owned subsidiary or joint venture of Nichols TXEN, will be granted
an option to purchase 5,000 shares of common stock at the initial public
offering price. Each subsequently appointed or elected non-employee director
will be granted an option to purchase 1,000 shares of common stock at an
exercise price equal to the fair market value on the date of the grant. In
addition, each non-employee director will be granted an option at each annual
meeting of stockholders to purchase 1,000 shares of common stock at an exercise
price equal to the fair market value on the date of the grant. A total of 50,000
shares of common stock are available for awards under the Director Stock Option
Plan.
DIRECTOR INDEMNIFICATION
Nichols TXEN has entered into indemnification agreements with each of its
directors that provide the maximum indemnification allowed to directors under
Delaware law. In addition, as authorized by our amended and restated bylaws and
Delaware law, the indemnification agreements provide generally that we will
advance expenses incurred by directors in any action or proceeding as to which
they may be entitled to indemnification.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by Nichols
TXEN for the fiscal year ended August 31, 1998, for its Chief Executive Officer
and the four highest compensated executive officers of Nichols TXEN whose total
annual salary and bonuses determined at August 31, 1998, exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
YEAR ENDED
AUGUST 31, 1998(1)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
--------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Paul D. Reaves..................................... $125,000 $ 78,432 $1,993
Chief Executive Officer
Thomas L. Patterson................................ 133,529 -- 2,000
Chairman of the Board
H. Grey Wood....................................... 125,000 69,368 2,000
President and Chief Operating Officer
W. Sanders Pitman.................................. 110,000 187,704 1,420
Vice President and General Manager, Managed Care
W. Luckey Crocker.................................. 78,750 25,000 2,000
Vice President and General Manager, Physician
Practice
</TABLE>
- ---------------------------
(1) "Annual Compensation" does not include the value of perquisites or other
personal benefits, if any, furnished by Nichols TXEN to the officers (or
for which it reimburses the officers), unless the value of such benefits in
total exceeds the lesser of $50,000 or 10% of the total annual salary and
bonus reported in the above table.
(2) Amounts matched into a 401(k) Plan by Nichols TXEN under the Nichols
Research Retirement Plan for the fiscal year ended August 31, 1998.
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<PAGE> 56
EMPLOYEE BENEFIT PLANS
401(k) Plan
Substantially all full-time employees of Nichols TXEN are covered by a defined
contribution plan offered through Nichols Research. Employees are permitted to
defer up to 15% of their salary. Nichols Research matches the employee
contribution's up to a maximum of 2% of the employee's salary. Discretionary
contributions may also be made to the plan as determined annually by the Nichols
Research Board of Directors. Amounts charged to Nichols TXEN's earnings with
respect to the plan were approximately $38,000 for fiscal year 1996, $38,000 for
fiscal year 1997 and $124,000 for fiscal year 1998.
We intend to establish our own defined contribution plan with similar terms in
the future. Until that time, we will bear our allocable share of the costs of
the Nichols Research plan.
1998 Stock Option Plan
Nichols TXEN adopted the Nichols TXEN Corporation 1998 Stock Option Plan on
November 6, 1998. Nichols TXEN has reserved 1,700,000 shares of common stock,
subject to adjustments, for issuance to key employees of Nichols TXEN, its
subsidiaries and its parent corporation, Nichols Research. As of May 31, 1999,
options exercisable for 746,000 shares of common stock at an exercise price
equal to the initial public offering price were granted subject to the
completion of this offering.
The 1998 Stock Option Plan permits a committee composed of either the entire
Board of Directors or two or more disinterested non-employee directors of
Nichols TXEN to issue incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, and non-statutory stock options that
do not conform to the requirements of that Code section. The committee has
discretionary authority to determine the individuals to whom options will be
granted from among those individuals who are eligible, as well as the number of
options to be granted to each individual. The exercise price of each incentive
stock option shall not be less than 100% of the fair market value of the common
stock at the time of the grant, except in the case of a grant to an employee who
owns 10% or more of the outstanding stock of Nichols TXEN, the exercise price
shall be not less than 110% of such fair market value. The exercise price of
each non-statutory option will be determined by the committee at the time of the
grant of the non-statutory stock option, which price may not be less than the
fair market value of the shares at the time the option is granted, except that
with respect to not more than 10% of the shares of common stock authorized under
the 1998 Stock Option Plan, a committee composed solely of disinterested
non-employee directors may establish an exercise price below fair market value.
In addition, options may not be repriced to specify a price less than the
initial exercise price, except that with respect to not more than 10% of the
shares of common stock authorized under the 1998 Stock Option Plan, a committee
composed solely of disinterested non-employee directors may approve a repricing
of options specifying a lower price.
No non-statutory option is exercisable either in whole or in part prior to the
earlier of the date specified in the non-statutory option or six months from the
date the non-statutory option is granted. Each non-statutory option will expire
on the earlier of the date specified in the non-statutory option or ten years
from the date the non-statutory option is granted. No incentive option is
exercisable, either in whole or in part, prior to two years from the date it is
granted and in no event is an incentive option exercisable after the expiration
of five years from the date it is granted. Each incentive option is exercisable
in three installments. Up to one-third of the total shares granted may be
purchased after 24 months from the date of the grant, up to an additional
one-third may be purchased after 36 months and up to the final one-third may be
purchased after 48 months. Incentive option recipients may accumulate
installments not yet exercised, which may be exercised, in whole or in part, in
any subsequent period but not later than five years from the date the incentive
option is granted.
The Board of Directors may amend the 1998 Stock Option Plan without stockholder
approval, except with respect to:
- a change in the number of shares for which options may be granted under the
1998 Stock Option Plan either in the aggregate or as to any individual
employee;
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<PAGE> 57
- a change in the provisions relating to the determination of employees to whom
options may be granted;
- removal of the administration of the 1998 Stock Option Plan from the
committee;
- a decrease in the price at which incentive options may be granted; or
- a change in the restrictions on repricing options.
Employees' Stock Purchase Plan
On November 6, 1998, our Board of Directors and Nichols Research, as our sole
stockholder, adopted and approved the Nichols TXEN Corporation Employees' Stock
Purchase Plan. The plan was amended and restated on June 18, 1999, by our Board
of Directors and Nichols Research. A total of 1,000,000 shares of common stock,
subject to adjustments, have been reserved for purchase by employees upon the
exercise of options granted under the plan. The Stock Purchase Plan will be
administered by a committee composed of either the entire Board of Directors or
two or more non-employee directors who do not have a material financial
relationship with Nichols TXEN or any of its subsidiaries. Persons serving on
the Stock Purchase Plan's committee may receive option grants under the Stock
Purchase Plan.
Employees of Nichols TXEN, Nichols Research and their subsidiaries are eligible
to receive options under the Stock Purchase Plan. On each March 1, June 1,
September 1 and December 1, beginning after the effective date of this offering,
each eligible employee will be granted a non-transferable option to purchase
common stock from Nichols TXEN on the last day of the option period. Option
periods are three month periods beginning on March 1, June 1, September 1 and
December 1 and ending on the next May 31, August 31, November 30 and February
28. Options expire at the end of the option period. The price for stock
purchased under each option is 85% of its fair market value on the first day or
the last day of the option period, whichever is less. Fair market value on any
day means the closing price of the common stock on the Nasdaq National Market on
such day, or if not traded on such day, on the last preceding day on which the
stock was traded.
An employee may exercise the option granted to him only by authorizing payroll
deductions. As of the last day of the option period, the amount of payroll
deductions during such option period will be used to purchase from Nichols TXEN
whole shares of common stock under the employee's option. If an employee of
Nichols Research participates in our Stock Purchase Plan, he must allocate his
payroll deduction between the purchase of Nichols Research stock and Nichols
TXEN stock. An employee of Nichols Research is required to allocate either 20%
or 40% of his payroll deductions to purchase Nichols TXEN stock with the balance
of his payroll deductions allocated to purchase Nichols Research stock. If
during an option period an employee becomes ineligible to purchase stock under
the Stock Purchase Plan because of the termination of employment or if payroll
deductions are discontinued during an option period, the employee's payroll
deductions will be returned without interest to the employee.
EMPLOYMENT AGREEMENTS
Nichols TXEN's predecessor, TXEN, Inc., entered into an employment agreement
with Thomas L. Patterson on December 16, 1994. His employment agreement was
amended by Nichols TXEN on August 29, 1997, June 1, 1998, and November 6, 1998.
Under the provisions of the employment agreement, Mr. Patterson is employed as
the Chairman of the Board of Directors of Nichols TXEN on a part-time basis for
a term that ends two years after the effective date of this offering. His base
salary is an hourly rate for each hour of service performed by him. The
employment of Mr. Patterson will terminate upon his death or disability, upon 30
days prior written notice by either party, or for good cause. If Mr. Patterson
is terminated by Nichols TXEN on 30 days prior written notice or if Mr.
Patterson terminates his employment for good cause or due to his death or
disability, he will be paid, as additional compensation, 50% of his annualized
base salary for six months after the date of termination.
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<PAGE> 58
Nichols TXEN's predecessor, TXEN, Inc., entered into an employment agreement
with Paul D. Reaves on December 16, 1994. His employment agreement was amended
by Nichols TXEN on August 29, 1997, and November 6, 1998. Under the provisions
of the employment agreement, Mr. Reaves is employed as the Chief Executive
Officer for a term that ends two years after the effective date of this
offering. The employment agreement automatically renews on a month-to-month
basis thereafter. The employment agreement provides that Mr. Reaves will be paid
a monthly base salary of $12,500, subject to increases as authorized by the
Board of Directors. He may be awarded discretionary performance bonuses. The
employment of Mr. Reaves will terminate upon his death or disability, upon 30
days prior written notice by either party, or for good cause. If Mr. Reaves is
terminated by Nichols TXEN on 30 days prior written notice or if Mr. Reaves
terminates his employment for good cause or due to his death or disability, he
will be paid, as additional compensation, 50% of his annualized base salary for
six months after the date of termination.
Nichols TXEN entered into an employment agreement with H. Grey Wood on August
29, 1997. His employment agreement was amended on November 6, 1998. Under the
provisions of the employment agreement, Mr. Wood is employed as President and
Chief Operating Officer of Nichols TXEN for a term that ends two years after the
effective date of this offering. The employment agreement automatically renews
on a month-to-month basis thereafter. The employment agreement provides that Mr.
Wood will be paid a monthly base salary of $12,500, subject to increases as
authorized by the Board of Directors. He may be awarded discretionary
performance bonuses. The employment of Mr. Wood will terminate upon his death or
disability, upon 30 days prior written notice by either party, or for good
cause. If Mr. Wood is terminated by Nichols TXEN on 30 days prior written notice
or if Mr. Wood terminates his employment for good cause or due to his death or
disability, he will be paid, as additional compensation, an amount equal to his
monthly base salary for six months after the date of termination.
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<PAGE> 59
CERTAIN TRANSACTIONS
CORPORATE SERVICES AGREEMENT
After this offering, Nichols Research will retain a controlling equity interest
in Nichols TXEN. Nichols Research will furnish administrative services to
Nichols TXEN pursuant to a Corporate Services Agreement. Under the services
agreement, for an annual fee Nichols Research will provide or assist with
various administrative services, including:
- public reporting compliance;
- corporate record keeping;
- risk management;
- employee benefits administration;
- administration of investor and media relations;
- tax return preparation;
- centralized cash management; and
- financial services.
In fiscal year 1999, the fee is 2.4% of operating expenses less costs of goods
sold, defined as direct materials and purchased labor. In fiscal years 1996,
1997 and 1998 under a similar arrangement, Nichols TXEN paid $192,453, $249,577,
and $696,214, respectively, to Nichols Research for administrative services.
Nichols TXEN believes that the charges under the services agreement are
reasonable. For additional items, such as software development services or
administrative services that create unusual demands for resources, Nichols
Research will charge Nichols TXEN costs actually incurred in performing such
services plus a mutually acceptable fee. For the fiscal years ended August 31,
1996, 1997 and 1998, Nichols TXEN paid $145,506, $174,070 and $0, respectively,
to Nichols Research for these additional services. Nichols TXEN is not obligated
to use Nichols Research for these additional services. During the term of the
services agreement, the Nichols TXEN Board of Directors will elect as Secretary
of Nichols TXEN the Secretary of Nichols Research and will elect as Treasurer of
Nichols TXEN the Chief Financial Officer of Nichols Research. The Secretary and
Treasurer of Nichols TXEN will serve in such capacities without compensation
from Nichols TXEN. The services agreement automatically renews for successive
one-year terms, unless canceled by either Nichols Research or Nichols TXEN upon
90 days prior notice following the initial one-year term.
VOTING AGREEMENT
Nichols Research has entered into a Voting Agreement with Nichols TXEN dated
November 6, 1998, which will become effective upon completion of this offering.
Pursuant to the voting agreement, Nichols Research has agreed to vote all of its
shares of Nichols TXEN common stock at any meeting at which directors of Nichols
TXEN are elected in favor of the election of independent directors so that after
such election, if such persons are elected, there will be at least two
independent directors of Nichols TXEN. The voting agreement will terminate upon
the earlier of five years from the date of the voting agreement or the date upon
which Nichols Research beneficially owns 50% or less of the common stock of
Nichols TXEN.
TAX SHARING AGREEMENT
Nichols Research and Nichols TXEN have entered into a Tax Sharing Agreement
which generally provides for the manner in which the parties will bear taxes for
the period beginning on September 1, 1998, and ending upon the sale by Nichols
TXEN of the common stock pursuant to this offering and income tax deficiencies
or refunds resulting from future audit adjustments. Nichols TXEN will be
required to pay to Nichols Research an amount equal to the excess of the income
tax liability which Nichols TXEN would have for the short period over the amount
which Nichols TXEN has previously paid (or
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<PAGE> 60
been charged with by Nichols Research) with respect to such taxes. If additional
taxes must be paid by Nichols TXEN or Nichols Research as a result of an
adjustment made by a tax regulatory authority, and as a result of that
adjustment the other party would obtain an offsetting tax benefit, the party
obtaining the tax benefit pays an amount equal to the additional tax to the
party whose income tax liability was increased. Likewise, if income taxes are
reduced as a result of an adjustment made by a tax regulatory authority, and as
a result of that adjustment the other party would suffer an offsetting tax
detriment, the party whose taxes were reduced must pay such amount to the other
party. The tax sharing agreement also contains provisions dealing with
contesting adjustments made by tax regulatory authorities, determining who will
bear the expense of any such challenge and cooperation between the parties.
THE TXEN ACQUISITION
As part of the TXEN acquisition, the TXEN shares of the following named
executive officers and directors of Nichols TXEN were purchased by Nichols
Research for the following consideration consisting of cash and common stock of
Nichols Research:
<TABLE>
<CAPTION>
AGGREGATE
NAME CONSIDERATION
---- --------------
(IN THOUSANDS)
<S> <C>
Thomas L. Patterson......................................... $19,855
Paul D. Reaves.............................................. 8,519
H. Grey Wood................................................ 1,800
W. Luckey Crocker........................................... 463
Chris H. Horgen............................................. 2,672
</TABLE>
NETWORK SERVICES AGREEMENT WITH ENVOY CORPORATION
Nichols TXEN contracts with ENVOY Corporation for batch claims submission,
online verification and referral processing services. James D. Kever serves as
Co-Chief Executive Officer of ENVOY Corporation. Mr. Kever is a director of both
ENVOY Corporation and Nichols TXEN. The initial term of the agreement ended
December 31, 1998, and renews automatically for consecutive one year terms
unless either party gives 30 days notice of termination. ENVOY is compensated by
Nichols TXEN according to the number of transactions processed. For the fiscal
year ended August 31, 1998, we paid ENVOY an aggregate of $117,886 and for the
nine months ended May 31, 1999, we paid ENVOY an aggregate of $248,850.
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PRINCIPAL STOCKHOLDERS
Prior to this offering, Nichols Research owned 7,000,000 shares, or 100% of
Nichols TXEN. Nichols TXEN will sell 2,625,000 shares in connection with this
offering, and thereafter, Nichols Research will own 7,000,000 shares, or
approximately 73% of Nichols TXEN and 70% if the underwriters' over-allotment
option is exercised in full. In addition, Chris H. Horgen, the Chairman of the
Board of Nichols Research, has authority to direct the voting and disposition of
Nichols Research's shares of Nichols TXEN and, therefore, beneficially owns
these shares. Mr. Horgen disclaims beneficial ownership of these shares.
As of May 31, 1999, options covering 746,000 shares of common stock pursuant to
the 1998 Stock Option Plan and the Non-Employee Director Stock Option Plan were
granted subject to completion of this offering. The tables below set forth the
option grants to the executive officers and directors of Nichols TXEN, other
officers and employees of Nichols TXEN as a group, and other officers and
employees of Nichols Research as a group.
1998 STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
------------------
<S> <C>
Nichols TXEN executive officers and directors:
Thomas L. Patterson....................................... 40,000
Paul D. Reaves............................................ 89,000
H. Grey Wood.............................................. 94,000
W. Sanders Pitman......................................... 79,000
W. Luckey Crocker......................................... 22,500
John D. McKay............................................. 22,500
Chris H. Horgen........................................... 40,000
Allen E. Dillard.......................................... 5,000
Patsy L. Hattox........................................... 5,000
Other officers and employees of Nichols TXEN................ 329,000
Other officers and employees of Nichols Research............ 10,000
</TABLE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
------------------
<S> <C>
James D. Kever.............................................. 5,000
James I. Harrison, Jr....................................... 5,000
</TABLE>
The right to exercise options under the 1998 Stock Option Plan will not vest
until 24 months from the grant date. Up to one-third of the shares subject to
these initial grants may be purchased after 24 months from the date of grant, up
to an additional one-third may be purchased after 36 months from the date of
grant, and up to the final one-third may be purchased after 48 months from the
date of grant. None of the options may be exercised later than five years from
the grant date. The right to exercise options under the Non-Employee Director
Stock Option Plan will not vest until six months from the grant date. The
exercise price per share for all of the stock options listed above is the
initial public offering price.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Nichols TXEN's authorized capital stock consists of 30,000,000 shares of common
stock, par value $0.01 per share. As of May 31, 1999, Nichols TXEN had issued
and outstanding 7,000,000 shares of common stock. After this offering, Nichols
TXEN will have 9,625,000 shares of common stock outstanding.
COMMON STOCK
Holders of shares of common stock are entitled to one vote per share for the
election of directors and all matters to be submitted to a vote of Nichols
TXEN's stockholders. Nichols TXEN's amended and restated certificate of
incorporation does not provide for cumulative voting and, accordingly, the
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election. The
holders of shares of common stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by Nichols TXEN
out of funds legally available therefor. In the event of a dissolution,
liquidation or winding up of Nichols TXEN, holders of shares of common stock are
entitled to share ratably in all assets remaining after payment of all
liabilities and liquidation preferences, if any. Holders of shares of common
stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued by Nichols TXEN in connection with this offering will be, duly
authorized, validly issued, fully paid and nonassessable. The transfer agent and
registrar for the common stock is ChaseMellon Shareholder Services.
CERTAIN PROVISIONS OF DELAWARE LAW
Nichols TXEN is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
pursuant to which the person became an interested stockholder, unless the
business combination is approved in a manner prescribed by Delaware law. For
purposes of Section 203, a "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, then owns, or owned during the previous three years,
15% or more of Nichols TXEN's voting stock. Section 203 could prohibit or delay
mergers or other takeover or change in control attempts with respect to Nichols
TXEN and, accordingly, may discourage attempts to acquire Nichols TXEN.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Nichols TXEN's amended and restated certificate of incorporation provides that a
director of Nichols TXEN shall not be personally liable to Nichols TXEN or its
stockholders, except liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law;
- the unlawful payment of a dividend or unlawful stock purchase or redemption;
and
- any transaction from which the director derives an improper personal benefit.
The amended and restated certificate of incorporation and the amended and
restated bylaws also provide that Nichols TXEN shall indemnify directors and
officers of Nichols TXEN to the fullest extent permitted by the Delaware General
Corporation Law. Nichols TXEN has entered into indemnification agreements with
each of its directors.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering no market existed for the shares of the common stock of
Nichols TXEN. Nichols TXEN can make no predictions as to the effect, if any,
that sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of significant
amounts of the common stock in the public market, or the perception that such
sales may occur, could adversely affect prevailing market prices.
Upon consummation of this offering, Nichols TXEN will have outstanding 9,625,000
shares of common stock. Of the 9,625,000 shares outstanding upon completion of
this offering, the 2,625,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless they are purchased by "affiliates" of Nichols TXEN as that term is
defined in Rule 144 under the Securities Act. The remaining 7,000,000
outstanding shares of common stock may be sold in the public market only if
registered or sold pursuant to an exemption from registration such as Rule 144
or 144(k) promulgated under the Securities Act. Nichols Research may cause
Nichols TXEN to register for sale any or all of its shares of common stock.
Nichols Research, the officers and directors of Nichols TXEN and the executive
officers and directors of Nichols Research have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or agree
to dispose of (other than as gifts), any shares of common stock until 180 days
after the date of this prospectus without the prior written consent of CIBC
World Markets Corp. CIBC World Markets Corp., in its sole discretion and without
notice, may earlier release for sale in the public market all or any portion of
the shares subject to such lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned shares for at least
one year is entitled to sell in "brokers' transactions" or to market makers,
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock outstanding; or
- the average weekly trading volume in the common stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to
such sale.
Sales under Rule 144 are subject to the availability of current public
information about Nichols TXEN. After the expiration of the 180-day lock-up
period, 7,000,000 shares owned by Nichols Research will be eligible for sale in
the public market subject to compliance with Rule 144.
After the completion of this offering, Nichols TXEN intends to file a
Registration Statement on Form S-8 under the Securities Act to register:
- the 1,700,000 shares of common stock reserved for issuance under the 1998
Stock Option Plan;
- the 50,000 shares of common stock reserved under the Non-Employee Director
Stock Option Plan; and
- the 1,000,000 shares of common stock reserved for issuance under the
Employees' Stock Purchase Plan.
60
<PAGE> 64
UNDERWRITING
Nichols TXEN has entered into an underwriting agreement with the underwriters
named below. CIBC World Markets Corp., Friedman, Billings, Ramsey & Co., Inc.
and The Robinson-Humphrey Company, LLC are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
CIBC World Markets Corp. ...................................
Friedman, Billings, Ramsey & Co., Inc. .....................
The Robinson-Humphrey Company, LLC..........................
---------
Total.................................................... 2,625,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any shares are
purchased. Under the underwriting agreement, if any underwriter defaults in its
commitment to purchase shares, the commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The shares should be ready for delivery on or about , 1999, against
payment in immediately available funds. The representatives have advised Nichols
TXEN that the underwriters propose to offer the shares directly to the public at
the initial public offering price that appears on the cover page of this
prospectus. In addition, the representatives may offer some of the shares to
securities dealers at such price less a concession of $ per share. The
underwriters may also allow, and such dealers may reallow, a concession not in
excess of $ per share to other dealers. After the shares are released for
sale to the public, the representatives may change the offering price and other
selling terms at various times.
Nichols TXEN has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 375,000 additional shares from
Nichols TXEN to cover over-allotments. If the underwriters exercise all or part
of this option, they will purchase shares covered by the option at the initial
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the total price
to the public will be $ and the total proceeds to Nichols TXEN will be
approximately $ . The underwriters have severally agreed that, to the
extent the over-allotment option is exercised, they will each purchase a number
of additional shares proportionate to the underwriter's initial amount reflected
in the foregoing table.
The following table provides information regarding the amount of the discount to
be given to the underwriters by Nichols TXEN:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ------------------------- ---------------------------
<S> <C> <C> <C>
Nichols TXEN........................... $ $ $
Total.......................................... $ $
</TABLE>
61
<PAGE> 65
Nichols TXEN estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $1,000,000.
Nichols TXEN has agreed to indemnify the underwriters against liabilities
specified in the underwriting agreement, including liabilities under the
Securities Act of 1933.
Nichols TXEN, Nichols Research, the officers and directors of Nichols TXEN and
the executive officers and directors of Nichols Research have agreed to a
180-day "lock-up" with respect to the shares and other securities that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to some exceptions, for a period of 180
days following the date of this prospectus, Nichols TXEN and such persons may
not offer, sell, pledge or otherwise dispose of these securities without the
prior written consent of CIBC World Markets Corp. When determining whether to
release shares from the lock-up agreements, CIBC World Markets Corp. may
consider, among other factors, market conditions at the time, the number of
shares for which the release is requested and the stockholder's reasons for
requesting the release.
The representatives have informed Nichols TXEN that they do not expect
discretionary sales by the underwriters to exceed five percent of the shares
offered by this prospectus.
There is no established trading market for the shares. The offering price for
the shares has been determined by the representatives and Nichols TXEN, based on
the following factors:
- the history of and the prospects for the industry in which Nichols TXEN
competes;
- Nichols TXEN's management;
- Nichols TXEN's past and present operations;
- Nichols TXEN's historical results of operations;
- Nichols TXEN's prospects for future earnings and business potential;
- the general condition of the securities markets at the time of this offering;
- the recent market prices of securities of generally comparable companies;
- the market capitalizations and stages of development of other companies which
Nichols TXEN and the representatives believe to be comparable to Nichols
TXEN; and
- other factors deemed to be relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with this offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of their over-allotment option.
- penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
62
<PAGE> 66
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither the underwriters nor Nichols TXEN make any representation or prediction
as to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock offered hereby
will be passed upon for Nichols TXEN by Lanier Ford Shaver & Payne, P.C.,
Huntsville, Alabama. John R. Wynn is a member of the law firm Lanier Ford Shaver
& Payne, P.C., and is a director of Nichols Research. As of the date of this
prospectus, six attorneys of Lanier Ford Shaver & Payne, P.C., including Mr.
Wynn, beneficially owned an aggregate of 31,321 shares of Nichols Research
common stock. Legal matters in connection with this offering will be passed upon
for the underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements and schedule of Nichols TXEN and financial statements
of TXEN, Inc., appearing in this prospectus and the registration statement have
been audited by Ernst & Young LLP, independent auditors, to the extent indicated
in their reports thereon also appearing elsewhere herein and in the registration
statement. Such financial statements and schedule have been included herein in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
63
<PAGE> 67
WHERE YOU CAN FIND MORE INFORMATION
Nichols TXEN has filed a registration statement on Form S-1 with the Securities
and Exchange Commission in connection with this offering. In addition, upon
completion of the offering, Nichols TXEN will be required to file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy the registration
statement and any other documents filed by Nichols TXEN at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. The
Securities and Exchange Commission's Internet site at "http://www.sec.gov".
This prospectus is a part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of Nichols TXEN,
the reference may not be complete and you should refer to the exhibits that are
part of the registration statement for a copy of the contract or document.
After the offering, Nichols TXEN expects to provide annual reports to its
stockholders that include financial information examined and reported on by
Nichols TXEN's independent public accountant.
64
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NICHOLS TXEN CORPORATION:
Report of Independent Auditors.............................. F-2
Balance Sheets as of August 31, 1997 and 1998, and May 31,
1998 (unaudited) and May 31, 1999 (unaudited)............. F-3
Statements of Operations for the three years ended August
31, 1996, 1997 and 1998, and the nine months ended May 31,
1998 (unaudited) and May 31, 1999 (unaudited)............. F-4
Statements of Changes in Stockholder's Equity for the four
years ended August 31, 1995, 1996, 1997 and 1998, and the
nine month period ended May 31, 1999 (unaudited).......... F-5
Statements of Cash Flows for the three years ended August
31, 1996, 1997 and 1998, and the nine months ended May 31,
1998 (unaudited) and May 31, 1999 (unaudited)............. F-6
Notes to Financial Statements............................... F-7
TXEN, INC.:
Report of Independent Auditors.............................. F-17
Balance Sheets as of June 30, 1996 and 1997................. F-18
Statements of Operations for the two years ended June 30,
1996 and 1997............................................. F-19
Statements of Changes in Stockholders' Equity for the three
years ended June 30, 1995, 1996 and 1997.................. F-20
Statements of Cash Flows for the two years ended June 30,
1996 and 1997............................................. F-21
Notes to Financial Statements............................... F-22
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of
Nichols TXEN Corporation
We have audited the accompanying balance sheets of Nichols TXEN Corporation as
of August 31, 1997 and 1998, and the related statements of operations, changes
in stockholder's equity and cash flows for each of the three years in the period
ended August 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Nichols TXEN Corporation as of
August 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1998 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
January 7, 1999
F-2
<PAGE> 70
NICHOLS TXEN CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
----------------- -----------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 237 $ 1,804 $ 573 $ 693
Accounts receivable, less allowance for doubtful
accounts of $150 and $500 at August 31, 1997 and
1998, respectively................................. 6,946 9,919 15,673 11,487
Deferred income taxes................................. 156 436 369 394
Other................................................. 575 1,455 1,199 1,291
------- ------- ------- -------
Total current assets................................... 7,914 13,614 17,814 13,865
Property and equipment, net............................ 4,783 6,527 6,069 8,939
Deferred income taxes.................................. -- -- -- 606
Intangible assets, net................................. 39,355 37,574 38,260 31,524
------- ------- ------- -------
Total assets........................................... $52,052 $57,715 $62,143 $54,934
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................................... $ 1,105 $ 751 $ 525 $ 558
Accrued compensation and benefits..................... 459 1,444 1,725 1,540
Income taxes payable.................................. 419 2,126 1,535 661
Payable to Nichols Research and affiliates............ 1,003 2,635 5,101 2,161
Deferred revenue...................................... 2,371 379 4,218 98
Other................................................. 334 499 246 1,137
------- ------- ------- -------
Total current liabilities.............................. 5,691 7,834 13,350 6,155
Deferred income taxes.................................. 532 800 664 --
Commitments
Stockholder's equity:
Common stock.......................................... 70 70 70 70
Additional paid-in capital............................ 52,838 52,838 52,838 52,838
Retained earnings (deficit)........................... (7,079) (3,827) (4,779) (4,129)
------- ------- ------- -------
Total stockholder's equity............................. 45,829 49,081 48,129 48,779
------- ------- ------- -------
Total liabilities and stockholder's equity............. $52,052 $57,715 $62,143 $54,934
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 71
NICHOLS TXEN CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $10,370 $12,438 $43,480 $30,454 $38,086
Cost of revenues............................. 6,438 7,769 23,256 16,229 20,427
------- ------- ------- ------- -------
Gross profit................................. 3,932 4,669 20,224 14,225 17,659
Selling, general and administrative
expenses................................... 1,932 2,251 7,367 5,102 7,142
Research and development..................... 710 1,155 2,771 1,948 2,289
Depreciation and amortization................ 947 985 4,547 3,249 3,704
Write-off of purchased in-process research
and development............................ -- 8,500 -- -- --
Intangible asset impairment.................. -- -- -- -- 4,297
------- ------- ------- ------- -------
Income (loss) from operations................ 343 (8,222) 5,539 3,926 227
Other income (expense):
Other income (expense)...................... -- -- (4) (3) (21)
Equity in earnings of TXEN, Inc............. 94 656 -- -- --
------- ------- ------- ------- -------
Income (loss) before income taxes............ 437 (7,566) 5,535 3,923 206
Income tax expense........................... 117 107 2,283 1,623 508
------- ------- ------- ------- -------
Net income (loss)............................ $ 320 $(7,673) $ 3,252 $ 2,300 $ (302)
======= ======= ======= ======= =======
Earnings (loss) per common share............. $ 0.05 $ (1.10) $ 0.46 $ 0.33 $ (0.04)
======= ======= ======= ======= =======
Weighted average common shares outstanding... 7,000 7,000 7,000 7,000 7,000
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 72
NICHOLS TXEN CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1995.................. 7,000,000 $70 $ 9,038 $ 274 $ 9,382
Net income.................................. -- -- 320 320
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1996.................. 7,000,000 70 9,038 594 9,702
Contribution from Nichols Research for
acquisition of TXEN....................... -- 43,800 -- 43,800
Net loss.................................... -- -- (7,673) (7,673)
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1997.................. 7,000,000 70 52,838 (7,079) 45,829
Net income.................................. -- -- 3,252 3,252
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1998.................. 7,000,000 70 52,838 (3,827) 49,081
Stock dividend and reverse stock split...... 7,000,000 70 -- -- --
Net loss (unaudited)........................ -- -- (302) (302)
--------- --- ------- ------- -------
BALANCE AT MAY 31, 1999 (UNAUDITED)......... 7,000,000 $70 $52,838 $(4,129) $48,779
========= === ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 73
NICHOLS TXEN CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------ -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 320 $ (7,673) $ 3,252 $ 2,300 $ (302)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization.............. 947 985 4,547 3,249 3,704
Provision for doubtful accounts............ -- -- 350 108 272
Equity in earnings of TXEN, Inc............ (94) (656) -- -- --
Deferred income taxes...................... 54 (4) (12) (81) (1,364)
Write-off of purchased in-process research
and development......................... -- 8,500 -- -- --
Intangible asset impairment................ -- -- -- -- 4,297
Changes in assets and liabilities, net of
effects of acquisition:
Accounts receivable...................... (531) (584) (3,323) (8,835) (1,840)
Other assets............................. (228) (73) (880) (624) 164
Accounts payable......................... 2 5 (354) (580) (193)
Accrued compensation and benefits........ 59 44 985 1,266 96
Payable to Nichols Research and
affiliates............................ 438 309 1,632 5,214 (1,939)
Other current liabilities................ 115 79 120 1,759 357
------ -------- ------- ------- -------
Net cash provided by operating activities... 1,082 932 6,317 3,776 3,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (684) (909) (4,185) (3,071) (4,012)
Payments for acquisitions, net of cash
acquired.................................. -- (17,439) -- -- --
Additions to deferred software development
cost...................................... (280) (490) (565) (369) (351)
------ -------- ------- ------- -------
Net cash used by investing activities....... (964) (18,838) (4,750) (3,440) (4,363)
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers from Nichols Research............. -- 17,892 -- -- --
------ -------- ------- ------- -------
Net cash provided by financing activities... -- 17,892 -- -- --
------ -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 118 (14) 1,567 336 (1,111)
Cash and cash equivalents at beginning of
period.................................... 133 251 237 237 1,804
------ -------- ------- ------- -------
Cash and cash equivalents at end of
period.................................... $ 251 $ 237 $ 1,804 $ 573 $ 693
====== ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Issuance of Nichols Research common stock as
consideration in acquisitions............. $ -- $ 26,325 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 74
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Nichols SELECT Corporation, a wholly owned subsidiary of Nichols Research
Corporation, was incorporated under the laws of the State of Delaware on
September 17, 1996. Nichols TXEN is a provider of outsourcing solutions for
information technology and administrative services in the managed care and
physician practice management markets. All references to Nichols TXEN in the
notes to the Financial Statements refer to Nichols TXEN Corporation and its
predecessor businesses and divisions, as discussed below.
Nichols Research formed CSC Acquisition, Inc. as a wholly owned subsidiary on
June 6, 1995. On June 30, 1995, CSC Acquisition acquired Computer Services
Corporation (CSC). Nichols Research formed Nichols SELECT Corporation as a
wholly owned subsidiary on September 17, 1996. On September 23, 1996, CSC
Acquisition was merged into Nichols SELECT. On December 16, 1994, Nichols
Research acquired 19.9% of the capital stock of TXEN, Inc., with an option to
acquire the remaining 80.1% of TXEN. On August 29, 1997, Nichols Research
exercised its option and acquired the remaining 80.1% of TXEN through a merger
of TXEN into Nichols SELECT, which after the merger continued to be wholly owned
by Nichols Research. After the TXEN merger, Nichols SELECT changed its name to
Nichols TXEN Corporation.
Basis of Presentation
The accompanying financial statements have been prepared using Nichols
Research's historical basis in the selected assets and liabilities of Nichols
TXEN. The financial statements reflect the results of operations, financial
condition and cash flows of Nichols TXEN as a component of Nichols Research and
may not be indicative of the actual results of operations and financial position
of Nichols TXEN. Nichols TXEN believes the statements of operations include a
reasonable allocation of administrative costs, which are described in Note 2,
incurred by Nichols Research on behalf of Nichols TXEN.
On November 6, 1998, Nichols TXEN amended its Certificate of Incorporation to
change the authorized capital stock from 1,000 shares of $1.00 par value common
stock to 30,000,000 shares of $0.01 par value common stock and effected a
7,500-for-1 stock split in the form of a stock dividend of 7,499 shares for each
one share outstanding. As a result of the stock split, the outstanding shares of
common stock of Nichols TXEN increased to 7,500,000 shares. On June 18, 1999,
Nichols TXEN effected a reverse stock split in the form of a reduction in the
number of issued and outstanding shares of common stock from 7,500,000 shares to
7,000,000 shares. All share and per share amounts have been retroactively
restated to reflect the reverse stock split.
Earnings Per Share
In February 1997, Statement of Financial Account Standards (SFAS) No. 128,
Earnings per Share, was issued which requires the presentation of basic and
diluted earning per share for each period presented in the Company's financial
statements. SFAS No. 128 also requires presentation for sale of securities in a
public market. Basic earnings per share of common stock is computed by dividing
net income by the weighted average number of common shares outstanding during
the period. For purposes of the calculation of basic earnings per share,
weighted average common shares outstanding assumes shares of Common Stock are
outstanding for each period presented (see Basis of Presentation above). Diluted
earnings per share is calculated in the same manner as basic earnings per share
as there are no additional common stock equivalents in include. Employee stock
options for approximately 746,000 shares of common stock are to be issued upon
completion of an initial public offering of Nichols TXEN's common stock at the
offering price are assumed to have no dilutive effect.
F-7
<PAGE> 75
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue from services is recognized either as the services are performed based
on Nichols TXEN's standard rates for the applicable services or as contract
milestones are achieved, if specified and required under the contract with the
customer. Revenue from post-contract customer support is recognized in the
period the customer support services are provided. Nichols TXEN's long-term
contracts typically have initial terms ranging from two to five years. These
contracts contain automatic one year renewal provisions. Substantially all of
these contracts contain financial penalties for early termination or transfer
from administrative services to technology services. The Company recognizes
revenues monthly based on contractual services provided during the month. For
example, monthly bills to customers include amounts due for any claims
adjudicated, processed or coded in the prior billing month. Revenue recognized
under contracts with milestones has not been significant in prior years and the
Company currently has no such agreements in effect.
Concentration of Credit Risk and Financial Instruments
Financial instruments which subject Nichols TXEN to credit risk are primarily
trade accounts receivable. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the large number and diversity of
customers comprising Nichols TXEN's customer base. Nichols TXEN believes that
any risk associated with trade accounts receivable is adequately provided for in
the allowance for doubtful accounts. Nichols TXEN generally does not require
collateral on its trade accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of three to ten years for
equipment and furniture and over the terms of the related leases for leasehold
improvements.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Nichols
TXEN adopted Statement No. 121 in the first quarter of fiscal year 1997 with no
impact to the financial statements.
Income Taxes
Historically, Nichols TXEN's operations have been included in the consolidated
federal income tax returns filed by Nichols Research. Income tax expense as
presented in the accompanying financial statements has been calculated on a
separate tax return basis. Deferred income taxes are provided for temporary
differences between financial and taxable income, primarily related to accrued
liabilities, intangible amortization and use of accelerated depreciation methods
for income tax purposes.
Cash and Temporary Cash Investments
Nichols TXEN considers cash equivalents as those securities that are available
upon demand or have maturities of three months or less at the time of purchase.
At August 31, 1998, temporary cash investments consisted of various money market
accounts, primarily with an Alabama bank.
F-8
<PAGE> 76
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
Goodwill and customer base are being amortized on a straight-line basis over
twenty years. Workforce is being amortized on a straight-line basis over seven
years. Nichols TXEN periodically evaluates the recoverability of such
intangibles resulting from business acquisitions and measures the amount of
impairment, if any, by assessing current and future levels of income and cash
flows as well as other factors, such as business trends and prospects and market
and economic conditions. Nichols TXEN assesses long-lived assets, of which
goodwill associated with assets acquired in a purchase business combination is
included, for impairment evaluations under Statement No. 121.
Deferred software development costs which are primarily comprised of salaries
and related costs, are expensed until technological feasibility is established
and then capitalized until a marketable product is completed. Technological
feasibility is established upon completion of a working model or when a detail
product design and program design exists. Amortization of capitalized software
costs begins when the related product is available for general release to
customers and is provided for each product based on the greater of the amount
computed using (1) the ratio of current gross revenues to total current and
anticipated future gross revenues for the related software or (2) the
straight-line method over a five-year life or the product's estimated economic
life, if shorter.
Stock Options
From time to time Nichols Research has granted stock options for the purchase of
shares of the common stock of Nichols Research to selected Nichols TXEN
employees. These grants had an exercise option price equal to the fair value of
the shares at the date of option grant. Nichols Research accounts for stock
option grants in accordance with the Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and intends to continue to do
so; accordingly, no compensation expense for such stock option grants is
included in the financial statements of Nichols TXEN.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
Interim Financial Statements (Unaudited)
The accompanying unaudited financial statements as of May 31, 1998, and May 31,
1999, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months
ended May 31, 1999, are not necessarily indicative of the results that may be
expected for the year ended August 31, 1999.
2. RELATED PARTY TRANSACTIONS
Nichols TXEN utilized the central cash management system of Nichols Research to
finance its operations. Cash requirements are satisfied either by intercompany
transactions between Nichols Research and Nichols TXEN under the centralized
cash management system or by cash from operations. Such
F-9
<PAGE> 77
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
2. RELATED PARTY TRANSACTIONS (CONTINUED)
intercompany transactions are included in the payable to Nichols Research's
account. Intercompany transactions between Nichols Research and Nichols TXEN do
not bear interest and, therefore, no interest charge is reflected in the
accompanying statements of operations.
Nichols Research provides and assists with various administrative services for
Nichols TXEN. Such corporate administrative expenses amounting to $192,453,
$249,577 and $696,214, have been allocated to Nichols TXEN during the fiscal
years ended August 31, 1996, 1997 and 1998, respectively, and are reflected in
the accompanying statements of operations as selling, general and administrative
expenses. These costs were allocated to Nichols TXEN by multiplying certain
direct operating expenses by a standard overhead rate for each period presented.
The standard overhead rate was developed through analysis of actual services and
related estimated costs provided to Nichols TXEN on a historical basis. However,
the costs of these transactions may differ from those that would result from
transactions with unrelated parties.
An analysis of the intercompany activity included in the payable to Nichols
Research and affiliates follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Allocation of corporate services and employee benefits...... $ 192 $ 250 $ 696
Other net payments/transfers to Nichols Research relating to
normal cash management activity........................... 46 22 936
Payable to Nichols Research................................. $ 731 $1,003 $2,635
Average amount outstanding to Nichols Research.............. $ 742 $ 831 $3,189
</TABLE>
Substantially all full-time employees of Nichols TXEN are covered by a defined
contribution plan offered through Nichols Research. Employees are permitted to
defer up to 15% of their salary. Nichols Research matches the employee's
contribution up to a maximum of 2% of the employee's salary. Discretionary
contributions may also be made to the plan as determined annually by the Nichols
Research Board of Directors. Amounts charged to Nichols TXEN's earnings with
respect to the plan were approximately $38,000, $38,000 and $124,000 for 1996,
1997 and 1998, respectively.
Nichols TXEN intends to establish its own defined contribution plan with similar
terms in the future. Until that time, Nichols TXEN will bear its allocable share
of the costs of the Nichols Research plan.
Nichols TXEN contracts with ENVOY Corporation for batch claims submission,
online verification and referral processing services. James D. Kever serves as
Co-Chief Executive Officer of ENVOY Corporation. Mr. Kever is a director of both
ENVOY Corporation and Nichols TXEN. The initial term of the agreement ended
December 31, 1998, and renews automatically for consecutive one year terms
unless either party gives 30 days notice of termination. ENVOY is compensated by
Nichols TXEN according to the number of transactions processed. For the fiscal
year ended August 31, 1998, we paid ENVOY an aggregate of $117,886 and for the
nine months ended May 31, 1999, we paid ENVOY an aggregate of $248,850.
F-10
<PAGE> 78
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
3. INCOME TAXES
Income taxes allocated to Nichols TXEN were determined as if Nichols TXEN filed
on a separate income tax return basis. The provisions for income taxes for the
years ended August 31, consist of the following :
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................... $154 $101 $2,070
State...................................................... 16 10 225
---- ---- ------
170 111 2,295
---- ---- ------
Deferred:
Federal.................................................... (46) (4) (11)
State...................................................... (7) -- (1)
---- ---- ------
(53) (4) (12)
---- ---- ------
$117 $107 $2,283
==== ==== ======
</TABLE>
The significant components of deferred tax assets and liabilities as of August
31:
<TABLE>
<CAPTION>
1997 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Accrued liabilities not currently deductible............... $ 92 $255
Allowance for doubtful accounts receivable................. 64 181
---- ----
Total current deferred tax assets........................... 156 436
---- ----
Non-current deferred tax liabilities:
Basis difference for property and equipment................ 311 472
Amortization of intangibles................................ 221 328
---- ----
Total non-current deferred tax liabilities.................. 532 800
---- ----
$376 $364
==== ====
</TABLE>
Income tax expense as a percentage of income before income taxes for the years
ended August 31, varies from the federal statutory rate due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
----- ------ -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% (34.0)% 34.0%
State income taxes, net of federal benefit.................. 3.7 -- 4.1
Non-deductible write-off of purchased in-process research
and development........................................... -- 38.2 --
Equity in earnings of TXEN, Inc............................. (7.3) (2.9) --
Other....................................................... (3.6) 0.1 3.1
----- ------ -----
26.8% 1.4% 41.2%
===== ====== =====
</TABLE>
Nichols TXEN made payments in lieu of income taxes to Nichols Research of
approximately $100,000, $75,000 and $1,800,000, in 1996, 1997 and 1998,
respectively.
F-11
<PAGE> 79
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
4. COMMITMENTS
Nichols TXEN leases office facilities under various operating leases. The leases
generally have terms of one to ten years. Rent expense for all operating leases
for the years ended August 31, was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Total rent expense.......................................... $ 299 $ 333 $ 821
</TABLE>
Future minimum lease payments under operating leases with remaining terms of one
year or more for the years ended August 31, are (in thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total.................................... $1,535 $1,659 $1,659 $1,659 $1,659 $8,163
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of August 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures...................................... $1,152 $1,400
Data processing and computer equipment...................... 2,627 5,275
Other....................................................... 1,511 2,042
------ ------
5,290 8,717
Less accumulated depreciation............................... 507 2,190
------ ------
$4,783 $6,527
====== ======
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets were comprised of the following as of August 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $23,536 $23,536
Customer base............................................... 13,365 13,365
Deferred software development costs......................... 2,864 3,872
Workforce................................................... 780 780
------- -------
40,545 41,553
Less accumulated amortization............................... 1,190 3,979
------- -------
$39,355 $37,574
======= =======
</TABLE>
7. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS
Nichols Research has employee stock option plans that provide for the issuance
of incentive stock options (as defined by the Internal Revenue Code) and
nonstatutory stock options to key employees, including officers of Nichols TXEN.
Options are, in general, nontransferable and exercisable only during employment.
Options expire five years from the date of grant.
F-12
<PAGE> 80
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
7. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS (CONTINUED)
A summary of activity relating to Nichols Research stock options of Nichols
TXEN's employees is as follows:
<TABLE>
<CAPTION>
INCENTIVE NONSTATUTORY
TOTAL STOCK OPTIONS TOTAL
------- ------------- ------------
<S> <C> <C> <C>
Outstanding at August 31, 1996........................... 104,460 93,996 10,464
Outstanding at August 31, 1997........................... 133,564 123,063 10,501
Outstanding at August 31, 1998........................... 131,385 125,374 6,011
Exercisable at August 31, 1998........................... 19,291 19,291 --
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NUMBER WEIGHTED WEIGHTED AVERAGE AVERAGE
RANGE OF OPTIONS AVERAGE REMAINING NUMBER EXERCISABLE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
--------------- ----------- -------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$10.00 -- $15.50 43,615 $12.02 1.93 years 18,541 $11.88
$20.38 -- $23.50 52,770 22.49 3.74 years 750 21.50
$24.50 -- $25.00 35,000 24.93 3.94 years -- --
</TABLE>
Nichols Research has an employee stock purchase plan that allows eligible
employees to purchase common stock at less than fair value. The purchase price
is 85% of fair market value on each quarterly purchase date. Purchases are
limited to the lesser of 10% of an employee's annual compensation or $25,000.
Shares of common stock issued under this plan were 2,018, 3,482 and 20,373, in
1996, 1997 and 1998, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation, which requires that financial
statements include disclosures about the stock-based employees compensation and
allows, but does not require, a fair value-based method of accounting for such
compensation. As allowed under the provisions of Statement No. 123, Nichols TXEN
has elected to apply APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock based plans.
Accordingly, no compensation cost has been recognized for the qualified stock
option plans and the employee stock purchase plans. Had compensation cost for
these programs been determined based on the fair value at the grant dates for
awards under these programs consistent with Statement No. 123, Nichols TXEN's
net income (loss) would have been reduced to the pro forma amounts indicated
below. The effects of applying Statement No. 123 on a pro forma basis are not
likely to be representative of the effects on reported pro forma net income
(loss) for future years as the estimated compensation cost reflects only options
granted subsequent to August 31, 1995.
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss):
As reported................................................ $ 320 $(7,673) $ 3,252
Pro forma.................................................. 302 (7,766) 2,934
</TABLE>
The fair value of each option grant is estimated on the date of grant using a
type of Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants in fiscal 1996, 1997 and 1998, respectively;
dividend yield of 0% for all years, expected volatility factors of 0.378, 0.312
and 0.391; risk-free interest rates of 6.64%, 6.23% and 6.37%; and expected
lives of four years.
F-13
<PAGE> 81
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
8. BUSINESS COMBINATIONS
In fiscal year 1995, Nichols Research purchased 19.9% of the capital stock of
TXEN, for approximately $1.5 million. In August 1997, Nichols Research exercised
its option to acquire the remaining 80.1% of the capital stock of TXEN for
aggregate consideration of approximately $43.8 million. The total purchase price
for the TXEN acquisition was allocated to the TXEN assets and liabilities. The
excess of the purchase price over the fair market value of the tangible assets
acquired, $42.8 million, was allocated to the following intangibles: $8.5
million to in-process research and development, $17.4 million to goodwill, $14.1
million to other intangibles and $2.8 million to capitalized software
development. In-process research and development of $8.5 million was expensed in
the fourth quarter of 1997. The fair value of the acquired in-process technology
was determined based on an analysis of the markets, cash flows and risk of
achieving such cash flows. Goodwill and other intangibles of $30.7 million are
being amortized using the straight-line method over an estimated useful life of
20 years.
Of the total purchase price for the acquisition of TXEN, $8.5 million was
allocated to ten software programs and systems constituting in-process
technology. At the date of acquisition, the technological feasibility of the
acquired technology had not been established and the acquired technology has no
alternative future uses. There can be no assurance that the purchased in-process
technology will be successfully developed. The acquired in-process technology
consisted of ten software and systems development projects to reduce the time
and personnel needed to perform managed care administrative functions and
provide enhanced information reports. At the date of acquisition, the estimated
cost to complete the projects was $1.8 million, of which $0.4 million was spent
in fiscal year 1998 and of which $1.3 million is expected to be spent in the
fiscal year 1999. To the extent the in-process technology is not successfully
developed, this could have a material adverse impact on Nichols TXEN's operating
results and financial condition.
The following unaudited pro forma summary presents information as if the TXEN
acquisition had occurred at the beginning of the fiscal year ended August 31,
1996. The charge of $8.5 million related to the write-off of purchased
in-process research and development has been included in the pro forma results
for the year ended August 31, 1996. The pro forma information is presented for
informational purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
companies.
<TABLE>
<CAPTION>
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $ 18,274 $27,921
Net income (loss)........................................... $(10,266) $ 1,030
</TABLE>
9. SUBSEQUENT EVENTS (UNAUDITED):
In connection with a proposed public offering of a portion of Nichols TXEN's
common stock, Nichols TXEN and Nichols Research would execute and deliver
related agreements, the proposed forms of which are summarized below.
Services Agreement
Nichols Research will furnish administrative services to Nichols TXEN pursuant
to a Corporate Services Agreement. Under the Corporate Services Agreement,
Nichols Research will provide various administrative services, including public
reporting compliance, corporate record keeping, risk management, employee
benefit administration, administration of investor and media relations, tax
return preparation, centralized cash management and financial and other services
for an annual fee. In fiscal year 1999, the fee is 2.4% of operating expenses
less costs of goods sold defined as direct materials and purchased labor. In
fiscal years
F-14
<PAGE> 82
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
9. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
1996, 1997 and 1998, under a similar arrangement, Nichols TXEN paid $192,453,
$249,577, and $696,214, respectively, to Nichols Research for administrative
services. Nichols TXEN believes that the charges under the Corporate Services
Agreement are reasonable. For additional items, such as software development
services or administrative services that create unusual demands for resources,
Nichols Research will charge Nichols TXEN costs actually incurred in performing
such services plus a mutually acceptable fee. For the fiscal years ended August
31, 1996, 1997 and 1998, Nichols TXEN paid $145,506, $174,070 and $0,
respectively, to Nichols Research for these additional services. Nichols TXEN is
not obligated to use Nichols Research for these additional services. During the
term of the services agreement, the Nichols TXEN Board of Directors will elect
as Secretary the Secretary of Nichols Research and will elect as Treasurer the
Chief Financial Officer of Nichols Research. The Secretary and Treasurer will
serve in such capacities without compensation from Nichols TXEN. The services
agreement automatically renews for successive one-year terms, unless canceled by
either Nichols Research or Nichols TXEN upon 90 days prior notice following the
initial one-year term.
Voting Agreement
Nichols Research has entered into a Voting Agreement with Nichols TXEN dated
November 6, 1998, which will become effective upon completion of an initial
public offering. Pursuant to the Voting Agreement, Nichols Research has agreed
to vote all of its shares of Nichols TXEN common stock at any meeting at which
directors are elected in favor of the election of independent directors so that
after such election, if such persons are elected, there will be at least two
independent directors of Nichols TXEN. The Voting Agreement will terminate upon
the earlier of five years from the date of the Voting Agreement or the date upon
which Nichols Research owns beneficially 50% or less of the common stock of
Nichols TXEN.
Tax Sharing Agreement
Nichols Research and Nichols TXEN have entered into a Tax Sharing Agreement
which generally provides for the manner in which the parties will bear taxes for
the period beginning on September 1, 1998, and ending upon the sale by Nichols
TXEN of the common stock pursuant to this offering and income tax deficiencies
or refunds resulting from future audit adjustments. Nichols TXEN will be
required to pay to Nichols Research an amount equal to the excess of the income
tax liability which Nichols TXEN would have for the short period over the amount
which Nichols TXEN has previously paid (or been charged with by Nichols
Research) with respect to such taxes. If additional taxes must be paid by
Nichols TXEN or Nichols Research as a result of an adjustment made by a tax
regulatory authority, and as a result of that adjustment, the other party would
obtain an offsetting tax benefit, the party obtaining the tax benefit pays an
amount equal to the additional tax to the party whose income tax liability was
increased. Likewise, if income taxes are reduced as a result of an adjustment
made by a tax regulatory authority, and as a result of that adjustment, the
other party would suffer an offsetting tax detriment, the party whose taxes were
reduced must pay such amount to the other party. The Tax Sharing Agreement also
contains provisions dealing with contesting adjustments made by tax regulatory
authorities, determining who will bear the expense of any such challenge and
cooperation between the parties.
10. INTANGIBLE ASSET IMPAIRMENT (UNAUDITED)
At February 18, 1999, Nichols TXEN recorded an intangible asset impairment
charge of $4.3 million. As previously disclosed, management regularly monitors
its results of operations and other developments within the industry to adjust
its cash flow forecast, as necessary, to determine if an adjustment is necessary
to the carrying value of Nichols TXEN's intangible assets.
F-15
<PAGE> 83
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
10. INTANGIBLE ASSET IMPAIRMENT (UNAUDITED) (CONTINUED)
During the second quarter of 1999, the management of Nichols TXEN believed there
were events and changes in circumstances that warranted a re-assessment as to
whether the carrying amount of the goodwill related to the 1995 purchase of the
practice management business of CSC was still recoverable. These events include:
(1) loss of two significant customers; (2) discontinuance of turnkey sales; and
(3) a reduction in technology outsourcing revenues. Therefore, in accordance
with applicable accounting rules, management prepared an undiscounted cash flow
analysis over the estimated recovery period to determine if these intangible
assets were still recoverable. Management prepared the analysis with assumptions
that reflected its current outlook on the business. In all instances, management
believed the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: (1) revenue was forecasted to decline through
fiscal 2000 and then remain flat; (2) EBITDA margin was forecasted to continue
to decrease in 1999, increase slightly over the following four years and then
stabilize at a moderate margin over the remaining life of the assets; and (3)
capital spending would be maintained in the range of 3% of revenue. Since the
undiscounted cash flow model showed an impairment of Nichols TXEN's long-lived
assets, Nichols TXEN used a discounted cash flow model to measure the fair value
of these long-lived assets, which was consistent with Nichols TXEN's policy. The
fair value calculation determined the fair value of the long-lived assets was
less than book value, which resulted in the write-off of all of the goodwill
associated with the CSC acquisition in accordance with paragraph 12 of SFAS 121.
11. CONTINGENCY (UNAUDITED)
In the third quarter of fiscal 1999 Nichols TXEN was contacted by legal counsel
representing the owner of patented technology allegedly possessing functionality
similar to that of Nichols TXEN's non-patented technology for electronic
integrated commerce and healthcare management systems. This claim has been
referred to counsel, and is in the early stages of evaluation. Nichols TXEN has
been offered an opportunity to obtain a license for the use of this patented
technology. Nichols TXEN can give no assurance that the terms of any offered
licenses will be acceptable to Nichols TXEN.
F-16
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TXEN, Inc.
We have audited the accompanying balance sheets of TXEN, Inc. as of June 30,
1996 and 1997 and the related statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TXEN, Inc. at June 30, 1996 and
1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996 the Company changed
its method of accounting for depreciation.
ERNST & YOUNG LLP
Birmingham, Alabama
August 1, 1997
F-17
<PAGE> 85
TXEN, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 631 $1,146
Accounts receivable, net of allowance for doubtful accounts
of $35 and $125 at June 30, 1996 and 1997,
respectively............................................. 1,096 4,771
Prepaid expenses........................................... 85 111
Income taxes receivable.................................... 25 --
Deferred income taxes...................................... 301 211
Inventory.................................................. 17 15
Other...................................................... 4 --
------ ------
Total current assets........................................ 2,159 6,254
Property and equipment, net................................. 2,272 2,917
Deferred software development............................... -- 662
------ ------
Total assets................................................ $4,431 $9,833
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder................................ $ 8 $ 8
Customer deposits.......................................... 129 --
Accounts payable and accrued expenses...................... 171 722
Accrued salaries, bonuses and vacation..................... 209 398
Income taxes payable....................................... -- 433
Current portion of long-term debt.......................... 253 276
Short-term notes........................................... 135 --
Deferred revenue........................................... 1,071 2,049
Interest payable........................................... -- 231
Accrued officers salaries.................................. -- 288
Other...................................................... 7 3
------ ------
Total current liabilities................................... 1,983 4,408
Interest payable............................................ 200 --
Accrued officers salaries................................... 288 --
Deferred income taxes....................................... 124 395
Long-term debt to stockholders.............................. 258 274
Long-term debt.............................................. 639 366
Stockholders' equity:
Preferred stock, $.002 par value; 1 share authorized, 1
share and 0 shares issued and outstanding at 1996 and
1997, respectively....................................... 1,500 --
Class A common stock, $.002 par value; 5,000,000 shares
authorized, 5,000,000 and 4,000,500 shares issued and
outstanding at 1996 and 1997, respectively............... 10 8
Class B common stock, $.002 par value; 1,250,000 shares
authorized, 0 and 999,500 shares issued and outstanding
at 1996 and 1997, respectively........................... -- 2
Additional paid-in capital................................. 410 1,910
Retained earnings (deficit)................................ (532) 2,889
Notes receivable from stockholders......................... (449) (419)
------ ------
Total stockholders' equity............................... 939 4,390
------ ------
Total liabilities and stockholders' equity.................. $4,431 $9,833
====== ======
</TABLE>
See accompanying notes.
F-18
<PAGE> 86
TXEN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues.................................................... $ 6,860 $14,980
Cost of revenues............................................ 3,212 4,848
------- -------
Gross profit................................................ 3,648 10,132
Selling, general and administrative expenses................ 2,467 2,945
Research and development.................................... 926 1,069
Depreciation and amortization............................... 532 709
------- -------
Income (loss) from operations............................... (277) 5,409
Other income (expense):
Interest expense........................................... (153) (88)
Interest income............................................ 102 75
Other...................................................... -- 4
------- -------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle............................ (328) 5,400
Income tax expense (benefit)................................ (93) 1,979
------- -------
Income (loss) before cumulative effect of a change in
accounting principle...................................... (235) 3,421
Cumulative effect on prior years of changing to a different
depreciation method (net of taxes of $33)................. 82 --
------- -------
Net income (loss)........................................... $ (153) $ 3,421
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 87
TXEN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
CLASS A CLASS B ADDITIONAL RETAINED RECEIVABLE TOTAL
PREFERRED COMMON COMMON PAID-IN EARNINGS FROM STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) STOCKHOLDERS EQUITY
--------- ------- ------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995.... $1,500 $10 $-- $ 410 $ (379) $(437) $1,104
Issuance of notes
receivable from
stockholders............. -- -- -- -- -- (65) (65)
Payments received on
notes................... -- -- -- -- -- 89 89
Accrued interest on
notes................... -- -- -- -- -- (36) (36)
Net loss.................. -- -- -- -- (153) -- (153)
------ --- -- ------ ------ ----- ------
BALANCE, JUNE 30, 1996.... 1,500 10 -- 410 (532) (449) 939
Issuance of notes
receivable from
stockholders............. -- -- -- -- -- (16) (16)
Conversion of preferred
stock to common stock.... (1,500) -- 2 1,498 -- -- --
Contribution of common
stock to treasury and
subsequent retirement.... -- (2) -- 2 -- -- --
Payments received on
notes................... -- -- -- -- -- 73 73
Accrued interest on
notes................... -- -- -- -- -- (27) (27)
Net income................ -- -- -- -- 3,421 -- 3,421
------ --- -- ------ ------ ----- ------
BALANCE, JUNE 30, 1997.... $ -- $ 8 $2 $1,910 $2,889 $(419) $4,390
====== === == ====== ====== ===== ======
</TABLE>
See accompanying notes.
F-20
<PAGE> 88
TXEN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(153) $ 3,421
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 532 709
Cumulative effect of change in accounting principle, net of
tax of $32.............................................. (82) --
Deferred income taxes...................................... (64) 360
Provision for doubtful accounts............................ (65) 90
Loss on sublease........................................... 6 --
Changes in operating assets and liabilities:
Accounts receivable...................................... 44 (3,764)
Prepaid expenses......................................... (36) (26)
Income taxes receivable.................................. (7) 25
Inventory................................................ 3 2
Other.................................................... 1 (1)
Interest payable......................................... 29 31
Customer deposits........................................ 4 (129)
Accounts payable and accrued expenses.................... (156) 551
Accrued salaries, bonuses and vacation................... 76 190
Income taxes payable..................................... -- 433
Deferred revenue......................................... 437 978
------- -------
Net cash provided by operating activities................... 569 2,870
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,060) (1,328)
Additions to deferred software development costs............ -- (688)
------- -------
Net cash used in operating activities....................... (1,060) (2,016)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt........................ (188) (250)
Notes payable............................................... 135 (135)
Payments on debt to stockholders............................ (9) --
Increase in debt to stockholders............................ 63 16
Principal payments on note payable to stockholder........... (42) --
Increase in notes receivable from stockholders.............. (11) 30
------- -------
Net cash used in financing activities....................... (52) (339)
------- -------
Net (decrease) increase in cash and cash equivalents........ (543) 515
Cash and cash equivalents at beginning of year.............. 1,174 631
------- -------
Cash and cash equivalents at end of year.................... $ 631 $ 1,146
======= =======
</TABLE>
See accompanying notes.
F-21
<PAGE> 89
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
TXEN, Inc. facilitates the administration of health benefits by providing
healthcare organizations hardware and software solutions through either
outsourcing or turnkey agreements primarily in the United States. TXEN also
provides data processing services through management service organization, or
MSO, agreements.
Cash and Cash Equivalents
TXEN considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Revenue Recognition
Outsourcing/MSO. Outsourcing and MSO fees are recognized as services are
provided.
System sales. Software license fees and equipment revenue are recognized upon
delivery of the software product to the customer, unless TXEN has significant
related obligations remaining. Revenue requiring any significant obligations to
customers is deferred and recognized once the remaining obligations become
insignificant.
Professional services. Revenue from professional services is recognized either
as the services are performed based on TXEN's standard rates for the applicable
services or as contract milestones are achieved, if specified and required under
the contract with the customer. Revenue from post-contract customer support is
recognized in the period the customer support services are provided.
Concentration of Credit Risk and Financial Instruments. Financial instruments
which subject TXEN to credit risk are primarily trade accounts receivable.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number and diversity of customers comprising TXEN's
customer base. TXEN believes that any risk associated with trade accounts
receivable is adequately provided for in the allowance for doubtful accounts.
TXEN generally does not require collateral on its trade accounts receivable.
Software Development Cost
Under Statement of Financial Accounting Standards No. 86, "Accounting for
Software Costs," once technological feasibility is established related to
software development costs for new products or for enhancements to existing
products which extend the product's useful life, the costs are capitalized until
the product or enhancement is available for release to customers, after which
the capitalized costs are amortized over the product's estimated life giving
consideration to estimates of recoverability and net realizable value. Total
costs capitalized for software development were $0 and $687,338, during the
fiscal years ended June 30, 1996 and 1997, respectively.
Capitalized software development costs are being amortized over five years.
Accumulated amortization of capitalized software development cost were $0 and
$25,887, during fiscal years ended June 30, 1996 and 1997, respectively. TXEN
capitalized interest related to software development costs of $0 and $27,177,
during the fiscal years ended June 30, 1996 and 1997, respectively.
F-22
<PAGE> 90
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development
Research and development is conducted by TXEN under both customer sponsored and
TXEN sponsored programs. Total research and development costs incurred by TXEN
were $926,000 and $1,756,338, during the fiscal years ended June 30, 1996 and
1997, respectively.
Inventory
Inventory is carried at the lower of cost or market using the specific
identification method.
Property and Equipment and Change in Depreciation Method
Property and equipment is stated on the basis of cost. Property and equipment
are depreciated over the estimated useful lives of the assets (generally three
to seven years). Depreciation and amortization had been provided using the
straight-line method for items purchased prior to July 1, 1994, and double-
declining balance for items purchased after July 1, 1994. During the fiscal year
ended June 30, 1996, TXEN adopted the straight-line method of depreciation for
all assets. The new method of depreciation was adopted to better match the cost
of the property and equipment with the revenues generated by those assets and
has been applied retroactively to property and equipment acquired in prior
years. The effect of the change in fiscal year 1996, was to decrease loss before
cumulative effect of the change in accounting principle by approximately
$28,400. The adjustment of $81,615 (after reduction for income taxes of $32,252)
to apply the new method, is included in net loss for fiscal year 1996.
Income Taxes
All income tax amounts and balances have been computed in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under Statement No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Stock Options
TXEN has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," (SFAS 123) requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of TXEN'S employee stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-23
<PAGE> 91
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $2,162 $3,016
Software.................................................... 285 334
Furniture and fixtures...................................... 923 1,112
------ ------
3,370 4,462
Less accumulated depreciation............................... 1,098 1,545
------ ------
$2,272 $2,917
====== ======
</TABLE>
3. LONG-TERM DEBT AND LINES OF CREDIT
TXEN has two revolving credit lines with a bank which are payable on demand
totaling $1,000,000 which are collateralized by certain assets of TXEN and the
general guaranty of the primary stockholders. There were no borrowings under the
credit lines at June 30, 1996 and 1997.
On March 17, 1994, TXEN borrowed $1,342,719 from the bank under a long-term
note. The note, which has a balance of $892,031 and $641,834 at June 30, 1996
and 1997, respectively, and matures on October 17, 1998, bears interest at prime
plus 1/2% and is cross-collateralized with assets pledged under the revolving
credit lines.
Annual maturities of long-term debt are as follows: 1998 -- $275,411 and
1999 -- $366,423.
TXEN incurred $54,474 and $19,500 during the fiscal years ended June 30, 1996
and 1997, respectively, of long-term debt to two stockholders for the purchase
of common stock of TXEN that was then sold to various employees of TXEN in
exchange for notes receivable. Interest accrues at 8.0% and matures on October
1, 1997.
TXEN paid $146,975 and $115,268 in interest during the fiscal years ended June
30, 1996 and 1997, respectively.
4. LEASES
TXEN operates in leased premises and also leases certain equipment.
The future minimum lease payments under operating leases for the next three
years and in the aggregate are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $278
1999........................................................ 98
2000........................................................ 224
----
$600
====
</TABLE>
Rent expense for the fiscal years ended June 30, 1996 and 1997, was $263,668 and
$251,985, respectively. TXEN is also subleasing space to another tenant over the
next two years. The total estimated minimum sublease rentals to be received in
the future under this sublease are $33,209 and $6,642 at June 30, 1996 and 1997,
respectively.
F-24
<PAGE> 92
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY
On December 16, 1994, TXEN entered into a Stock Purchase Option Agreement with a
third-party. Under the terms of the agreement, TXEN sold one share of
convertible preferred stock to the third-party for $1,500,000. TXEN also
authorized 1,250,000 shares of Class B common stock which was reserved for
issuance upon the conversion of the preferred stock.
On July 17, 1996, the Stock Purchase Option Agreement with the holder of the
preferred stock was amended to allow the holder of the preferred stock to
accelerate the date to exercise the option to purchase all of the issued and
outstanding Class A common stock of TXEN. The option is exercisable for a period
of 30 days after release of TXEN's audited financial statements for the fiscal
year ended June 30, 1997. The holder of the preferred stock converted all of the
preferred stock to Class B common stock which is a condition precedent to the
right to exercise the option to purchase all of the outstanding shares of Class
A common stock of TXEN. TXEN expects the option to be exercised which will
require all related party balances to be settled prior to the purchase. As a
result, accrued officers salaries and the related interest payable have been
classified as current liabilities on the balance sheet.
6. INCOME TAXES
TXEN paid $0 and $1,161,001 in income taxes during the fiscal years ended June
30, 1996 and 1997, respectively.
Significant components of TXEN's current deferred tax liabilities and assets at
June 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................. $228 $ 260
Software development costs................................. -- 239
---- -----
228 499
Deferred tax assets:
Allowance for doubtful accounts............................ 13 45
Accrued salaries and interest.............................. 185 188
Accrued leave.............................................. 44 78
Other...................................................... 6 4
Net operating loss carryforwards........................... 157 --
---- -----
405 315
---- -----
$177 $(184)
==== =====
</TABLE>
F-25
<PAGE> 93
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes (benefit) are as
follows:
<TABLE>
<CAPTION>
1996 1997
----- -------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal.................................................... $ 4 $1,599
State...................................................... -- 163
Benefit of operating loss carryforward..................... -- (143)
---- ------
Total current............................................... 4 1,619
Deferred:
Federal.................................................... (56) 314
State...................................................... (8) 46
---- ------
Total deferred.............................................. (64) 360
---- ------
$(60) $1,979
==== ======
</TABLE>
7. RELATED PARTY TRANSACTIONS
TXEN has a note payable to a stockholder of TXEN for $8,333 at June 30, 1996 and
1997, bearing interest at 8.0%. Payment of the principal balance and accrued
interest will be made upon demand except where TXEN is restricted from doing so
by any agreements with third-parties in force at that time.
TXEN has notes and accrued interest receivable from stockholders of TXEN of
$448,783 and $418,833 at June 30, 1996 and 1997, respectively, which bear
interest at 8.0%.
TXEN incurred $269,202 in expenses with an affiliated company for contracted
services of which $38,857 is included in accounts payable at June 30, 1997. TXEN
had $188,037 of revenue from an affiliated company during the fiscal year ended
June 30, 1997.
8. SAVINGS AND RETIREMENT PLAN
TXEN has a savings and retirement plan administered by Nichols Research for all
eligible employees pursuant to Section 401(k) of the Internal Revenue Code. TXEN
will match employee contributions to the savings and retirement plan at a level
determined annually by the TXEN's Board of Directors. TXEN's contribution for
the fiscal years ended June 30, 1996 and 1997, was $3,400 and $6,009,
respectively.
9. STOCKHOLDERS' AGREEMENT
Certain members of management are also stockholders of TXEN and owned
approximately 60% of the Class A common stock at June 30, 1997. Under a stock
purchase agreement, TXEN is committed to purchase management's common stock in
the event of death, retirement or termination of employment. The price to be
paid for the common stock is set by formula in the Employee Stock Purchase
Agreement. As discussed in Note 5, the holder of the Class B common stock has
the right to exercise an option to purchase all of the outstanding shares of
Class A common stock of TXEN for a period of 30 days after release of TXEN's
audited financial statements for the fiscal year ended June 30, 1997, which
would include all the stock held by members of management.
F-26
<PAGE> 94
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. CONTINGENCY
TXEN entered into an agreement with a customer whereby TXEN must deliver the
final version of software currently under development by August 1, 1999. If the
software is not ready to be released to the customer by August 1, 1999, TXEN
must pay a penalty of $195,000. Management estimates that delivery of the
software under development will occur prior to the deadline and no penalty will
be incurred and, therefore, no accrual for this contingency has been recorded in
the financial statements.
11. STOCK OPTION PLANS
During 1996, the Board of Directors approved the TXEN, Inc., 1996 Incentive
Stock Option Plan which authorized the issuance of options to purchase up to
100,000 shares of common stock and the Key Employee Incentive Stock Option Plan
which authorized the issuance of options to purchase up to 40,000 shares of
common stock. All options under the 1996 Plans have five-year terms. Incentive
stock options vest and become exercisable at the end of two years of continued
employment while non-qualified stock options are exercisable upon grant. The pro
forma information regarding net income is required by SFAS 123, and has been
determined as if TXEN had accounted for its employee stock options under the
fair value method required by SFAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the following
assumptions for 1996: risk-free interest rates of 6.30%; weighted-average
expected life of the options of 4 years; no volatility factors of the expected
market price of TXEN's common stock because TXEN is privately held; and no
dividend yields.
If TXEN had adopted SFAS 123 in accounting for its stock options granted in
fiscal year 1996, its net income would have been decreased by approximately
$31,000. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying pro forma disclosures based on SFAS 123 are not likely to be
representative of the effects on future net income. As of June 30, 1996, there
were no options which had been exercised. During fiscal year 1997, 123,371
shares were granted with an exercise price of $6.20 and remain outstanding at
June 30, 1997. The weighted average fair value of options granted during the
year was $6.78 with a weighted average contractual life of 4.2 years.
F-27
<PAGE> 95
Nichols TXEN
Software Application Services
Screen Print of NextSTEPP
(Photo:
High-end, Comprehensive Managed
Care Administration)
(Photo: Screen Print of FirstSTEPP)
Workflow-driven Medical
utilization management
(Photo:
Screen Print of TXEN MD.Com)
Extranet e-commerce provider-oriented
inquiry for patient eligibility, benefit
and claim information
(Photo: Screen Print of MDrSTEPP)
High-end, Comprehensive physician
practice administration
<PAGE> 96
- --------------------------------------------------------------------------------
(NICHOLS TXEN LOGO)
NICHOLS TXEN CORPORATION
2,625,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
______ , ____
CIBC WORLD MARKETS
FRIEDMAN BILLINGS RAMSEY
THE ROBINSON-HUMPHREY COMPANY
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THOSE SECURITIES.
DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL _______ , _____ (25 DAYS AFTER
THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the securities
being registered are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 10,842
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,400
Nasdaq National Market listing fee.......................... 75,000
Accountants' fees and expenses.............................. 250,000
Legal fees and expenses..................................... 300,000
Blue Sky fees and expenses.................................. 16,000
Transfer Agent's fees and expenses.......................... 30,000
Printing and engraving expenses............................. 165,000
Miscellaneous............................................... 148,758
----------
Total Expenses........................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification by
Nichols TXEN of any director, officer, employee or agent of Nichols TXEN or
person who is serving or was serving at Nichols TXEN's request as a director,
officer, employee or agent of another corporation or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with the
defense of any threatened, pending or completed action (whether civil, criminal,
administrative or investigative), to which he is or may be a party by reason of
having been such director, officer, employee or agent provided that he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of Nichols TXEN, and, with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful. Nichols
TXEN also has the power under Section 145 to indemnify persons set forth above
from threatened, pending or completed actions or suits by or in the right of
Nichols TXEN to procure a judgment in its favor by reason of the fact that such
person was a director, officer, employee or agent of Nichols TXEN or is or was
serving at the request of Nichols TXEN as a director, officer, employee or agent
of another corporation or enterprise against expenses actually and reasonably
incurred by him in connection with the defense or settlement of the action if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of Nichols TXEN, except that no indemnification
can be made with regard to any claim, issue or matter as to which the person has
been adjudged to be liable for negligence or misconduct in the performance of
his duty to Nichols TXEN unless and only to the extent that the Delaware Court
of Chancery or the court in which the action was brought determines that the
person was fairly and reasonably entitled to indemnity. Any indemnification
(unless ordered by a court) must be made by Nichols TXEN only as authorized in
the specific case upon a determination that indemnification of the person is
proper in the circumstances because he has met the applicable standards of
conduct. The determination must be made by the Board of Directors by a majority
vote of a quorum consisting of directors who are not parties to the action, or
if a quorum is not obtainable or, even if obtainable, a quorum of disinterested
directors so directs, by independent counsel in a written opinion, or by the
stockholders. Nichols TXEN may pay the expenses of an action in advance of final
disposition if authorized by the Board of Directors in a specific case, upon
receipt of an undertaking by the person to be indemnified to repay any such
advances unless it shall ultimately be determined that such person is entitled
to be indemnified by Nichols TXEN as authorized by law.
Article XI of Nichols TXEN's amended and restated certificate of incorporation
and Article Eight of Nichols TXEN's amended and restated bylaws provide for
indemnification of Nichols TXEN's directors, officers, employees or agents to
the extent permitted by Section 145 of the Delaware General Corporation
II-1
<PAGE> 98
Law. Article XI of Nichols TXEN's amended and restated certificate of
incorporation and Article Eight of Nichols TXEN's amended and restated bylaws
further provide that Nichols TXEN may purchase and maintain insurance on behalf
of those persons described above as eligible for indemnification for liability
arising out of such person's duties or status with Nichols TXEN whether or not
indemnification in respect of such liability would be permissible.
Nichols TXEN has entered into indemnification agreements with each of its
directors to give such directors additional contractual assurances regarding the
scope of the indemnification set forth in Nichols TXEN's amended and restated
certificate of incorporation and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of Nichols TXEN regarding which indemnification is sought,
nor is Nichols TXEN aware of any threatened litigation that may result in claims
for indemnification.
Nichols TXEN has in effect an officers and directors liability insurance policy
with National Union Fire Insurance Company. The policy provides indemnity to the
directors and officers of Nichols TXEN for the loss arising from any claim by
reason of a wrongful act where there is no corporate indemnification. The
insurance provides for Nichols TXEN to be reimbursed for any indemnification it
may be required by statute or Nichols TXEN's amended and restated bylaws to make
to any of its directors and officers in connection with a claim by reason of a
wrongful act. Pursuant to exclusions, the policy covers negligent acts, errors,
omissions or breach of duty by a director or officer. The principal exclusions
from coverage include the following: (1) claims involving various violations of
Section 16(b) of the Securities Exchange Act of 1934; (2) dishonest acts; and
(3) libel, slander, or non-monetary damages. The policy has no deductible amount
per director or officer for each loss. A $100,000 deductible self-insurance
retention applies to Nichols TXEN, except for securities law claims for which a
$250,000 deductible applies. The limit of liability under the policy is
$15,000,000 in the aggregate annually in excess of deductibles and
participations.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon incorporation of Nichols TXEN on September 17, 1996, five hundred shares of
the Company's $1.00 par value common stock were issued to the founder and sole
stockholder, Nichols Research, in exchange for its initial capital contribution
of $1,000.00 in cash. Upon the merger of Computer Services Corporation with and
into Nichols TXEN on September 23, 1996, five hundred shares of the common stock
were issued to Nichols Research, the sole stockholder of Computer Services
Corporation, in exchange for all of its shares of Computer Services Corporation.
All 1,000 shares sold were issued pursuant to Section 4(2) of the Securities Act
of 1933, in an exempt transaction by Nichols TXEN not involving any public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Proposed form of Underwriting Agreement
2.1+ -- Agreement of Merger among Nichols Research Corporation,
Nichols SELECT Corporation, TXEN, Inc. and the shareholders
of TXEN, Inc., dated August 27, 1997
3.1+ -- Registrant's Amended and Restated Certificate of
Incorporation
3.2+ -- Registrant's Amended and Restated Bylaws
4.1* -- Specimen Stock Certificate
5.1* -- Opinion and Consent of Lanier Ford Shaver & Payne, P.C.
</TABLE>
II-2
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1+ -- Nichols TXEN Corporation 1998 Stock Option Plan**
10.2a+ -- Nichols TXEN Corporation Employee's Stock Purchase Plan
10.2b -- Amended and Restated Nichols TXEN Corporation Employees'
Stock Purchase Plan**
10.3+ -- Nichols TXEN Corporation Non-Employee Director Stock Option
Plan**
10.4+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Thomas L. Patterson**
10.5+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Paul D. Reaves**
10.6+ -- Employment Agreement dated August 29, 1997, as amended,
between Registrant and H. Grey Wood**
10.7+ -- Corporate Services Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.8+ -- Tax Sharing Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.9+ -- Form of Indemnification Agreement between Registrant and its
directors
10.10+ -- Software Licensing Agreement between CSC Healthcare Systems,
Inc. and TXEN, Inc. dated June 1, 1993
10.11+ -- Voting Agreement dated November 6, 1998, between Registrant
and Nichols Research Corporation
10.12+ -- Commercial Lease dated September 1, 1996, between Computer
Services Corporation and Birmingham S.S.P., Inc.
10.13+ -- Commercial Lease dated October 31, 1985, between Computer
Services Corporation and Wimberly & Thomas Building
Restoration Partnership
10.14+ -- Lease between Nichols SELECT Corporation and Birmingham
S.S.P., Inc.
10.15+ -- Office Space Lease dated May 6, 1998, between the Registrant
and Raytheon Engineers & Constructors, Inc.
10.16+ -- Office Lease dated April 13, 1998, between the Registrant
and Metropolitan Life Insurance Company
10.17+ -- Sublease dated May 5, 1997, between TXEN, Inc. and ABB
Environmental Systems, Inc.
10.18 -- Lease dated May 8, 1998, between the Registrant and Daniel
Meadow Brook South, LLC
11.1+ -- Computation of Earnings Per Share
23.1 -- Consent of Ernst & Young LLP, independent auditors, with
respect to Nichols TXEN Corporation
23.2 -- Consent of Ernst & Young LLP, independent auditors, with
respect to TXEN, Inc.
23.3* -- Consent of Lanier Ford Shaver & Payne, P.C. (included in
Exhibit 5.1)
24.1+ -- Power of Attorney
27.1+ -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------------------
* To be filed by amendment.
** Management contract or compensatory plan or arrangement.
+ Previously filed.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
II-3
<PAGE> 100
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant as
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Amendment No. 2 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Birmingham, State of Alabama, on the
18th day of June, 1999.
Nichols TXEN Corporation
By: John D. McKay
------------------------------------
John D. McKay,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer and June 18, 1999
- ------------------------------------------------ Director (Principal Executive
Paul D. Reaves Officer)
* Chairman of the Board June 18, 1999
- ------------------------------------------------
Thomas L. Patterson
* President, Chief Operating Officer June 18, 1999
- ------------------------------------------------ and Director
H. Grey Wood
* Director June 18, 1999
- ------------------------------------------------
Chris H. Horgen
* Director June 18, 1999
- ------------------------------------------------
James D. Kever
* Director June 18, 1999
- ------------------------------------------------
James I. Harrison, Jr.
John D. McKay Chief Financial Officer (Principal June 18, 1999
- ------------------------------------------------ Financial and Accounting Officer)
John D. McKay
*By: John D. McKay
- ------------------------------------------------
John D. McKay
Attorney-in-fact
</TABLE>
II-5
<PAGE> 102
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Stockholder of
Nichols TXEN Corporation
We have audited the financial statements of Nichols TXEN Corporation as of
August 31, 1997 and 1998, and for each of the three years in the period ended
August 31, 1998, and have issued our report thereon dated January 7, 1999,
included elsewhere in this Registration Statement. Our audit also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Birmingham, Alabama
January 7, 1999
S-1
<PAGE> 103
NICHOLS TXEN CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO ADDITIONS
BALANCE AT COSTS AND CHARGED TO BALANCE
BEGINNING EXPENSES OTHER ACCOUNTS DEDUCTIONS AT END
----------- ----------- -------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the nine months ended May 31,
1999
Allowance for doubtful accounts
(unaudited)...................... $500 $272 $ -- $(547) $225
---- ---- ---- ----- ----
Total valuation and qualifying
accounts....................... $500 $272 $ -- $(547) $225
==== ==== ==== ===== ====
For the year ended August 31, 1998
Allowance for doubtful accounts..... $145 $512 $ -- $(157) $500
---- ---- ---- ----- ----
Total valuation and qualifying
accounts....................... $145 $512 $ -- $(157) $500
==== ==== ==== ===== ====
For the year ended August 31, 1997
Allowance for doubtful accounts..... $ 5 $ -- $140(1) $ -- $145
---- ---- ---- ----- ----
Total valuation and qualifying
accounts....................... $ 5 $ -- $140 $ -- $145
==== ==== ==== ===== ====
For the year ended August 31, 1996
Allowance for doubtful accounts..... $ 5 $ -- $ -- $ -- $ 5
---- ---- ---- ----- ----
Total valuation and qualifying
accounts....................... $ 5 $ -- $ -- $ -- $ 5
==== ==== ==== ===== ====
</TABLE>
- ---------------------------
(1) Acquisition of TXEN, Inc.
S-2
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Proposed form of Underwriting Agreement
2.1+ -- Agreement of Merger among Nichols Research Corporation,
Nichols SELECT Corporation, TXEN, Inc. and the stockholders
of TXEN, Inc., dated August 27, 1997
3.1+ -- Registrant's Amended and Restated Certificate of
Incorporation
3.2+ -- Registrant's Amended and Restated Bylaws
4.1* -- Specimen Stock Certificate
5.1* -- Opinion and Consent of Lanier Ford Shaver & Payne, P.C.
10.1+ -- Nichols TXEN Corporation 1998 Stock Option Plan**
10.2a+ -- Nichols TXEN Corporation Employee's Stock Purchase Plan
10.2b -- Amended and Restated Nichols TXEN Corporation Employees'
Stock Purchase Plan**
10.3+ -- Nichols TXEN Corporation Non-Employee Director Stock Option
Plan**
10.4+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Thomas L. Patterson**
10.5+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Paul D. Reaves**
10.6+ -- Employment Agreement dated August 29, 1997, as amended,
between Registrant and H. Grey Wood**
10.7+ -- Corporate Services Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.8+ -- Tax Sharing Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.9+ -- Form of Indemnification Agreement between Registrant and its
directors
10.10+ -- Software Licensing Agreement between CSC Healthcare Systems,
Inc. and TXEN, Inc. dated June 1, 1993
10.11+ -- Voting Agreement dated November 6, 1998, between Registrant
and Nichols Research Corporation
10.12+ -- Commercial Lease dated September 1, 1996, between Computer
Services Corporation and Birmingham S.S.P., Inc.
10.13+ -- Commercial Lease dated October 31, 1985, between Computer
Services Corporation and Wimberly & Thomas Building
Restoration Partnership
10.14+ -- Lease between Nichols SELECT Corporation and Birmingham
S.S.P., Inc.
10.15+ -- Office Space Lease dated May 6, 1998, between the Registrant
and Raytheon Engineers & Constructors, Inc.
10.16+ -- Office Lease dated April 13, 1998, between the Registrant
and Metropolitan Life Insurance Company
10.17+ -- Sublease dated May 5, 1997, between TXEN, Inc. and ABB
Environmental Systems, Inc.
10.18 -- Lease dated May 8, 1998, between the Registrant and Daniel
Meadow Brook South, LLC
11.1+ -- Computation of Earnings Per Share
23.1 -- Consent of Ernst & Young LLP, independent auditors, with
respect to Nichols TXEN Corporation
23.2 -- Consent of Ernst & Young LLP, independent auditors, with
respect to TXEN, Inc.
23.3* -- Consent of Lanier Ford Shaver & Payne, P.C. (included in
Exhibit 5.1)
24.1+ -- Power of Attorney
27.1+ -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------------------
* To be filed by amendment.
** Management contract or compensatory plan or arrangement.
+ Previously filed.
<PAGE> 1
EXHIBIT 10.2b
AMENDED AND RESTATED
NICHOLS TXEN CORPORATION
EMPLOYEES' STOCK PURCHASE PLAN
ARTICLE I
PURPOSES
Nichols TXEN Corporation previously established the Plan set forth
herein in order to encourage ownership of its Common Stock by its employees and
employees of certain Affiliates, by providing them a convenient means for
regular and systematic purchases on an advantageous basis, thereby increasing
their interest in the Company's success. The Company hereby amends and restates
the Plan to permit employees of its parent corporation, Nichols Research
Corporation, to make limited purchases of the Common Stock of the Company
pursuant to the terms of the Plan.
ARTICLE II
DEFINITIONS
"Affiliate" means a subsidiary of the Company (including corporations
becoming subsidiaries subsequent to the adoption of the Plan) in an unbroken
chain of corporations beginning with the Company if at the time of the granting
of the Option each of such corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"Board " means the Company's Board of Directors.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and regulations thereunder.
"Company" means Nichols TXEN Corporation.
"Effective Date" shall mean the later of (1) the date a registration
statement initially registering the Company's common stock under the Securities
Act of 1933 is declared effective by the Securities and Exchange Commission, or
(2) the date the Plan is approved by the shareholders of the Company.
"Employee" means all employees (full-time and part-time) of the
Company, its Affiliates or the Parent.
"Employer" means the Company, its Affiliates which are designated by
the Board as an employer for purposes of this Plan, and the Parent. The Board
may from time to time change the designation of Affiliates who are employers for
purposes of this Plan.
"Option" means a right to purchase Stock granted under Section 4.1.
"Option Period" means a three-month period beginning on the Effective
Date of the Plan and any March 1, June 1, September 1, and December 1
thereafter, and ending on the next February 28, May 31, August 31, or November
30.
-1-
<PAGE> 2
"Parent" means Nichols Research Corporation, the parent corporation of
the Company, and any of its subsidiaries as referred to in Section 424(f) of the
Code other than the Company and its Affiliates.
"Plan" means the Nichols TXEN Corporation Employees' Stock Purchase
Plan set forth herein, as it may be amended from time to time.
"Stock" means the one cent ($.01) par value per share Common Stock of
Nichols TXEN Corporation.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Participation. On the Effective Date and on each March 1, June 1,
September 1, and December 1 thereafter, an Employee may elect to participate in
the Plan by authorizing payroll deductions through the Employee's Employer. An
Employee of the Parent may elect to participate in the Plan provided such
employee is also a participant in the Parent's employee stock purchase plan (as
defined in Section 423 of the Code). An Employee electing to participate in the
Plan pursuant to this Section 3.1 shall continue as a participant in the Plan
until such time as he discontinues payroll deductions pursuant to Section 5.3.
Once participation is discontinued hereunder, an Employee may not again elect to
participate in the Plan until the next succeeding March 1 or, in the case of an
Employee subject to the reporting requirements of Section 16(a) of the
Securities Act of 1934, until the later of (i) the March 1 immediately following
his discontinuance of payroll deductions, or (ii) the March 1 next occurring
after the date which is six (6) months after the date such Employee discontinued
payroll deductions under the Plan.
3.2 Eligibility. An Employee who elects to participate in the Plan
under Section 3.1 shall be eligible for an Option on the first day of an Option
Period if he is an Employee of an Employer.
ARTICLE IV
GRANTING OF OPTIONS
4.1 Option Periods. On each March 1, June 1, September 1, and December
1 beginning with the Effective Date, each Employee who is participating in the
Plan and who is eligible for an Option under Article III shall be granted an
Option to purchase Stock from the Company on the last day of the Option Period
beginning on that date, by authorizing payroll deductions under Article V.
Notwithstanding the foregoing, no Employee shall be eligible for an Option under
Article III if such Employee, immediately after the Option is granted, shall own
5% or more of the voting power or value of all classes of stock of the Company,
any of its Affiliates, or the Parent, treating the maximum amount of stock
available to him under the Plan for such Option Period and shares subject to any
other option as owned by him and treating as owned by him shares owned by others
to the extent provided in Section 425 (d) of the Code. Any Options granted in an
Option Period which are not exercised on the last day of the Option Period shall
expire as of the end of the Option Period.
4.2 Exercise Price. For any Option Period, the exercise price of each
Option shall be the lesser of (a) 85% of the fair market value of the stock on
the first day of the Option Period, or (b) 85% of the fair market value of the
Stock on the last day of the Option Period. Fair market value on any day means
the closing sale price of the Stock as reported on the Nasdaq National Market
on such day or, if not traded on such day, on the last preceding day on which
the Stock was traded.
-2-
<PAGE> 3
4.3 Nontransferability. Options granted to an Employee are not
transferable, and may be exercised during the Employee's lifetime only by him.
Any attempt of assignment, transfer, pledge, hypothecation, or other disposition
of any Option contrary to the provisions of this Plan, and the levy and
attachment or any similar proceedings upon any Option, shall be null and void.
4.4 Stockholder Approval. If the Plan is not approved by the Company's
stockholders on or before the date which is twelve (12) months after the Board
of Directors adopts the Plan, then the Plan shall be null and void.
4.5 Limits on Stock Purchase. Notwithstanding any other provision of
this Plan, no Employee may purchase in an Option Period more than the number of
shares equal to 10% of his annual basic rate of compensation divided by the
exercise price of the option. In addition, no Employee may be granted an Option
which permits him to purchase during a calendar year under the Plan and any
other employee stock purchase plan within the meaning of Section 423 of the
Code, shares of the Company, its Affiliates, and the Parent having an aggregate
fair market value, determined at the time such Option is granted, of more than
$25,000. For any employee that participates in both this Plan and the Parent's
employee stock purchase plan, in no event shall the aggregate amount of payroll
deductions from the Employee's compensation to purchase options under both plans
exceed 10% of such compensation. If an Employee of the Parent participates in
this Plan, he shall elect to allocate either (a) 20% of his payroll deduction,
or (b) 40% of his payroll deduction to the purchase of Stock under this Plan
with the balance of such payroll deduction allocated to purchase stock of the
Parent.
4.6 Amount of Stock Available. An aggregate of 1,000,000 shares of
Stock shall be available for purchase under the Plan, subject to adjustment
under Section 4.7. To the extent Options expire unexercised, the Stock subject
to such Options shall become available for subsequent grant. Stock available for
purchase under the Plan shall be authorized but unissued shares or reacquired
shares.
4.7 Adjustments of Amount of Stock. In the event of change in the
number of shares of Stock outstanding by reason of a stock dividend, stock split
or other recapitalization, or by reason of a merger or consolidation or
otherwise, the number of shares of stock available under this Plan, and the fair
market value of such shares at the beginning of the Option Period during which
such change occurs, shall be adjusted in such manner as the Board, in its
discretion, deems equitable and appropriate.
ARTICLE V
PAYMENT FOR STOCK
5.1 Payroll Deductions. Each Employee may exercise Options granted to
him under Section 4. 1, exclusively by authorizing payroll deductions on a form
provided by his Employer. The actual exercise of the Options shall occur on the
last day of the Option Period. Deductions may be authorized beginning on the
Effective Date or any March 1, June 1, September 1 or December 1 thereafter, in
any integral percentage, up to ten (10%) percent of an Employee's basic rate of
compensation paid by the Employer. Total deductions may not exceed $25,000 for
any calendar year. A payroll deduction authorization hereunder shall remain in
effect until changed or discontinued pursuant to Section 5.3.
-3-
<PAGE> 4
5.2 Purchase of Stock. As of the last day of each Option Period the
amount of payroll deductions during such Option Period for each person who
remains an Employee on such date shall be used to purchase from the Company
whole shares of Stock under the Employee's Option. Any balance which is
attributable to a fractional share shall be retained by the Employer and treated
as a payroll deduction by the Employee for the next Option Period if he remains
an Employee. Upon the purchase of shares of Stock under an Option, the Company
shall deliver, or cause to be delivered, promptly to the Employee stock
certificates for such shares. Such shares shall be registered in the name of the
Employee or in the Employee's name jointly with a member of the Employee's
family.
5.3 Change; Discontinuance. (a) Any Employee who is not subject to the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934
may decrease (but not below 1% of the basic rate of compensation paid by the
Employer) or increase (within the limits specified in Section 5.1) payroll
deductions authorized under Section 5.1 by signing and filing with the Employer
a form provided for this purpose. Such change in payroll deductions shall be
effective on the March 1, June 1, September 1, or December 1 next occurring
after the Employee's change form is received by the Employer. An Employee
subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934 may not change his payroll deductions in accordance with
this Section 5.3.
(b) An Employee may discontinue payroll deductions authorized
under Section 5.1 at any time, by signing and filing with his Employer, within
the time prescribed in rules and regulations adopted under Article VIII, a form
provided for this purpose. Once discontinued hereunder, payroll deductions may
not be made again until the next succeeding March 1 or, in the case of an
Employee subject to the reporting requirements of Section 16(a) of the
Securities Act of 1934, until the later of (i) the March 1 immediately following
his discontinuance of payroll deductions, or (ii) the March 1 next occurring
after the date which is six (6) months after the date such Employee discontinued
payroll deductions under the Plan.
5.4 Refund of Contributions. If during an Option Period an Employee for
whom contributions are being made under Section 5.1 becomes ineligible to have
Stock purchased for him under Section 5.2, or discontinues his contributions
under Section 5.3, his payroll deductions during such Option Period shall be
returned without interest to him within 30 days of the date on which the Company
first learns of the Employee's ineligibility, or the date on which the Employee
informs his Employer that he wishes to discontinue contributions. If the
aggregate amount of payroll deductions under Section 5.1, during any Option
Period exceeds the purchase price of Stock available under the Plan, the
available Stock shall be allocated to Employees in proportion to the respective
maximum number of shares that can be purchased during the Option Period, and
amounts not used to purchase Stock shall be returned without interest to the
respective Employees as soon as practicable. Any payroll deductions in excess of
the limits in Section 4.5 shall be returned without interest to an Employee
within 30 days of the date on which the Company first learns of the existence of
any excess contributions.
5.5 Rights of Employees. An Employee shall have no right, title or
interest in any Stock subject to an Option, including no right to receive
dividends, until such Stock has been purchased for him and issued to him.
-4-
<PAGE> 5
5.6 Requirements of Securities Laws. No shares of Stock may be issued
under any Option until all requirements of Federal, state or other securities
laws, and of any securities exchange upon which Stock may be listed, with
respect to the purchase, sale and issuance of the Stock shall have been
satisfied. If any action must be taken because of such requirements, then the
purchase, sale and issuance of the shares shall be postponed until such action
can reasonably be taken. Upon demand by the Company, an Employee shall deliver
to the Company a representation in writing that the purchase of all shares of
Stock under an Option is being made for investment only and not for resale or
with a view to distribution, and containing such other representations and
provisions with respect thereto as the Company may reasonably require in order
to comply with any registration requirements or exemptions therefrom of
applicable securities laws.
ARTICLE VI
APPLICABLE LAW
Options granted under this Plan shall be construed and shall take
effect in accordance with the laws of the State of Delaware.
ARTICLE VII
AMENDMENT; TERMINATION
7.1 Amendment. The Board of Directors, insofar as permitted by law,
shall have the right from time to time with respect to any shares at the time
not subject to options, to suspend or discontinue the Plan or revise or amend it
in any respect whatsoever, except that without approval of the shareholders of
the Company, no such revision or amendment shall: (a) increase (except as
provided in Section 4.7) the number of shares of stock available for purchase
under the Plan, or (b) remove the administration of the Plan from the Committee.
7.2 Termination. The Plan may be terminated by the Board at any time,
in its entirety or as to any group of Employees. In the event of termination of
the participation of an Employee under this Article VII during an Option Period,
no further payroll deductions shall be made with respect to such Employee's
annual basic rate of compensation under Section 5.1, but Stock shall be
purchased for him under the terms of Section 5.2 as of the last day of the
Option Period. If the Plan is terminated by the Board under this Article VII and
if (a) any reclassification or change of outstanding shares of Stock, (b) any
consolidation or merger of the Company with or into another corporation, or (c)
any sale, lease, exchange or other disposition of all or substantially all the
property and assets of the Company occurs on or prior to the last day of the
Option Period during which the Plan is terminated, then notwithstanding the
foregoing, no Stock shall be purchased as of the last day of such Option Period
and each Optionee's payroll deductions during such Option Period shall be
returned without interest to him within 30 days.
-5-
<PAGE> 6
ARTICLE VIII
ADMINISTRATION
The Plan shall be administered by a committee (the "Committee")
composed of either the entire Board of Directors or a committee of the Board of
Directors that is composed solely of two or more Non-Employee Directors. For
this purpose, the term "Non-Employee Director" shall mean a person who is a
member of the Company's Board of Directors who (a) is not currently an officer
or employee of the Company or any parent or subsidiary of the Company, (b) does
not directly or indirectly receive compensation for serving as a consultant or
in any other non-director capacity from the Company or any parent or subsidiary
of the Company that exceeds the dollar amount for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K promulgated under the
Securities Act of 1933 and the Securities Exchange Act of 1934 ("Regulation
S-K"), (c) does not possess an interest in any other transaction with the
Company or any parent or subsidiary of the Company for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K, and (d) is not engaged in a
business relationship with the Company or any parent or subsidiary of the
Company which would be disclosable under Item 404(b) of Regulation S-K. In the
event the Committee is a committee composed of two or more Non-Employee
Directors, the Board of Directors may from time to time remove members from, add
members to, and fill vacancies, on the Committee. An Employee member of the
Committee shall be eligible to participate in the Plan and receive options under
the Plan.
The Board may prescribe, amend and rescind, and the Committee may
recommend to the Board, rules and regulations for administration of the Plan,
and the Committee shall have full power and authority to construe and interpret
the Plan. A majority of the members of the Committee shall constitute a quorum
and the acts of a majority of the members present at a meeting or the consent in
writing signed by all members of the Committee shall be the acts of the
Committee and shall be final, conclusive and binding upon all parties, including
the Company, its Affiliates, the Parent, the stockholders, the Employees and all
persons or entities claiming by or through the Employees. The Board may correct
any defect or any omission or reconcile any inconsistency in the Plan or in any
Option granted hereunder in the manner and to the extent it shall deem
desirable. The expense of the Plan shall be paid for by the Company.
ARTICLE IX
LIMITATIONS OF SALE OF STOCK PURCHASED UNDER THE PLAN
The Company does not intend to restrict or influence any Employee in
the conduct of his own affairs. An Employee may, therefore, sell Stock purchased
under the Plan at any time he chooses; provided, however, that because of
certain Federal tax requirements, each Employee will agree by entering the Plan,
promptly to give the Company notice of any Stock disposed of within two (2)
years after the date of the last day of the Option Period during which the Stock
was purchased showing the number of such shares disposed of and the date or
dates of disposition. The Employee assumes the risk of any market fluctuations
in the price of such Stock.
-6-
<PAGE> 1
EXHIBIT 10.18
LEASE AGREEMENT
by and between
DANIEL MEADOW BROOK SOUTH, L.L.C.
("Landlord")
and
NICHOLS TXEN CORPORATION
("Tenant")
Dated
May 8, 1998
for
Meadow Brook South
Suite Number 100
containing
73,915 square feet of Rentable Floor Area
Term: 120 months
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
----
<S> <C> <C>
1. Certain Definitions.................................................... 1
2. Lease of Premises...................................................... 2
3. Term................................................................... 3
4. Possession............................................................. 3
5. Rental Payments........................................................ 3
6. Base Rental............................................................ 4
7. Base Rental Escalation................................................. 4
8. Additional Rental...................................................... 5
9. Operating Expenses..................................................... 6
10. Tenant Taxes; Rent Taxes............................................... 9
11. Payments............................................................... 9
12. Late Charges.......................................................... 10
13. Use/Rules............................................................. 10
14. Alterations and Installations......................................... 10
15. Repairs............................................................... 10
16. Landlord's Right of Entry............................................. 11
17. Insurance............................................................. 11
18. Waiver of Subrogation................................................. 12
19. Default............................................................... 12
20. Waiver of Breach...................................................... 15
21. Assignment and Subletting............................................. 15
22. Destruction........................................................... 16
23. Landlord's Lien....................................................... 17
24. Tenant's Waiver of Redemption and With Regard to Billings............. 17
25. Services by Landlord.................................................. 17
26. Attorneys' Fees and Homestead......................................... 18
27. Time.................................................................. 18
28. Subordination and Attornment.......................................... 18
29. Estoppel Certificates................................................. 19
30. No Estate............................................................. 19
31. Cumulative Rights..................................................... 19
32. Holding Over.......................................................... 19
33. Surrender of Premises................................................. 20
34. Notices............................................................... 20
35. Damage of Theft of Personal Property.................................. 20
36. Eminent Domain........................................................ 20
37. Parties............................................................... 21
38. Liability of Tenant................................................... 22
39. Intentionally Omitted................................................. 22
40. Force Majeure......................................................... 22
41. Landlord's Liability.................................................. 22
42. Landlord's Covenant of Quiet Enjoyment................................ 22
43. Intentionally Omitted................................................. 23
44. Hazardous Substances.................................................. 23
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
45. Submission of Lease.................................................................................................. 23
46. Severability......................................................................................................... 24
47. Entire Agreement..................................................................................................... 24
48. Headings............................................................................................................. 24
49. Brokers.............................................................................................................. 24
50. Governing Law........................................................................................................ 24
51. Guaranty............................................................................................................. 25
52. Authority............................................................................................................ 25
53. Financial Statements................................................................................................. 25
54. Joint and Several Liability.......................................................................................... 25
55. ERISA Compliance..................................................................................................... 25
56. Delivery of Documents................................................................................................ 25
57. Use of Name of Tenant................................................................................................ 26
58. Rule Against Perpetuities............................................................................................ 26
</TABLE>
Exhibit "A" Legal Description of Land
Exhibit "B" Floor Plan(s)
Exhibit "C" Work Letter
Exhibit "D" Confirmation Notice
Exhibit "E" Building Standard Services
Exhibit "F" Rules and Regulations
Exhibit "G" Special Stipulations
Exhibit "H" Absolute Unconditional and Continuing Guaranty
of Payment of Lease Obligations
Exhibit "I" Promissory Note
<PAGE> 4
LEASE AGREEMENT
THIS LEASE AGREEMENT ("LEASE"), is made and entered into this 8th day of May,
1998 (the "Effective Date"), by and between Landlord and Tenant.
W I T N E S S E T H:
1. Certain Definitions. For purposes of this Lease, the following terms
shall have the meanings hereinafter ascribed thereto:
(a) Landlord: Daniel Meadow Brook South, L.L.C.
(b) Landlord's Address:
Daniel Realty Company
3595 Grandview Parkway
Birmingham, Alabama 35243
(c) Tenant: Nichols TXEN Corporation
(d) Tenant's Address:
Nichols TXEN Corporation
10 Inverness Center Parkway
Suite 500
Birmingham, Alabama 35242
(e) Building Address:
2500 Corporate Drive
Birmingham, Alabama 35252
(f) Suite Number: 100
(g) Rentable Floor Area of the Demised Premises shall be:
73,915
(h) Rentable Floor Area of the Building shall be: 98,553 square feet.
(i) Rental Term: One hundred twenty (120) months. (Article 3)
(j) Base Rental Rate: $17.25 per square foot of Rentable Floor Area
of the Demised Premises per year, subject to adjustments as set
forth in Article 7 and paragraph 4.01(2) of Exhibit "G".
(k) Rental Commencement Date: The earlier of (a) April 1, 1999; or
(y) the date upon which Tenant occupies the Demised Premises and
operates therefrom.
(l) Rent Deposit: $108,553.00 (Article 5[C]).
1
<PAGE> 5
(m) Construction Allowance: The amount equal to $15.00 multiplied by the
Rentable Floor Area of the Demised Premises.
(n) Security Deposit: $ None (Article 443[a]).
(o) Broker(s): Daniel Realty Corporation and Zachary T. Hutto, II
(Article 49).
(p) State: The State of Alabama.
(q) Lease Year: The twelve month period commencing on the Rental
Commencement Date, or, if the Rental Commencement Date is not on the
first day of a calendar month, commencing on the first day of the
first calendar month following the Rental Commencement Date, and
each successive twelve month period thereafter during the Lease
Term.
(r) Use: General offices in connection with Tenant's business as a
software development company for the managed healthcare industry.
(s) Expense Stop: The Operating Expense Amount as defined in Article
8(c) herein for the calendar year 1999 per square foot of Rental
Floor Area of the Demised Premises per year (adjusted as set forth
in Article 8(c)(x) as if the Project had been in operation and
occupied during all of calendar year 1999.
2. Lease of Premises. Landlord, in consideration of the covenants and
agreements to be performed by Tenant, and upon the terms and conditions
hereinafter stated, does hereby rent and lease unto Tenant, and Tenant does
hereby rent and lease from Landlord, certain premises (the "Demised Premises")
in the building (hereinafter referred to as "Building") located or to be
located on that certain tract of land (the "Land") more particularly described
in Exhibit "A" attached hereto and by this reference made a part hereof, which
Demised Premises are outlined in red or crosshatched on the floor plan attached
hereto as Exhibit "B" and by this reference made a part hereof, with no
easement for light, view or air included in the Demised Premises or being
granted hereunder. The obligations of Landlord and Tenant with respect to the
initial leasehold improvements to the Demised Premises are set forth in Exhibit
"C" attached hereto and by this reference made a part hereof. Landlord shall
cause the Demised Premises to be "ready for occupancy" (as defined in Exhibit
"C" attached hereto) not later than April 1, 1999, subject to force majeure,
delays caused by Tenant and Tenant's compliance with the terms and provisions
of Exhibit "C" attached hereto. In the event the Demised Premises are not ready
for occupancy on or before April 1, 1999 (the "Turnover Date"), Landlord shall
reimburse Tenant, as set forth below, for any rental expense actually incurred
by Tenant in excess of the rental expense Tenant would have incurred but for
the delay in the Turnover Date based on the rental rates in effect for the
month of March, 1999 (the "Excess Rent Payments"). The reimbursement obligation
set forth in the immediately preceding sentence shall apply only to Tenant's
office premises at the following locations:
Inverness Office Park Building 10 22,152 Rentable Square Feet
Inverness Office Park Building 31 15,872 Rentable Square Feet
Meadow Brook Corporate Park Building 300 21,058 Rentable Square Feet
Such obligation of Landlord for Excess Rent Payments shall continue until the
Demised Premises are "ready for occupancy" as defined in Exhibit "C" attached
hereto. Notwithstanding the foregoing, Landlord shall have no obligation to
reimburse Tenant for any Excess Rent Payments if the Turnover Date shall be
delayed due to force majeure or delays caused by or within the reasonable
control of Tenant.
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<PAGE> 6
The "Project" is comprised of the Building, the Land, the Building's parking
facilities, any walkways, covered walkways, tunnels or other means of access to
the Building and the Building's parking facilities, all common areas, including
any lobbies or plazas, and any other improvements or landscaping on the Land.
The Project is located in the development known as "Meadow Brook South" (the
"Development").
3. Term. The term of this Lease ("Lease Term") shall commence on the Effective
Date, and, unless extended or sooner terminated as provided in this Lease, shall
end on the expiration of the Rental Term designated in Article 1(i) above,
which Rental Term shall commence on the Rental Commencement Date, unless the
Rental Commencement Date shall be other than the first day of a calendar month,
in which event the Rental Term shall commence on the first day of the calendar
month following the month in which the Rental Commencement Date occurs. Promptly
after the Rental Commencement Date, Landlord shall send to Tenant a Confirmation
Notice in the form of Exhibit "D" attached hereto and by this reference made a
part hereof, specifying the Rental Commencement Date, the date of expiration of
the Lease Term established in accordance herewith and certain other matters
Landlord may deem appropriate.
4. Possession. Taking of possession by Tenant shall be deemed conclusively to
establish Tenant has accepted the Demised Premises as suitable for Tenant's
intended use and that Landlord's construction obligations with respect to the
Demised Premises have been completed and that the Demised Premises, to the
extent of Landlord's construction obligations with respect thereto, are in good
and satisfactory condition (subject to completion of any incomplete or
corrective items specified in a "punch list" approved by Landlord and Tenant).
5. Rental Payments.
(a) Effective upon the Rental Commencement Date, and continuing thereafter
throughout the Lease Term, Tenant covenants and agrees to pay Landlord, all
Rent due and payable under this Lease, at the times and in the manner provided
in this Lease. As used in this Lease, the term "Rent" shall mean the Base Rental
(as hereinafter defined), Tenant's Forecast Additional Rental (as hereinafter
defined), Tenant's Additional Rental (as hereinafter defined), and any other
amounts that Tenant assumes or agrees to pay under the provisions of this Lease
that are owed to Landlord, including without limitation any and all other sums
that may become due by reason of any default of Tenant or failure on Tenant's
part to comply with the agreements, terms, covenants and conditions of this
Lease to be performed by Tenant. For both Tenant's and Landlord's accounting
purposes, it is agreed that Rent charges of every kind herein set forth shall
begin to accrue on the Rental Commencement Date and continue throughout the
Lease Term and any extensions or renewals thereof.
With regard to payments of Base Rental and Tenant's Forecast Additional
Rental, the first installment shall be due, in advance, on the Rental
Commencement Date. Each subsequent installment, in an amount equal to one
twelfth (1/12) of the annual rate, shall be due, in advance, on the first day of
each month next ensuing after the Rental Commencement Date, and continuing
thereafter throughout the Lease Term and any extensions or renewals thereof.
All Rent payable by Tenant hereunder to Landlord shall be paid, in lawful
money of the United States of America, to Landlord at the address provided for
payment of Rent or to such other payee or address as Landlord may designate in
writing to Tenant. Tenant shall pay all Rent and other sums of money as shall
become due from and payable by Tenant to Landlord under this Lease at the times
and in the manner provided in this Lease, without demand, deduction, set-off or
counterclaim.
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<PAGE> 7
(b) If the Rental Commencement Date is other than the first day of a
calendar month or if this Lease terminates on other than the last day of a
calendar month, then the installments of Base Rental and Tenant's Forecast
Additional Rental for such month or months shall be prorated on a daily basis.
Also, if the Rental Commencement Date occurs on other than the first day of a
calendar year, or if this Lease expires or is terminated on other than the last
day of a calendar year, Tenant's Additional Rental shall be prorated for such
commencement or termination year, as the case may be, by multiplying such
Tenant's Additional Rental by a fraction, the numerator of which shall be the
number of days of the Lease Term (from and after the Rental Commencement Date)
during the commencement or expiration or termination year, as the case may be,
and the denominator of which shall be 365, and the calculation described in
Article 8 hereof shall be made as soon as possible after the expiration or
termination of this Lease, Landlord and Tenant hereby agreeing that the
provisions relating to said calculation shall survive the expiration or
termination of this Lease.
(c) As security for Tenant's obligations to take possession of the Demised
Premises in accordance with the terms of this Lease and to comply with all of
Tenant's covenants, warranties and agreements hereunder, Tenant has deposited
with Landlord the Rent Deposit set forth in Article 1(l) above. Such amount
shall be applied by Landlord to the first monthly installment(s) of Base Rental
as they become due hereunder. In the event Tenant fails to take possession of
the Demised Premises as aforesaid or otherwise fails to comply with any of
Tenant's covenants, warranties or agreements hereunder, said sum shall be
retained by Landlord for application in reduction, but not in satisfaction, of
damages suffered by Landlord as a result of such breach by Tenant. Unless
otherwise required by State law, Landlord shall not be required to keep such
deposit separate from its general accounts.
(d) No payment by Tenant or acceptance by Landlord of an amount less than
the Rent herein stipulated or otherwise becoming due shall be deemed a waiver of
any other Rent due. No partial payment or endorsement on any check or any letter
accompanying such payment of Rent shall be deemed an accord and satisfaction,
but Landlord may accept such payment without prejudice to Landlord's right to
collect the balance of any Rent due under the terms of this Lease or any late
charge assessed against Tenant hereunder. All payments received by Landlord
shall be applied by Landlord as Landlord shall determine, regardless of any
notation that may be made on any check or any letter accompanying such payment.
6. Base Rental. Subject to adjustments in accordance with Article 7 and
paragraph 4.01(2) of Exhibit "G" below, from and after the Rental Commencement
Date, Tenant shall pay to Landlord a base annual rental (herein called "Base
Rental") equal to the Base Rental Rate set forth in Article 1(j) above
multiplied by the Rentable Floor Area of the Demised Premises set forth in
Article l(g) above. Payments of Base Rental shall be made at the times and in
the manner set forth in Article 5(a) hereinabove.
7. Base Rental Escalation.
(a) As used in this Article 7, the term "Subsequent Year" shall mean each
Lease Year of the Lease Term following the first Lease Year. The term "Prior
Year" shall mean the Lease Year immediately preceding each Subsequent Year.
(b) On the first day of each Subsequent Year, the Base Rental Rate shall
be increased to an amount equal to the Base Rental Rate set forth below:
<TABLE>
<S> <C>
Second Lease Year $17.61 per square foot of Rentable Floor Area
Third Lease Year $17.98 per square foot of Rentable Floor Area
Fourth Lease Year $18.36 per square foot of Rentable Floor Area
</TABLE>
4
<PAGE> 8
<TABLE>
<S> <C>
Fifth Lease Year $18.76 per square foot of Rentable Floor Area
Sixth Lease Year $19.16 per square foot of Rentable Floor Area
Seventh Lease Year $19.58 per square foot of Rentable Floor Area
Eighth Lease Year $20.01 per square foot of Rentable Floor Area
Ninth Lease Year $20.45 per square foot of Rentable Floor Area
Tenth Lease Year $20.91 per square foot of Rentable Floor Area
</TABLE>
8. Additional Rental.
(a) Subject to the terms of this Article 8, from and after the Rental
Commencement Date, Tenant shall pay to Landlord "Tenant's Forecast Additional
Rental" (as defined in subparagraph (b) hereinbelow) and "Tenant's Additional
Rental" (as defined in subparagraph (c) hereinbelow). Payments of Tenant's
Forecast Additional Rental shall be made as set forth in Article 5(a).
(b) For purposes of this Lease, "Tenant's Forecast Additional Rental"
shall mean Landlord's reasonable estimate of Tenant's Additional Rental for the
coming calendar year or portion thereof. If at any time it appears to Landlord
that Tenant's Additional Rental for the current calendar year will vary from
Landlord's estimate by more than five percent (5%), Landlord shall have the
right to revise, by notice to Tenant, its estimate for such year, and subsequent
payments by Tenant for such year shall be based upon such revised estimate of
Tenant's Additional Rental. Failure to make a revision contemplated by the
immediately preceding sentence shall not prejudice Landlord's right to collect
the full amount of Tenant's Additional Rental. Prior to the Rental Commencement
Date and thereafter prior to the beginning of each calendar year during the
Lease Term, including any extensions thereof, Landlord shall present to Tenant a
statement of Tenant's Forecast Additional Rental for such calendar year;
provided, however, that if such statement is not given prior to the beginning of
any calendar year as aforesaid, Tenant shall continue to pay during the next
ensuing calendar year on the basis of the amount of Tenant's Forecast Additional
Rental payable during the calendar year just ended until the month after such
statement is delivered to Tenant.
(c) For purposes of this Lease, "Tenant's Additional Rental" shall mean
for each calendar year (or portion thereof) the Operating Expense Amount
(defined below), less the Expense Stop set forth in Article 1(s), multiplied by
the number of square feet of Rentable Floor Area of the Demised Premises. As
used herein, "Operating Expense Amount" shall mean an amount equal to (x) plus
(y) where:
(x) equals the amount of Operating Expenses (as defined below) for
such calendar year divided by the greater of (i) 95% of the number of
square feet of Rentable Floor Area of the Building, or (ii) the total
number of square feet of Rentable Floor Area occupied in the Building
for such calendar year on an average annualized basis; provided,
however, if the Operating Expenses actually incurred by Landlord are
lower than would be incurred if at least 95% of the Building were
occupied or if Landlord shall not furnish any particular item(s) of
work or services (the cost of which would otherwise be included within
Operating Expenses) to portions of the Building because (A) such
portions are not occupied, (B) such item of work or services is not
required or desired by the tenant of such portion, (C) such tenant is
itself obtaining such item of work or services, or (D) of any other
reason, then appropriate adjustments shall be made to determine
Operating Expenses for such calendar year as though the Building were
actually occupied to the extent of the greater of (i) or (ii) above
and as though Landlord had furnished such item of work or services to
the greater of (i) or (ii) above; and
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<PAGE> 9
(y) equals a management fee contribution equal to three percent (3%)
of the difference between Tenant's Base Rental Rate and the Expense
Stop, plus three percent (3%) of the per square foot amount described
in (x) above.
(d) Within one hundred twenty (120) days after the end of the calendar
year in which the Rental Commencement Date occurs and of each calendar year
thereafter during the Lease Term, or as soon thereafter as practicable, Landlord
shall provide Tenant a statement showing the Operating Expenses for said
calendar year, and a statement comparing Tenant's Forecast Additional Rental
with Tenant's Additional Rental. In the event Tenant's Forecast Additional
Rental exceeds Tenant's Additional Rental for said calendar year, Landlord shall
credit such amount against Rent then owing or next due hereunder or, if the
Lease Term has expired or is about to expire, refund such excess to Tenant if
Tenant is not in default under this Lease (in the instance of a default such
excess shall be held as additional security for Tenant's performance, may be
applied by Landlord to cure any such default, and shall not be refunded until
any such default is cured). In the event that the Tenant's Additional Rental
exceeds Tenant's Forecast Additional Rental for said calendar year, Tenant
covenants and agrees to pay Landlord, within thirty (30) days of receipt of the
statement, an amount equal to such difference, Landlord's failure to provide
Tenant said statement within one hundred twenty (120) days as set forth above
shall not affect Tenant's obligation for payment of any amounts due under
Article 8. The provisions of this Lease concerning the payment of Tenant's
Additional Rental shall survive the expiration or earlier termination of this
Lease.
(e) For so long as Tenant is not in default under this Lease, Landlord's
books and records pertaining to the calculation of Operating Expenses for any
calendar year within the Lease Term may be audited by an authorized
representative of Tenant at Tenant's expense, at any time within twelve (12)
months after the end of each such calendar year; provided that Tenant shall give
Landlord not less than thirty (30) days' prior written notice of any such audit.
For purposes hereof, an authorized representative of Tenant shall mean a bona
fide employee of Tenant, any of the "big six" accounting firms, or any other
party reasonably approved in writing by Landlord. In no event shall an
authorized representative of Tenant include the owner of any office building in
the metropolitan area in which the Demised Premises are located or any affiliate
of such owner. Prior to the commencement of such audit, Tenant shall cause its
authorized representative to agree in writing for the benefit of Landlord that
such representative will keep the results of the audit confidential and that
such representative will not disclose or divulge the results of such audit
except to Tenant and Landlord and except in connection with any dispute between
Landlord and Tenant relating to Operating Expenses. Such audit shall be
conducted during reasonable business hours at Landlord's office where Landlord's
books and records are maintained. Tenant shall cause a written audit report to
be prepared by its authorized representative following any such audit and shall
provide Landlord with a copy of such report promptly after receipt thereof by
Tenant. If Landlord's calculation of Tenant's Additional Rental for the audited
calendar year was incorrect, then Tenant shall be entitled to a prompt refund of
any overpayment or Tenant shall promptly pay to Landlord the amount of any
underpayment, as the case may be.
9. Operating Expenses.
(a) For the purposes of this Lease, "Operating Expenses" shall mean all
expenses, costs and disbursements (but not specific costs billed to specific
tenants of the Building) of every kind and nature, computed on an accrual basis,
relating to or incurred or paid in connection with the ownership, management,
operation, landscaping, repair and maintenance of the Project, including but not
limited to, the following:
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<PAGE> 10
1. wages, salaries and other costs of all on-site and off-site
employees engaged either full or part-time in the operation, management,
maintenance or access control of the Project, including taxes, insurance and
benefits relating to such employees, allocated equitably;
2. the cost of all supplies, tools, equipment, materials and
replacements used in the operation, management, repair, maintenance and access
control of the Project;
3. the cost of all utilities for the Project, including but not
limited to the cost of electricity, gas, water, sewer services and power for
heating, lighting, air conditioning and ventilating;
4. the cost of all maintenance, janitorial, trash and garbage
disposal and service agreements for the Project and the equipment therein,
including but not limited to security service, garage operators, window
cleaning, elevator maintenance, HVAC maintenance, janitorial service, waste
recycling service, landscaping maintenance and customary landscaping
replacement;
5. the cost of repairs and general maintenance of the Project;
6. amortization (together with reasonable financing charges) of the
cost of acquisition and/or installation of capital investment items (including
security and energy management equipment), amortized over their respective
useful lives, which are installed for the purpose of reducing operating
expenses, promoting safety, complying with governmental requirements, or
maintaining the first-class nature of the Project;
7. the cost of casualty, rental loss, liability and other insurance
applicable to the Project and Landlord's personal property used in connection
therewith;
8. the cost of trash and garbage removal, air quality audits, vermin
extermination, and snow, ice and debris removal;
9. the cost of legal and accounting services incurred by Landlord in
connection with the management, maintenance, operation and repair of the
Project, excluding the Landlord's general accounting, such as partnership
statements and tax returns, and excluding services described in Article 9(b)(14)
below;
10. all taxes, assessments and governmental charges, whether or not
directly paid by Landlord, whether federal, state, county or municipal and
whether they be by taxing districts or authorities presently taxing the Project,
or by others subsequently created or otherwise, or imposed as a result of any
lapses of any special abatement, and any other taxes and assessments
attributable to the Project or its operation (and the costs of contesting any of
the same), including business license taxes and fees, excluding, however, taxes
and assessments imposed on the personal property of the tenants of the Project,
federal and state taxes on income, death taxes, franchise taxes, and any taxes
(other than business license taxes and fees) imposed or measured on or by the
income of Landlord from the operation of the Project; and it is agreed that
Tenant will be responsible for ad valorem taxes on its personal property and on
the value of the leasehold improvements in the Demised Premises to the extent
that the same exceed Building Standard allowances, if said taxes are based upon
an assessment which includes the cost of such leasehold improvements in excess
of Building Standard allowances (and if the taxing authorities do not separately
assess Tenant's leasehold improvements, Landlord may make an appropriate
allocation of the ad valorem taxes allocated to the Project to give effect to
this sentence);
7
<PAGE> 11
11. the cost of operating the management office for the Project and
an equitable portion of the cost of operating the management office for the
Development, including in each case the cost of office supplies, bulletins or
newsletters distributed to tenants, postage, telephone expenses, maintenance and
repair of office equipment, non-capital investment equipment, amortization
(together with reasonable financing charges) of the cost of capital investment
equipment, and rent;
12. the costs and expenses incurred by Landlord in connection with
the maintenance, operation and repair of any common facilities, including
roadways, private driveways, plaza areas, walkways, utility lines, pipes, wires,
cables and other utility facilities, retention facilities, storm and sanitary
sewers, culverts, drains, headwalls, manholes and related equipment, parking
facilities, grounds and landscaping, and shared hallways, lobbies, corridors,
elevators, entrances and exits, restrooms and stairways, now or hereafter
servicing the Project or the Development;
13. the pro rata share applicable to the Project of any other costs
and expenses incurred by Landlord as "Owner" of the Project or as a part of the
Development under and pursuant to any declaration of covenants and
cross-easements, reciprocal easement agreements, ground leases (other than
ground rent due thereunder), condominium association agreements or any other
public or private arrangements or agreements, from time to time affecting the
Project or the Development, including, without limitations, that certain Meadow
Brook Corporate Park Declaration of Covenants, Conditions and Restrictions and
Architectural Guidelines, as amended, recorded in the applicable records of
Shelby County, Alabama;
14. the costs of taxes, insurance, repair, replacement, maintenance,
cleaning and operation of any tenant amenities shared by all tenants of the
Building, including but not limited to a health club or fitness facility located
within the Project; and
15. all other costs incurred by Landlord in connection with all other
services which Landlord may elect, but shall not be obligated, to perform with
respect to the Project.
(b) For purposes of this Lease, and notwithstanding anything in any other
provision of this Lease to the contrary, "Operating Expenses" shall not include
the following:
1. the cost of any special work or service performed for any tenant
(including Tenant) at such tenant's cost;
2. except as otherwise provided herein, the cost of installing,
operating and maintaining any specialty service, such as an observatory,
broadcasting facility, luncheon club, restaurant, cafeteria, retail store,
sundry shop, newsstand, or concession, but only to the extent such costs exceed
those which would normally be expected to be incurred had such space been
general office space;
3. the cost of correcting defects in construction;
4. compensation paid to officers and executives of Landlord (but it
is understood that the office park manager, the on-site building manager and
other on-site employees below the grade of building manager may carry a title
such as vice president and the salaries and related benefits of these
officers/employees of Landlord would be allowable Operating Expenses under
Article 9[a][1] above);
5. the cost of any items for which Landlord is reimbursed by
insurance, condemnation or otherwise, except for costs reimbursed pursuant to
provisions similar to Articles 8 and 9 hereof;
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<PAGE> 12
6. the cost of any additions, changes, replacements and other items
which are made in order to prepare for a new tenant's occupancy;
7. the cost of repairs incurred by reason of fire or other casualty
reimbursed by insurance proceeds under policies maintained by Landlord;
8. insurance premiums to the extent Landlord may be directly
reimbursed therefor, except for premiums reimbursed pursuant to provisions
similar to Articles 8 and 9 hereof;
9. interest on debt or amortization payments on any mortgage (except
to the extent specifically permitted by Article 9[a]) and rental under any
ground lease or other underlying lease;
10. any real estate brokerage commissions or other costs incurred in
procuring tenants or any fee in lieu of such commission;
11. any advertising expenses incurred in connection with the
marketing of any rentable space;
12. rental payments for base building equipment such as HVAC
equipment and elevators;
13. any expenses for repairs or maintenance which are covered by
warranties and service contracts, to the extent such maintenance and repairs are
made at no cost to Landlord;
14. legal expenses arising out of the construction of the
improvements on the Land or the entering into or enforcement of the provisions
of any lease of space within the Building, including without limitation this
Lease; and
15. management fees (Tenant's obligation for a management fee
contribution is set forth in Article 8(c) above);
10. Tenant Taxes; Rent Taxes. Tenant shall pay promptly when due all taxes
directly or indirectly imposed or assessed upon Tenant's gross sales, business
operations, machinery, equipment, trade fixtures and other personal property or
assets, whether such taxes are assessed against Tenant, Landlord or the
Building. In the event that such taxes are imposed or assessed against Landlord
or the Building, Landlord shall furnish Tenant with all applicable tax bills,
public charges and other assessments or impositions, and Tenant shall forthwith
pay the same either directly to the taxing authority or, at Landlord's option,
to Landlord. In addition, in the event there is imposed at any time a tax upon
and/or measured by the rental payable by Tenant under this Lease, whether by way
of a sales or use tax or otherwise, Tenant shall be responsible for the payment
of such tax and shall pay the same on or prior to the due date thereof;
provided, however, that the foregoing shall not include any inheritance, estate,
succession, transfer, gift or income tax imposed on or payable by Landlord.
11. Payments. All payments of Rent and other payments to be made to Landlord
shall be made on a timely basis, as provided in this Lease, and shall be payable
to Landlord or as Landlord may otherwise designate. All such payments shall be
mailed or delivered to Landlord's Address designated for the payment of Rent in
Article l(b) above or at such other place as Landlord may designate from time to
time in writing. If mailed, all payments shall be mailed in sufficient time and
with adequate postage thereon to be received in Landlord's account by no later
than the due date for such payment. Tenant agrees to pay to Landlord Fifty
Dollars ($50.00) for each check presented to Landlord in payment of any
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<PAGE> 13
obligation of Tenant which is not paid by the bank on which it is drawn,
together with interest from and after the due date for such payment at the rate
of eighteen percent (18%) per annum on the amount due.
12. Late Charges. Any Rent or other amounts payable to Landlord under this
Lease, if not paid by the fifth day of the month for which such Rent is due, as
provided in this Lease, or by the due date specified in any invoices from
Landlord for any other amounts payable hereunder, shall incur a late charge of
Fifty Dollars ($50.00) for Landlord's administrative expense in processing such
delinquent payment and in addition thereto shall bear interest at the rate of
eighteen percent (18%) per annum from and after the due date for such payment.
In no event shall the rate of interest payable on any late payment exceed the
legal limits for such interest enforceable under applicable law.
13. Use/Rules.
(a) Tenant shall use and occupy the Demised Premises solely for the
Use set forth in Article 1(r), and no other purposes, and in accordance with all
applicable laws, ordinances, rules and regulations of governmental authorities
and the rules and regulations attached hereto as Exhibit "G" and made a part
hereof (the "Rules and Regulations"). The occupancy rate of the Demised Premises
shall in no event be more than one (1) person per 143 square feet of Rentable
Floor Area of the Demised Premises; and
(b) Tenant covenants and agrees to abide by the Rules and Regulations in
all respects as now set forth and attached hereto as Exhibit "G" or as hereafter
promulgated by Landlord. All Rules and Regulations for the Building shall be
uniformly applied to all tenants in the Building, and Landlord will not be
arbitrary in effecting changes in the Rules and Regulations. Landlord shall have
the right at all times during the Lease Term, with notice to Tenant, to publish
and promulgate and thereafter enforce such rules and regulations or changes in
the existing Rules and Regulations as it may reasonably deem necessary in its
sole discretion to protect the tenantability, safety, operation, and welfare of
the Demised Premises, the Project and the Development; and
(c) Notwithstanding anything to the contrary in this Lease, in no event
shall Tenant, its employees, agents, contractors, visitors and invitees in the
aggregate utilize more than 1 parking space for each 143 square feet of the
Rentable Floor Area of the Demised Premises.
14. Alterations and Installations. Except for any initial improvement of the
Demised Premises pursuant to Exhibit "C" which shall be governed by the
provisions of said Exhibit "C", Tenant shall not make, suffer or permit to be
made any alterations, additions or improvements to or of the Demised Premises or
any part thereof, or attach any fixtures or equipment thereto, without first
obtaining Landlord's written consent, which consent shall not be unreasonably
withheld. Any such alterations, additions or improvements to the Demised
Premises shall be made subject to Landlord's requirements and at Tenant's sole
cost and expense. All such alterations, additions and improvements shall become
Landlord's property at the expiration or earlier termination of the Lease Term
and shall remain on the Demised Premises without compensation to Tenant unless
Landlord elects by notice to Tenant to have Tenant remove such alterations,
additions and improvements, in which event, notwithstanding any contrary
provisions respecting such alterations, additions and improvements contained in
Article 33 hereof, Tenant shall promptly restore, at its sole cost and expense,
the Demised Premises to its condition prior to the installation of such
alterations, additions and improvements, normal wear and tear excepted.
15. Repairs.
(a) Landlord shall maintain in good order and repair, subject to normal
wear and tear and subject to casualty and condemnation, the Building (excluding
the Demised Premises and other portions
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<PAGE> 14
of the Building leased to other tenants), the Building parking facilities, the
public areas and the landscaped areas. Notwithstanding the foregoing obligation,
the cost of any repairs or maintenance to the foregoing necessitated by the
intentional acts or negligence of Tenant or its agents, contractors, employees,
invitees, licensees, tenants or assigns, shall be borne solely by Tenant and
shall be deemed Rent hereunder and shall be reimbursed by Tenant to Landlord
upon demand. Landlord shall not be required to make any repairs or improvements
to the Demised Premises except structural repairs necessary for safety and
tenantability.
(b) Tenant covenants and agrees that it will take good care of the Demised
Premises and all alterations, additions and improvements thereto and will keep
and maintain the same in good condition and repair, except for normal wear and
tear. Tenant shall at once report, in writing, to Landlord any defective or
dangerous condition known to Tenant. To the fullest extent permitted by law,
Tenant hereby waives all rights to make repairs at the expense of Landlord or in
lieu thereof to vacate the Demised Premises as may be provided by any law,
statute or ordinance now or hereafter in effect. Landlord has no obligation and
has made no promise to alter, remodel, improve, repair, decorate or paint the
Densed Premises or any part thereof, except as specifically and expressly herein
set forth.
16. Landlord's Right of Entry. Landlord shall retain duplicate keys to all
doors of the Demised Premises, and Landlord and its agents, employees and
independent contractors shall have the right to enter the Demised Premises at
reasonable hours to inspect and examine same, to make repairs, additions,
alterations, and improvements, to exhibit the Demised Premises to mortgagees,
prospective mortgagees, purchasers or tenants, and to inspect the Demised
Premises to ascertain that Tenant is complying with all of its covenants and
obligations hereunder, all without being liable to Tenant in any manner
whatsoever for any damages arising therefrom; provided, however, that Landlord
shall, except in case of emergency, afford Tenant such prior notification of an
entry into the Demised Premises as shall be reasonably practicable under the
circumstances. Landlord shall be allowed to take into and through the Demised
Premises any and all materials that may be required to make such repairs,
additions, alterations or improvements. During such time as such work is being
carried on in or about the Demised Premises, the Rent provided herein shall not
abate, and Tenant waives any claim or cause of action against Landlord for
damages by reason of interruption of Tenant's business or loss of profits
therefrom because of the prosecution of any such work or any part thereof.
17. Insurance. From and after the Rental Commencement Date, Tenant shall
procure at its expense and maintain throughout the remainder of the Lease Term a
policy or policies of special form/all-risk insurance insuring the full
replacement cost of its furniture, fixtures, equipment, supplies, and other
property owned, leased, held or possessed by it and contained in the Demised
Premises, together with the excess value of the improvements to the Demised
Premises over the Construction Allowance, and worker's compensation insurance as
required by applicable law. From and after the Rental Commencement Date, Tenant
shall also procure at its expense and maintain throughout the remainder of the
Lease Term a policy or policies of commercial general liability insurance,
insuring Tenant, Landlord and any other person designated by Landlord, against
any and all liability for injury to or death of a person or persons and for
damage to property occasioned by or arising out of any construction work being
done on the Demised Premises, or arising out of the condition, use, or occupancy
of the Demised Premises, or in any way occasioned by or arising out of the
activities of Tenant, its agents, contractors, employees, guests, or licensees
in the Demised Premises, or other portions of the Building or the Project or the
Development, the limits of such policy or policies to be in combined single
limits for both damage to property and personal injury and in amounts not less
than Three Million Dollars ($3,000,000) for each occurrence, with deductibles
acceptable to Landlord. Such insurance shall, in addition, extend to any
liability of Tenant arising out of the indemnities provided for in this Lease.
Tenant shall also carry such other types of insurance in form and amount which
Landlord shall reasonably deem to be prudent for
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Tenant to carry, should the circumstances or conditions so merit Tenant carrying
such type of insurance, provided that such other insurance is then customarily
carried by tenants in other comparable buildings in the metropolitan area in
which the Project is located. All insurance policies procured and maintained by
Tenant pursuant to this Article 17 shall name Landlord and any additional
parties designated by Landlord as additional insureds, shall be carried with
companies licensed to do business in the State having a rating from Best's
Insurance Reports of not less than A-/X, and shall be non-cancelable and not
subject to material change except after thirty (30) days' written notice to
Landlord. Such policies or duly executed certificates of insurance with respect
thereto, accompanied by proof of payment of the premium therefor, shall be
delivered to Landlord prior to the date Tenant first enters upon the Demised
Premises (for installation of Tenant's improvements and fixtures, or otherwise),
and renewals of such policies shall be delivered to Landlord at least thirty
(30) days prior to the expiration of each respective policy term.
Landlord shall procure and maintain at its expense (but with the expense to be
included in Operating Expenses) throughout the Lease Term a policy or policies
of special form/all-risk (including rent loss coverage) real and personal
property insurance covering the Project (including the leasehold improvements in
the Demised Premises up to the amount of the Construction Allowance, but
excluding Tenant's personal property and equipment), in an amount equal to the
full insurable replacement cost thereof as such may increase from time to time
(but such insurance may provide for a commercially reasonable deductible), and
in an amount sufficient to comply with any co-insurance requirements in such
policy, and a policy of workers' compensation insurance, if any, as required by
applicable law. In addition, Landlord shall procure and maintain at its expense
(but with the expense to be included in Operating Expenses) and shall thereafter
maintain throughout the Lease Term, a commercial general liability insurance
policy covering the Project with combined single limits for both damage to
property and personal injury of not less than Three Million Dollars ($3,000,000)
per occurrence, subject to annual aggregate limits of not less than Five Million
Dollars ($5,000,000). Landlord may also carry such other types of insurance in
form and amounts which Landlord shall determine to be appropriate from time to
time, and the cost thereof shall be included in Operating Expenses. All such
policies procured and maintained by Landlord pursuant to this Article 17 shall
be carried with companies licensed to do business in the State. Any insurance
required to be carried by Landlord hereunder may be carried under blanket
policies covering other properties of Landlord and/or its partners and/or their
respective related or affiliated corporations so long as such blanket policies
provide insurance at all times for the Project as required by this Lease.
18. Waiver of Subrogation. Landlord and Tenant shall each have included in all
policies of fire, extended coverage, business interruption and loss of rents
insurance respectively obtained by them covering the Demised Premises, the
Building and contents therein, a waiver by the insurer of all right of
subrogation against the other in connection with any loss or damage thereby
insured against. Any additional premium for such waiver shall be paid by the
primary insured. To the full extent permitted by law, Landlord and Tenant each
waives all right of recovery against the other for, and agrees to release the
other from liability for, loss or damage to the extent such loss or damage is
covered by valid and collectible insurance in effect at the time of such loss or
damage or would be covered by the insurance required to be maintained under this
Lease by the party seeking recovery.
19. Default.
(a) The following acts, events or conditions shall be deemed to be events
of default by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Rent or any other
charge or assessment against Tenant pursuant to the terms hereof within five (5)
days after the due date thereof,
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(ii) the failure by Tenant to cease any conduct prohibited by this
Lease within three (3) days after receipt of written notice from Landlord
requesting cessation thereof; or the failure of Tenant to cease any conduct or
eliminate any condition which poses a danger to person or property within twelve
(12) hours of receipt of written notice from Landlord requesting cessation of
such conduct or elimination of such conditions;
(iii) Tenant or any guarantor of this Lease shall make a general
assignment for the benefit of creditors, or shall admit in writing its inability
to pay its debts as they become due, or shall file a petition in bankruptcy, or
shall be adjudicated as bankrupt or insolvent, or shall file a petition in any
proceeding seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file an answer admitting or fail timely to contest
the material allegations of a petition filed against it in any such proceeding;
(iv) a proceeding is commenced against Tenant or any guarantor of
this Lease seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, and such proceeding shall not have been dismissed within
forty-five (45) days after the commencement thereof;
(v) a receiver or trustee shall be appointed for the Demised
Premises or for all or substantially all of the assets of Tenant or of any
guarantor of this Lease;
(vi) Tenant shall fail to take possession of the Demised Premises as
provided in this Lease;
(vii) Tenant shall do or permit to be done anything which creates a
lien upon the Demised Premises or the Project and such lien is not removed or
discharged within fifteen (15) days after the filing thereof;
(viii) the Demised Premises are deserted, vacated or not used as
regularly or consistently as would normally be expected for similar premises or
not operated for general office use, for a period in excess of sixty (60)
consecutive days or one hundred twenty (120) days in the aggregate in any twelve
(12) month period, even though the Tenant continues to pay Rent hereunder;
(ix) Tenant shall fail to return a properly executed instrument to
Landlord in accordance with the provisions of Article 28 hereof within the time
period provided for such return following Landlord's request for same as
provided in Article 28;
(x) Tenant shall fail to return a properly executed estoppel
certificate to Landlord in accordance with the provisions of Article 29 hereof
within the time period provided for such return following Landlord's request for
same as provided in Article 29; or
(xi) Tenant shall fail to comply with any other term, provision,
covenant or warranty made under this Lease by Tenant, and shall not cure such
failure within fifteen (15) days after notice thereof to Tenant.
(b) Upon the occurrence of any of the aforesaid events of default,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever in addition to, and not in
limitation of any other remedy or right permitted it by law or in equity or by
this Lease:
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(i) terminate this Lease, in which event Tenant shall immediately
surrender the Demised Premises to Landlord and if Tenant fails to do so,
Landlord may without prejudice to any other remedy which it may have for
possession or arrearage in Rent, enter upon and take possession of the Demised
Premises and expel or remove Tenant and any other person who may be occupying
said Demised Premises or any part thereof without being liable for prosecution
or any claim of damages therefor; Tenant hereby agreeing to pay to Landlord on
demand the amount of all loss and damage which Landlord may suffer by reason of
such termination, whether through inability to relet the Demised Premises on
satisfactory terms or otherwise;
(ii) terminate Tenant's right of possession, without terminating
this Lease, and enter upon and take possession of the Demised Premises and expel
or remove Tenant and any other person who may be occupying said Demised Premises
or any part thereof, by entry, dispossessory suit or otherwise, without thereby
releasing Tenant from any liability hereunder, and without being liable for
prosecution or any claim of damages therefor and, if Landlord so elects, make
such alterations, decoration and repairs as, in Landlord's judgment, may be
necessary to relet the Demised Premises, and Landlord may, but shall be under no
obligation to do so (except as may be provided by State law), relet the Demised
Premises or any portion thereof in Landlord's or Tenant's name, but for the
account of Tenant, for such term or terms (which may be for a term extending
beyond the Lease Term) and at such rental or rentals and upon such other terms
as Landlord may deem advisable, with or without advertisement, and by private
negotiations, and receive the rent therefor, Tenant hereby agreeing to pay to
Landlord the deficiency, if any, between all Rent reserved hereunder and the
total rental applicable to the Lease Term hereof obtained by Landlord
re-letting, and Tenant shall be liable for Landlord's expenses in redecorating
and restoring the Demised Premises and all costs incident to such re-letting,
including broker's commissions and lease assumptions, and in no event shall
Tenant be entitled to any rentals received by Landlord in excess of the amounts
due by Tenant hereunder; and any such demand, reentry and taking possession of
the Demised Premises by Landlord shall not of itself constitute an acceptance by
Landlord of a surrender of this Lease or of the Demised Premises by Tenant and
shall not of itself constitute a termination of this Lease by Landlord; or
(iii) enter upon the Demised Premises without being liable for
prosecution or any claim of damages therefor, and do whatever Tenant is
obligated to do under the terms of this Lease; and Tenant agrees to reimburse
Landlord on demand for any expenses including, without limitation, reasonable
attorneys' fees which Landlord may incur in thus effecting compliance with
Tenant's obligations under this Lease, and Tenant further agrees that Landlord
shall not be liable for any damages resulting to Tenant from such action,
whether caused by negligence of Landlord or otherwise; or
(iv) without terminating this Lease, declare all Rent and other
charges and assessments which in Landlord's reasonable determination would
become due and payable during the remainder of the Lease Term (including, but
not limited to, increases in Rent pursuant to Article 7 hereof) to be
immediately due and payable; and thereupon all Rent and other charges due
hereunder to the end of the initial term or any then in effect renewal term,
shall be accelerated.
(c) Pursuit of any of the foregoing remedies shall not preclude pursuit of
any other remedy herein provided or any other remedy provided by law or at
equity, nor shall pursuit of any remedy herein provided constitute an election
of remedies thereby excluding the later election of an alternate remedy, or a
forfeiture or waiver of any Rent or other charges and assessments payable by
Tenant and due to Landlord hereunder or of any damages accruing to Landlord by
reason of violation of any of the terms, covenants, warranties and provisions
herein contained. No reentry or taking possession of the Demised Premises by
Landlord or any other action taken by or on behalf of Landlord shall be
construed to be an
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acceptance of a surrender of this Lease or an election by Landlord to terminate
this Lease unless written notice of such intention is given to Tenant.
Forbearance by Landlord to enforce one or more of the remedies herein provided
upon an event of default shall not be deemed or construed to constitute a waiver
of such default. In determining the amount of loss or damage which Landlord may
suffer by reason of termination of this Lease or the deficiency arising by
reason of any reletting of the Demised Premises by Landlord as above provided,
allowance shall be made for the expense of repossession. Tenant agrees to pay to
Landlord all costs and expenses incurred by Landlord in the enforcement of this
Lease, including, without limitation, the fees of Landlord's attorneys as
provided in Article 26 hereof.
20. Waiver of Breach. No waiver of any breach of the covenants, warranties,
agreements, provisions, or conditions contained in this Lease shall be construed
as a waiver of said covenant, warranty, provision, agreement or condition or of
any subsequent breach thereof, and if any breach shall occur and afterwards be
compromised, settled or adjusted, this Lease shall continue in full force and
effect as if no breach had occurred.
21. Assignment and Subletting. Tenant shall not, without the prior written
consent of Landlord, assign this Lease or any interest herein or in the Demised
Premises, or mortgage, pledge, encumber, hypothecate or otherwise transfer or
sublet the Demised Premises or any part thereof or permit the use of the Demised
Premises by any party other than Tenant. Consent to one or more such transfers
or subleases shall not destroy or waive this provision, and all subsequent
transfers and subleases shall likewise be made only upon obtaining the prior
written consent of Landlord. Without limiting the foregoing prohibition, in no
event shall Tenant assign this Lease or any interest herein, whether directly,
indirectly or by operation of law, or sublet the Demised Premises or any part
thereof or permit the use of the Demised Premises or any part thereof by any
party (i) if the proposed assignee or subtenant is a party who would, or whose
use would, detract from the character of the Building as a first class office
building (such as, without limitation, a dental, medical or chiropractic office
or a governmental office), or conflict with the uses, practices or requirements
of this Lease, or the Building; (ii) if the proposed use of the Demised Premises
shall involve an occupancy rate of more than one (1) person per 143 square feet
of Rentable Floor Area of the Demised Premises, (iii) if the proposed assignment
or subletting shall be to a governmental subdivision or agency or any person or
entity who enjoys diplomatic or sovereign immunity, (iv) if such proposed
assignee or subtenant is an existing tenant of the Building, or (v) if such
proposed assignment, subletting or use would contravene any restrictive covenant
(including any exclusive use) granted to any other tenant of the Building.
Sublessees or transferees of the Demised Premises for the balance of the Lease
Term shall become directly liable to Landlord for all obligations of Tenant
hereunder, without relieving Tenant (or any guarantor of Tenant's obligations
hereunder) of any liability therefor, and Tenant shall remain obligated for all
liability to Landlord arising under this Lease during the entire remaining Lease
Term including any extensions thereof, whether or not authorized herein. If
Tenant is a partnership, a limited liability company or a limited liability
partnership, a withdrawal or change, whether voluntary, involuntary or by
operation of law, of partners or members owning a controlling interest in the
Tenant shall be deemed a voluntary assignment of this Lease and subject to the
foregoing provisions. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or transfer of a
controlling interest in the capital stock of Tenant, shall be deemed a voluntary
assignment of this Lease and subject to the foregoing provisions. Landlord may,
as a prior condition to considering any request for consent to an assignment or
sublease, require Tenant to obtain and submit current financial statements of
any proposed subtenant or assignee. In the event Landlord consents to an
assignment or sublease, Tenant shall pay to Landlord a fee to cover Landlord's
accounting costs plus any legal fees incurred by Landlord as a result of the
assignment or sublease. Landlord may require an additional security deposit from
the assignee or subtenant as a condition of its consent. Any consideration, in
excess of the Rent and other charges and sums due and payable by Tenant under
this Lease, paid to Tenant by any assignee of this Lease for its assignment, or
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by any sublessee under or in connection with its sublease, or otherwise paid to
Tenant by another party for use and occupancy of the Demised Premises or any
portion thereof, shall be promptly remitted by Tenant to Landlord as additional
rent hereunder and Tenant shall have no right or claim thereto as against
Landlord. No assignment of this Lease consented to by Landlord shall be
effective unless and until Landlord shall receive an original assignment and
assumption agreement, in form and substance satisfactory to Landlord, signed by
Tenant and Tenant's proposed assignee, whereby the assignee assumes due
performance of this Lease to be done and performed for the balance of the then
remaining Lease Term of this Lease. No subletting of the Demised Premises, or
any part thereof, shall be effective unless and until there shall have been
delivered to Landlord an agreement, in form and substance satisfactory to
Landlord, signed by Tenant and the proposed sublessee, whereby the sublessee
acknowledges the right of Landlord to continue or terminate any sublease, in
Landlord's sole discretion, upon termination of this Lease, and such sublessee
agrees to recognize and attorn to Landlord in the event that Landlord elects
under such circumstances to continue such sublease.
Notwithstanding anything contained in this Lease which may be to the
contrary, in the event Tenant shall assign this Lease or sublet the Demised
Premises in contravention of this Article 21, or if Tenant shall otherwise, by
operation of law, cease to be the sole occupant of the Demised Premises, same
shall be deemed a material default of Tenant, and, in addition to any other
rights or remedies Landlord may have with respect to such failure, Landlord may
also charge and collect from Tenant (and/or the occupant of the Demised
Premises) as Base Rental, an amount equal to 150% of the Base Rental otherwise
reserved and payable under this Lease until such time as Tenant shall have
caused compliance with the terms of this Lease. Occupancy or possession of the
Demised Premises shall cause said unapproved assignee, sublessee, or occupant to
be liable directly to Landlord for all amounts chargeable under this Lease,
without the granting thereto of a right of possession of the Demises Premises.
Acceptance by Landlord of any Rent payable hereunder made by anyone other than
Tenant as named herein shall under no circumstances in and of itself be deemed
an approval by Landlord of any assignment or subletting without compliance with
this Article 21.
22. Destruction.
(a) If the Demised Premises are damaged by fire or other casualty, the
same shall be repaired or rebuilt as speedily as practical under the
circumstances at the expense of the Landlord (subject to subparagraph (c)
below], unless this Lease is terminated as provided in this Article 22, and
during the period required for restoration, a just and proportionate part of
Base Rental shall be abated until the Demised Premises are repaired or rebuilt.
(b) If the Demised Premises are (i) damaged to such an extent that repairs
cannot, in Landlord's judgment, be completed within nine (9) months after the
date of the casualty or (ii) damaged or destroyed as a result of a risk which is
not insured under standard special form/all-risk insurance policies, or (iii)
damaged or destroyed during the last eighteen (18) months of the Lease Term, or
if the Building is damaged in whole or in part (whether or not the Demised
Premises are damaged), to such an extent that the Building cannot, in Landlord's
judgment, be operated economically as an integral unit, then and in any such
event Landlord may at its option terminate this Lease by notice in writing to
the Tenant within sixty (60) days after the date of such occurrence. Landlord
shall give notice in writing to Tenant within one hundred twenty (120) days
after the date of such occurrence whether or not in Landlord's judgment such
repairs can be completed within nine (9) months after the date of the casualty.
If the Demised Premises are damaged to such an extent that repairs cannot, in
Landlord's judgment, be completed within nine (9) months after the date of the
casualty or if the Demised Premises are substantially damaged during the last
eighteen (18) months of the Lease Tenn, then in either such event Tenant may
elect to terminate this Lease by notice in writing to Landlord within fifteen
(15) days after
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Tenant's receipt of such notice from Landlord. Unless Landlord or Tenant elects
to terminate this Lease as hereinabove provided, this Lease will remain in full
force and effect and Landlord shall repair such damage at its expense to the
extent required in this Article as expeditiously as possible under the
circumstances.
(c) If Landlord should elect or be obligated pursuant to subparagraph (a)
above to repair or rebuild because of any damage or destruction, Landlord's
obligation shall be limited to the original Building and the leasehold
improvements in the Demised Premises (to the extent such leasehold improvements
can be restored for the amount of the Construction Allowance applicable thereto)
and shall not extend to any fumiture, equipment, supplies or other personal
property owned or leased by Tenant, its employees, contractors, invitees or
licensees. If the cost of performing such repairs and restoration exceeds the
actual proceeds of insurance paid or payable to Landlord on account of such
casualty, or if Landlord's mortgagee or the lessor under a ground or underlying
lease shall require that any insurance proceeds from a casualty loss be paid to
it, Landlord may terminate this Lease unless Tenant, within fifteen (15) days
after demand therefor, deposits with Landlord a sum of money sufficient to pay
the difference between the cost of repair and the proceeds of the insurance
available to Landlord for such purpose.
(d) In no event shall Landlord be liable for any loss or damage sustained
by Tenant by reason of casualties mentioned hereinabove or any other accidental
casualty.
23. Landlord's Lien. Landlord shall at all times have a valid first lien upon
all of the personal property of Tenant situated in the Demised Premises to
secure payment of Rent and other sums and charges due hereunder from Tenant to
Landlord and to secure the performance by Tenant of each and all of the
covenants, warranties, agreements and conditions hereof; provided that Landlord
will agree to subordinate such lien, upon terms and conditions reasonably
satisfactory to Landlord, to any first lien securing Tenant's financing of such
personal property or any part thereof. Said personal property shall not be
removed from the Demised Premises without the consent of Landlord until all
arrearages in Rent and other charges as well as any and all other sums of money
due hereunder shall first have been paid and discharged and until this Lease and
all of the covenants, conditions, agreements and provisions hereof have been
fully performed by Tenant. Tenant shall from time to time execute any financing
statements and other instruments necessary to perfect the security interest
granted herein. The lien herein granted may be foreclosed in the manner and form
provided by law for the foreclosure of security instruments or chattel
mortgages, or in any other manner provided by law. This Lease is intended as and
constitutes a security agreement within the meaning of the Uniform Commercial
Code of the State.
24. Tenant's Waiver of Redemption and with Regard to Billings. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Landlord obtaining possession of the Demised
Premises by reason of the violation by Tenant of any of the covenants and
conditions of this Lease or otherwise. The rights given to Landlord herein are
in addition to any rights that may be given to Landlord by any statute or
otherwise. Except as provided in Article 8(e), Tenant's failure to object to any
statement, invoice or billing rendered by Landlord within a period of thirty
(30) days after receipt thereof shall constitute Tenant's acquiescence with
respect thereto and shall render such statement, invoice or billing an account
stated between Landlord and Tenant.
25. Services by Landlord. Landlord shall provide the Building Standard Services
described on Exhibit "E" attached hereto and by reference made a part hereof.
Any services requested or required to be supplied to Tenant in excess of the
Building Standard Services shall be at Tenant's sole cost and expense and shall
be paid for by Tenant promptly upon invoice therefor, which invoice may include
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Landlord's administrative costs and a fee of 10% for such provision. Nothing
herein shall be deemed to require Landlord to provide to Tenant any services in
excess of the Building Standard Services.
26. Attorneys' Fees and Homestead. If any Rent or other debt owing by Tenant to
Landlord hereunder is collected by or through an attorney-at-law, Tenant agrees
to pay an additional amount equal to fifteen percent (15%) of such sum as
attorney's fees. If Landlord uses the services of any attorney in order to
secure compliance with any other provisions of this Lease, to recover damages
for any breach or default of any other provisions of this Lease, or to terminate
this Lease or evict Tenant, Tenant shall reimburse Landlord upon demand for any
and all attorney's fees and expenses so incurred by Landlord. Tenant waives all
homestead rights and exemptions which it may have under any law as against any
obligation owing under this Lease, and assigns to Landlord its homestead and
exemptions to the extent necessary to secure payment and performance of its
covenants and agreements hereunder.
27. Time. Time is of the essence of this Lease, and whenever a certain day is
stated for payment or performance of any obligation of Tenant or Landlord, the
same enters into and becomes a part of the consideration hereof.
28. Subordination and Attornment.
(a) Subject to the provisions of this Article, Tenant agrees that this
Lease and all rights of Tenant hereunder are and shall be subject and
subordinate to any ground or underlying lease which may now or hereafter be in
effect regarding the Project or any component thereof, to any mortgage now or
hereafter encumbering the Demised Premises or the Project or any component
thereof, to all advances made or hereafter to be made upon the security of such
mortgage, to all amendments, modifications, renewals, consolidations,
extensions, and restatements of such ground lease or mortgage, and to any
replacements and substitutions for such ground lease or mortgage. The terms of
this provision shall be self-operative and no further instrument of
subordination shall be required. Upon request of any party in interest, Tenant
shall execute promptly such instrument or certificates as may be reasonably
required to carry out the intent hereof, whether said requirement is that of
Landlord or any other party in interest, including, without limitation, any
ground lessor or mortgagee. Landlord is hereby irrevocably vested with full
power and authority as attorney-in-fact for Tenant and in Tenant's name, place
and stead, to subordinate Tenant's interest under this Lease to the lien or
security title of any ground lease or mortgage and to any future instrument
amending, modifying, renewing, consolidating, extending, restating, replacing or
substituting any such ground lease or mortgage.
(b) If any mortgagee, or any lessor under a ground or underlying lease,
elects to have this Lease superior to its mortgage or lease and signifies its
election in the instrument creating its lien or lease or by separate recorded
instrument, then this Lease shall be superior to such mortgage or lease, as the
case may be. The term "mortgage", as used in this Lease, includes any deed to
secure debt, deed of trust or security deed and any other instrument creating a
lien or conveying real property or any interest therein, in connection with any
other method of financing or refinancing. The term "mortgagee", as used in this
Lease, refers to the holder(s) of the indebtedness secured by a mortgage.
(c) In the event any proceedings are brought for the foreclosure of, or in
the event of exercise of the power of sale under, any mortgage covering the
Demised Premises or the Project, or in the event the interests of Landlord under
this Lease shall be transferred by reason of deed in lieu of foreclosure or
other legal proceedings, or in the event of termination of any lease under which
Landlord may hold title, Tenant shall, at the option of the transferee or
purchaser at foreclosure or under power of sale, or the lessor of the Landlord
upon such lease termination, as the case may be (sometimes hereinafter called
"such person"), attorn to such person and shall recognize and be bound and
obligated hereunder to such
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<PAGE> 22
person as the Landlord under this Lease; provided, however, that no such person
shall be (i) bound by any payment of Rent for more than one (1) month in
advance, except prepayments in the nature of security for the performance by
Tenant of its obligations under this Lease (and then only if such prepayments
have been deposited with and are under the control of such person); (ii) bound
by any amendment or modification of this Lease made without the express written
consent of the mortgagee or lessor of the Landlord, as the case may be; (iii)
obligated to cure any defaults under this Lease of any prior landlord (including
Landlord); (iv) liable for any act or omission of any prior landlord (including
Landlord); (v) subject to any offsets or defenses which Tenant might have
against any prior landlord (including Landlord); or (vi) bound by any warranty
or representation of any prior landlord (including Landlord) relating to work
performed by any prior landlord (including Landlord) under this Lease. Tenant
agrees to execute any attornment agreement not in conflict herewith requested by
Landlord, the mortgagee or such person. Tenant's obligation to attorn to such
person shall survive the exercise of any such power of sale, foreclosure or
other proceeding. Tenant agrees that the institution of any suit, action or
other proceeding by any mortgagee to realize on Landlord's interest in the
Demised Premises or the Building pursuant to the powers granted to a mortgagee
under its, mortgage, shall not, by Operation of law or otherwise, result in the
cancellation or termination of the obligations of the Tenant hereunder. Landlord
and Tenant agree that notwithstanding that this Lease is expressly subject and
subordinate to any mortgages, any mortgagee, its successors and assigns, or
other holder of a mortgage or of a note secured thereby, may sell the Demised
Premises or the Building, in the manner provided in the mortgage and may, at the
option of such mortgagee, its successors and assigns, or other holder of the
mortgage or note secured thereby, make such sale of the Demised Premises or
Building subject to this Lease.
29. Estoppel Certificates. Within ten (10) days after request therefor by
Landlord, Tenant agrees to execute and deliver to Landlord in recordable form an
estoppel certificate addressed to Landlord, any mortgagee or assignee of
Landlord's interest in, or purchaser of, the Demised Premises or the Building or
any part thereof, certifying (if such be the case) that this Lease is unmodified
and is in full force and effect (and if there have been modifications, that the
same is in full force and effect as modified and stating said modifications);
certifying that there are no defenses or offsets against the enforcement thereof
or stating those claimed by Tenant; stating the date to which Rent and other
charges have been paid; certifying that there are no defaults, or events which,
with the giving of notice or the passage of time would be an event of default,
under this Lease; and certifying as to any other matters which may reasonably be
requested. Such certificate shall also include such other information as may
reasonably be required by such mortgagee, proposed mortgagee, assignee,
purchaser or Landlord. Any such certificate may be relied upon by Landlord, any
mortgagee, proposed mortgagee, assignee, purchaser and any other party to whom
such certificate is addressed.
30. No Estate. This Lease shall create the relationship of landlord and tenant
only between Landlord and Tenant and no estate shall pass out of Landlord.
31. Cumulative Rights. All rights, powers and privileges conferred hereunder
upon the parties hereto shall be cumulative to, but not restrictive of, or in
lieu of those conferred by law.
32. Holding Over. If Tenant remains in possession after expiration or
termination of the Lease Term with or without Landlord's written consent, Tenant
shall become a tenant-at-sufferance, and there shall be no renewal of this Lease
by operation of law. During the period of any such holding over, all provisions
of this Lease shall be and remain in effect except that the monthly rental for
the first three (3) months of such holdover period shall be 125% of, and for all
months thereafter shall be 150% of, the amount of Rent (including any
adjustments as provided herein) payable for the last full calendar month of the
Lease Term including renewals or extensions. The inclusion of the preceding
sentence in this Lease shall not be construed as Landlord's consent for Tenant
to hold over.
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33. Surrender of Premises. Upon the expiration or other termination of this
Lease, Tenant shall quit and surrender to Landlord the Demised Premises and
every part thereof and all alterations, additions and improvements thereto,
broom clean and in good condition and state of repair, reasonable wear and tear
only excepted. If Tenant is not then in default, Tenant shall remove all
personalty and equipment not attached to the Demised Premises which it has
placed upon the Demised Premises, and Tenant shall restore the Demised Premises
to the condition immediately preceding the time of placement thereof. If Tenant
shall fail or refuse to remove all of Tenant's effects, personalty and equipment
from the Demised Premises upon the expiration or termination of this Lease for
any cause whatsoever or upon the Tenant being dispossessed by process of law or
otherwise, such effects, personalty and equipment shall be deemed conclusively
to be abandoned and may be appropriated, sold, stored, destroyed or otherwise
disposed of by Landlord without written notice to Tenant or any other party and
without obligation to account for same. Tenant shall pay Landlord on demand any
and all expenses incurred by Landlord in the removal of such property,
including, without limitation, the cost of repairing any damage to the Building
or Project caused by the removal of such property and storage charges (if
Landlord elects to store such property). The covenants and conditions of this
Article 33 shall survive any expiration or termination of this Lease.
34. Notices. All notices required or permitted to be given hereunder shall be
in writing and may be delivered in person to either party or may be sent by
courier, recognized national overnight delivery service or by United States
Mail, certified, return receipt requested, postage prepaid. Any such notice
shall be deemed received by the party to whom it was sent (i) in the case of
personal delivery, recognized national overnight delivery service or courier
delivery, on the date of delivery to such party, (ii) in the case or certified
mail, the date receipt is acknowledged on the return receipt for such notice,
and (iii) if delivery is rejected or refused or the courier, overnight delivery
service or U.S. Postal Service is unable to deliver same because of changed
address of which no notice was given pursuant hereto, the first date of such
rejection, refusal or inability to deliver. All such notices shall be addressed
to Landlord or Tenant at their respective addresses set forth hereinabove or at
such other address is either party shall have theretofore given to the other by
notice as herein provided, and all such notices to Landlord shall be sent
simultaneously to both addresses set forth for Landlord's Address for notices in
Article 1(b) hereof. Tenant hereby designates and appoints as its agent to
receive notice of all dispossessory or distraint proceedings and all other
notices required under this Lease, the person in charge of the Demised Premises
at the time said notice is given or occupying the Demised Premises at said time;
and, if no person is in charge of or occupying the said Demised Premises, then
such service or notice may be made by attaching the same, in lieu of mailing, on
the main entrance to the Demised Premises.
35. Damage or Theft of Personal property. All personal property brought into
Demised Premises by Tenant, or Tenant's employees, patients or invitees, shall
be at the risk of Tenant only, and Landlord shall not be liable for theft
thereof or any damage thereto occasioned by any act of co-tenants, occupants,
invitees or other users of the Building or any other person. Landlord shall not
at any time be liable for damage to any property in or upon the Demised Premises
which results from power surges or other deviations from the constancy of
electrical service or from gas, smoke, water, rain, ice or snow which issues or
leaks from or forms upon any part of the Building or from the pipes or plumbing
work of the same, or from any other place whatsoever.
36. Eminent Domain
(a) If all or part of the Demised Premises shall be taken for any public
or quasi-public use by virtue of the exercise of the power of eminent domain or
by private purchase in lieu thereof, this Lease shall terminate as to the part
of the Demised Premises so taken or rendered untenantable as a result of such
taking, as of the date of taking, and, in the case of a partial taking, either
Landlord or Tenant
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shall have the right to terminate this Lease as to the balance of the Demised
Premises by written notice to the other within thirty (30) days after such date;
provided, however, that a condition to the exercise by Tenant of such right to
terminate shall be that the portion of the Demised Premises taken shall be of
such extent and nature as substantially to handicap, impede or impair Tenant's
use of the balance of the Demised Premises. If title to so much of the Building
or Project is taken that a reasonable amount of reconstruction thereof will not
in Landlord's sole discretion result in the Building being a practical
improvement and reasonably suitable for use for the purpose for which it is
designed, then this Lease shall terminate on the date that the condemning
authority actually takes possession of the part so condemned or purchased.
(b) If this Lease is terminated under the provisions of this Article 36,
Rent shall be apportioned and adjusted as of the date of termination. Tenant
shall have no claim against Landlord or against the condemning authority for the
value of any leasehold estate or for the value of the unexpired Lease Term
provided that the foregoing shall not preclude any claim that Tenant may have
against the condemning authority for the unamortized cost of leasehold
improvements, to the extent the same were installed at Tenant's expense (and not
with the proceeds of the Construction Allowance), or for loss of business,
moving expenses or other consequential damages, in accordance with subparagraph
(d) below.
(c) If there is a partial taking of the Building or the Project and this
Lease is not thereupon terminated under the provisions of this Article 36, then
this Lease shall remain in full force and effect, and Landlord shall, within a
reasonable time thereafter, repair or reconstruct the remaining portion of the
Building or the Project to the extent necessary to make the same a complete
architectural unit to which Tenant has access; provided that in complying with
its obligations hereunder Landlord shall not be required to expend more than the
net proceeds of the condemnation award which are paid to Landlord.
(d) All compensation awarded or paid to Landlord upon a total or partial
taking of the Demised Premises, the Building or the Project shall belong to and
be the property of Landlord without any participation by Tenant. Nothing herein
shall be construed to preclude Tenant from prosecuting any claim directly
against the condemning authority for loss of business, for damage to, and cost
of removal of, trade fixtures, furniture and other personal property belonging
to Tenant, and for the unamortized cost of leasehold improvements to the extent
same were installed at Tenant's expense (and not with the proceeds of the
Construction Allowance), provided, however, that no such claim shall diminish or
adversely affect Landlord's award. In no event shall Tenant have or assert a
claim for the value of any unexpired term of this Lease. Subject to the
foregoing provisions of this subparagraph (d), Tenant hereby assigns to Landlord
any and all of its right, title and interest in or to any compensation awarded
or paid as a result of any such taking.
(e) Notwithstanding anything to the contrary contained in this Article 36,
if, during the Lease Term, the use or occupancy of any part of the Building or
the Demised Premises shall be taken or appropriated temporarily for any public
or quasi-public use under any governmental law, ordinance, or regulations, or by
right of eminent domain, this Lease shall be and remain unaffected by such
taking or appropriation, and Tenant shall continue to pay in full all Rent
payable hereunder by Tenant during the Lease Term. In the event of any such
temporary appropriation or taking, Tenant shall be entitled to receive that
portion of any award which represents compensation for the loss of use or
occupancy of the Demised Premises during the Lease Term, and Landlord shall be
entitled to receive that portion of any award which represents the cost of
restoration and compensation for the loss of use or occupancy of the Demised
Premises after the end of the Lease Term.
37. Parties. The term "Landlord", as used in this Lease, shall include Landlord
and its assigns and successors. It is hereby covenanted and agreed by Tenant
that should Landlord's interest in the Demised
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Premises cease to exist for any reason during the Lease Term, then
notwithstanding the happening of such event, this Lease nevertheless shall
remain in full force and effect, and Tenant hereby agrees to attorn to the then
owner of the Demised Premises. The term "Tenant" shall include Tenant and its
heirs, legal representatives and successors, and shall also include Tenant's
assignees and sublessees, if this Lease shall be validly assigned or the Demised
Premises be validly sublet for the balance of the Lease Term or any renewals or
extensions thereof. In addition, Landlord and Tenant covenant and agree that
Landlord's right to transfer or assign Landlord's interest in and to the Demised
Premises, or any part or parts thereof, shall be unrestricted, and that in the
event of any such transfer or assignment by Landlord which includes the Demised
Premises, Landlord's obligations to Tenant hereunder shall cease and terminate,
and Tenant shall look only and solely to Landlord's assignee or transferee for
performance thereof. "Landlord" and "Tenant" and the pronouns used with
reference thereto, include male and female, singular and plural, corporation,
partnership, company or individual, as may fit the particular parties.
38. Liability of Tenant. Tenant hereby indemnifies Landlord from and agrees to
hold Landlord harmless against, any and all liability, loss, cost, damage or
expense, including, without limitation court costs and reasonable attorney's
fees actually incurred (without regard to statutory definitions or constraints
upon the charge or collection thereof), through all appeals, imposed on Landlord
by any person whomsoever, caused in whole or in part by any act or omission of
Tenant, or any of its employees, contractors, servants, agents, subtenants,
assignees, representatives or invitees, or otherwise occurring in connection
with any default of Tenant hereunder. The provisions of this Article 38 shall
survive any termination of this Lease.
39. Intentionally Omitted.
40. Force Majeure. In the event of strike, lockout, labor trouble, civil
commotion, Act of God, or any other cause beyond a party's control (collectively
"force majeure") resulting in the Landlord's inability to supply the services or
to perform the other obligations required of Landlord hereunder, this Lease
shall not terminate and Tenant's obligation to pay Rent and all other charges
and submit due and payable by Tenant shall not be affected or excused. If, as a
result of force majeure, Landlord or Tenant is delayed in performing any of its
obligations under this Lease, other than Tenant's obligation to take possession
of the Demised Premises on or before the Rental Commencement Date and to pay
Rent and all other charges and sums payable by Tenant hereunder, Landlord's and
Tenant's performance shall be excused for a period equal to such delay and
Landlord and Tenant shall not during such period be considered to be in default
under this Lease with respect to the obligation, performance of which has thus
been delayed.
41. Landlord's Liability. Landlord shall have no personal liability with
respect to any of the provisions of this Lease. If Landlord is in default with
respect to its obligations under this Lease, Tenant shall look solely to the
equity of Landlord in and to the Building and the Land described in EXHIBIT "A"
hereto for satisfaction of Tenant's remedies, if any. It is expressly understood
and agreed that Landlord's liability under the terms of this Lease shall in no
event exceed the amount of its interest in and to said Land and Building. In no
event shall any partner or member of Landlord nor any joint venturer in
Landlord, nor any officer, director or shareholder of Landlord or any such
partner, member or joint venturer of Landlord be personally liable with respect
to any of the provisions of this Lease.
42. Landlord's Covenant of Quiet Enjoyment. Provided Tenant performs the terms,
conditions and covenants of this Lease, and subject to the terms and provisions
hereof, Landlord covenants and agrees to take all necessary steps to secure and
to maintain for the benefit of Tenant the quiet and peaceful possession of the
Demised Premises, for the Lease Term, without hindrance, claim or molestation by
Landlord or any other person lawfully claiming under Landlord.
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43. INTENTIONALLY OMITTED.
44. Hazardous Substances. Tenant hereby covenants and agrees that Tenant shall
not cause or permit any "Hazardous Substances" (as hereinafter defined) to be
generated, placed, held, stored, used, located or disposed of at the Project or
any part thereof, except for Hazardous Substances as are commonly and legally
used or stored as a consequence of using the Demised Premises for general office
and administrative purposes, but only so long as the quantities thereof do not
pose a threat to public health or to the environment or would necessitate a
"response action", as that term is defined in CERCLA (as hereinafter defined),
and so long as Tenant strictly complies or causes compliance with all applicable
governmental rules and regulations concerning the use, storage, production,
transportation and disposal of such Hazardous Substances. Promptly upon receipt
of Landlord's request, Tenant shall submit to Landlord true and correct copies
of any reports filed by Tenant with any governmental or quasi-governmental
authority regarding the generation, placement, storage, use, treatment or
disposal of Hazardous Substances on or about the Demised Premises.
For purposes of this Article 44, "Hazardous Substance" and "release" shall have
the meanings specified for said terms in CERCLA; provided however, that in the
event CERCLA is amended to broaden the meaning of any term defined thereby, such
broadened meaning shall apply subsequent to the effective date of such
amendment; and provided further, that to the extent that the laws of the State
of Alabama establish a meaning for "Hazardous Substance" or "release" which is
broader than that specified in CERCLA, such broader meaning shall I apply; and
provided further, that "Hazardous Substance" shall also be defined to include
oil, petroleum products, extremely flammable substances, explosives; and
radioactive materials, and all other elements or compounds which are contained
in the list of Hazardous Substances adopted by the United States Environmental
Protection Agency (EPA) or in any list of toxic pollutants designated by
Congress or the EPA or which are defined as hazardous, toxic, pollutant,
infectious or radioactive by any other federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to or
imposing liability (including, without limitation, strict liability) or
standards of conduct concerning, any hazardous, toxic or dangerous waste,
substance or material, as now or at any time hereinafter in effect (collectively
"Environmental Laws"). Tenant hereby agrees to indemnify Landlord and hold
Landlord harmless from and against any and all losses, liabilities, including
strict liability, damages, injuries, expenses, including reasonable attorneys'
fees, costs of settlement or judgment and claims of any and every kind
whatsoever paid, incurred or suffered by, or asserted against, Landlord by any
person, entity or governmental agency for, with respect to, or as a direct or
indirect result of, the presence in, or the disposal, escape, leakage, spillage,
discharge, emission or release from, the Demised Premises of any Hazardous
Substances (including, without limitation, any losses, liabilities, including
strict liability, damages, injuries, expenses, including reasonable attorneys'
fees, costs of any settlement or judgment or claims asserted or arising under
the Comprehensive Environmental Response, Compensation and Liability Act
["CERCLA"], any so-called federal, state or local "Superfund" or "Superlien"
laws or any other Environmental Law); provided, however, that the foregoing
indemnity is limited to matters arising solely from Tenant's violation of the
covenant contained in this Article 44. The obligations of Tenant under this
Article 44 shall survive any expiration or termination of this Lease.
45. Submission of Lease. The submission of this Lease for examination does
not constitute an offer to lease and this Lease shall be effective only upon
execution hereof by Landlord and Tenant and upon execution of any required
Guaranty Agreement annexed hereto and incorporated herein as Exhibit "H".
Notwithstanding anything contained in this Lease to the contrary, in the event
during the Tenn of this Lease (i) Tenant becomes a separate publicly traded
entity (the "Nichols TXEN Public Entity") with a net worth of at least $25
million, and (ii) Tenant has not defaulted in payment of Rent form the Rental
Commencement Date through the period ending thirty-six (36) months after the
initial public offering of
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the Nichols TXEN Public Entity, and (iii) Tenant is not otherwise in default of
this Lease, then the Guaranty shall be terminated and Guarantor shall have no
further liability with respect to this Lease.
46. Severability. If any clause or provision of this Lease is illegal, invalid
or unenforceable under present or future laws, the remainder of this Lease shall
not be affected thereby, and in lieu of each clause or provision of this Lease
which is illegal, invalid or unenforceable, there shall be added as a part of
this Lease a clause or provision as nearly identical to the said clause or
provision as may be legal, valid and enforceable.
47. Entire Agreement. This Lease contains the entire agreement of the parties
and no representations, inducements, promises or agreements, oral or otherwise,
between the parties not embodied herein shall be of any force or effect. No
failure of Landlord to exercise any power given Landlord hereunder, or to insist
upon strict compliance by Tenant with any obligation of Tenant hereunder, and no
custom or practice of the parties at variance with the terms hereof, shall
constitute a waiver of Landlord's right to demand exact compliance with the
terms hereof. This Lease may not be altered, waived, amended or extended except
by an instrument in writing signed by Landlord and Tenant. This Lease is not in
recordable form, and Tenant agrees not to record or cause to be recorded this
Lease or any short form or memorandum thereof.
48. Headings. The use of headings herein is solely for the convenience of
indexing the various paragraphs hereof and shall in no event be considered in
construing or interpreting any provision of this Lease.
49. Brokers. THE BROKER(S), AS DEFINED IN ARTICLE 1(O) ARE ENTITLED TO A
LEASING COMMISSION BY VIRTUE OF THIS LEASE, WHICH LEASING COMMISSION SHALL BE
PAID BY LANDLORD TO BROKER(S) IN ACCORDANCE WITH THE TERMS OF A SEPARATE
AGREEMENT BETWEEN LANDLORD AND BROKER(S). Each party hereto (each "Party")
represents and warrants to the other Party hereto (the "Indemnified Party") that
(except with respect to any Broker[s] identified in Article 1(o) hereinabove)
no broker, agent, commission salesperson, or other person has represented such
Party in the negotiations for and procurement of this Lease and of the Demised
Premises and that (except with respect to any Broker(s] identified in Article
l(o) hereinabove) no commissions, fees, or compensation of any kind are due and
payable in connection herewith to any broker, agent, commission salesperson, or
other person as a result of any act or agreement of such Party. Each Party
agrees to indemnify and hold the Indemnified Party harmless from all loss,
liability, damage, claim, judgment, cost or expense (including reasonable
attorneys' fees and court costs actually incurred, without regard to statutory
definitions or constraints upon the charge or collection thereof, through all
appeals) suffered or incurred by the Indemnified Party as a result of a breach
of the representation and warranty contained in the immediately preceding
sentence or as a result of the failure to pay commissions, fees, or
compensation due to any broker who represented such Party, whether or not
disclosed, or as a result of any claim for any fee, commission or similar
compensation with respect to this Lease made by any broker, agent or finder
(other than any Broker[s] identified in Article l(o) hereinabove) claiming to
have dealt with such Party, whether or not such claim is meritorious. Tenant
shall cause any agent or broker representing Tenant to execute a lien waiver to
and for the benefit of Landlord, waiving any and all lien rights with respect to
the Building and Land which such agent or broker has or might have under State
law.
50. Governing Law. The laws of the State shall govern the validity, performance
and enforcement of this Lease.
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51. Guaranty. As a material inducement to Landlord, without which Landlord
would not enter into this Lease, Tenant agrees to cause to be delivered to
Landlord, together with Tenant's delivery of this Lease to Landlord, a fully
executed Guaranty in the form of Exhibit "H" attached hereto and incorporated
herein by reference.
52. Authority. If Tenant executes this Lease as a corporation, each of the
persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly incorporated or a duly qualified (if
a foreign corporation) corporation and is fully authorized and qualified to do
business in the State in which the Demised Premises are located, that the
corporation has full right and authority to enter into this Lease, and that each
person signing on behalf of the corporation is an officer of the corporation and
is authorized to sign on behalf of the corporation. If Tenant signs as a
partnership, joint venture, limited liability company, limited liability
partnership, or sole proprietorship or other business entity (each being herein
called "Entity"), each of the persons executing on behalf of Tenant does hereby
covenant and warrant that Tenant is a duly authorized and existing Entity, that
Tenant has full right and authority to enter into this Lease, that all persons
executing this Lease on behalf of the Entity are authorized to do so on behalf
of the Entity, and that such execution is fully binding upon the Entity and its
partners, joint venturers, or principal, as the case may be. Upon the request of
Landlord, Tenant shall deliver to Landlord documentation satisfactory to
Landlord evidencing Tenant's compliance with this Article, and Tenant agrees to
promptly execute all necessary and reasonable applications or documents as
reasonably requested by Landlord, required by the jurisdiction in which the
Demised Premises is located, to permit the issuance of necessary permits and
certificates for Tenant's use and occupancy of the Demised Premises.
53. Financial Statements. Upon or before the Effective Date, and thereafter,
upon Landlord's written request therefor, but not more often than once per year,
Tenant shall promptly furnish to Landlord a financial statement with respect to
Tenant (and any guarantor of this Lease) for its most recent fiscal year
prepared in accordance with generally accepted accounting principles and
certified to be true and correct by Tenant, and such other financial information
as Landlord may reasonably request. Landlord agrees to keep confidential and not
use such financial statements and information, except in connection with the
administration or enforcement of this Lease, a proposed sale of the Building, or
the consummation or administration of loan transactions.
54. Joint and Several Liability. If Tenant comprises more than one person,
corporation, partnership or other entity, the liability hereunder of all such
persons, corporations, partnerships or other entities shall be joint and
several.
55. ERISA Compliance. Tenant represents to Landlord that Tenant is not an
"employee benefit plan", a "plan" or a "governmental plan" as defined below or
an entity whose assets constitute "plan assets" as defined below. The term
"employee benefit plan" means an "employee benefit plan" as defined in Section
3(3) of the Employment Retirement Income Security Act of 1974, as amended
("ERISA"), which is subject to Title I of ERISA. The term "plan" means a "plan"
as defined in Section 4975(e)(i) of the Internal Revenue Code of 1986, as
amended. The term "governmental plan" means a "governmental plan" within the
meaning of Section 3(32) of ERISA. The term "plan assets" means "plan assets" of
one or more plans within the meaning of 2a C.F.R. 2510.3-101.
56. Delivery of Documents. If Tenant fails to execute, acknowledge or deliver
any of the documents or instruments required under Article 28 or Article 29,
same shall be deemed a material default of Tenant; however, Tenant does hereby
make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact
and in its name, place and stead to execute, acknowledge and deliver such
documents or instruments, and Landlord shall have the right to do so without
waiving such material default of Tenant.
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In addition to any other rights or remedies Landlord may have with respect to
such failure, Landlord may also charge and collect from Tenant, as Additional
Rental, an administrative fee of $50 per day with respect to each day the same
remain delinquent.
57. Use of Name of Tenant. Tenant hereby authorizes Landlord to identify
Tenant as a tenant of the Building and to state the amount of space leased by
Tenant in advertisements and promotional materials relating to the Building.
58. Rule Against Perpetuities. In the event Landlord has not completed
construction of the Building on or before three (3) years from the Effective
Date, this Lease shall be null and void without any further action of the
parties.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of
the day, month and year first above written.
"LANDLORD":
DANIEL MEADOW BROOK SOUTH, L.L.C.
By: /s/
-----------------------------
Title: Senior Vice-President
--------------------------
"TENANT":
NICHOLS TXEN CORPORATION
By: /s/ H. Greg Wood
-----------------------------
Title: President
--------------------------
Attest: /s/ Teresa Lynn Blackmon
-------------------------
Title: Executive Assistant
--------------------------
(CORPORATE SEAL)
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EXHIBIT "A"
LEGAL DESCRIPTION OF LAND
That certain tract of land lying and being in the County of Shelby, State of
Alabama, and being more particularly described as follows:
Being all of Lots 11C and 11D, according to the survey of Lot 11, Meadow Brook
Corporate Park South, Phase II, as recorded in map book 13, page 82 in the
Office of the Judge of Probate of Shelby County, Alabama.
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EXHIBIT "B" FIRST FLOOR PLAN
<PAGE> 32
EXHIBIT "B" SECOND FLOOR PLAN
<PAGE> 33
EXHIBIT "C"
WORK LETTER
1. Tenant shall cause to be prepared by Tenant's architect and/or designer
and/or Landlord's -engineers the following:
(a) Complete, finished, detailed architectural drawings and
specifications for Tenant's partition layout, reflected ceiling and other
installations for the work to be done by Landlord under Paragraphs 2 and 3
hereof, which shall be prepared by Landlord's designer or architect.
(b) Complete mechanical and electrical plans and specifications where
necessary for installation of air conditioning system and ductwork, heating,
electrical, plumbing and other mechanical plans for the work to be done by
Landlord under Paragraphs 2 and 3 hereof, which shall be prepared by Landlord's
engineers.
Tenant shall pay all costs of preparation of said plans and specifications. All
such plans and specifications are expressly subject to Landlord's approval and
shall comply with all applicable laws, rules and regulations. Tenant covenants
and agrees to cause said plans and specifications to be delivered to Landlord on
or before October 1, 1998, and, upon approval by Landlord, Landlord will cause
said plans to be filed at Tenant's sole cost and expense with the appropriate
governmental agencies in such form (building notice, alteration or other form)
as Landlord may direct. The Demised Premises shall be deemed ready for occupancy
when Landlord's construction, as provided in Paragraphs 2 and 3 hereof, is
substantially completed. In the event of any dispute as to when Landlord's
construction has been substantially completed as aforesaid, the determination of
Landlord's architect or designer shall be final and binding upon the parties.
Landlord will give Tenant ten (10) days' advance written notice of the date on
which Landlord expects the Demised Premises to be ready for occupancy.
2. Landlord agrees, at its sole expense and without charge to
Tenant, to install the following in the Demised Premises (the following
describes the scope of the "Building Standard" work which will be provided by
Landlord at its expense in accordance with the specifications for the Building):
(a) Air conditioning
Air conditioning components, including diffusers, returns, flex
duct and spin-ins to support an air-conditioning system capable of maintaining
76 degrees F when outside temperature is 94 degrees F (summer) and 70 degrees F
when outside temperature is 21 degrees F (winter). Air conditioning design basis
is 3.0 watts per usable square foot lighting and power load, based upon an
occupancy rate of seven (7) persons per 1,000 rentable square feet (per ASHRAE
Standard 62-1989) and venetian blinds drawn with slats tilted against the sun at
not less than 45 degrees from horizontal. Landlord will provide the building
standard number of thermostats, temporarily placed in the ceiling plenum which
number varies depending on the location of the Demised Premises on the
applicable floor of the Building. Landlord will provide up to six (6) HVAC
supply air diffusers per 1,000 rentable square feet.
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(b) Electrical
(i) One (1) recessed (or surface mounted if required by
building conditions) 3 tube fluorescent parabolic light fixture 2' x 4' (or 2' x
2' if required by building conditions) for each 80 square feet of usable area.
All fixtures must conform in layout and spacing to the ceiling modules and shall
run in the same direction.
(ii) An electrical distribution system above the ceiling for
power (120/208 volts) at a capacity of 2.0 watts per square foot of rentable
space circuited at 8 outlets per 16 AMP circuit.
(iii) An electrical distribution system above the ceiling for
fluorescent lights (277/480 volts) at a capacity of 2.0 watts per square foot
of rentable space.
(c) Ceiling
(i) Building standard acoustical ceiling tile installed in
building standard ceiling grid.
(ii) A mechanically suspended ceiling support system designed to
utilize 2'x 2' lay-in acoustical tile throughout the office area.
(d) Sprinkler system
A complete building standard sprinkler system to meet local codes.
(e) The inside of the Building's perimeter walls will have gypsum
wallboard installed, taped and sanded only, and the core walls will have gypsum
wallboard installed, taped and sanded only.
(f) Venetian blinds on all exterior windows in accordance with
Landlord's standard specificitions.
3. Landlord agrees, at Tenant's sole cost and expense and in conformance
with working drawings and specifications, approved by Landlord, to provide and
install the following work:
(a) Air Conditioning
(i) Any modifications to or deviations from the Building
standard air conditioning system.
(ii) Fire dampers as required by Tenant's layout design.
(iii) Installation of building standard thermostats.
(iv) Test and balance work.
(b) Electrical and Telephone
(i) All light switches.
(ii) All electrical outlets.
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(iii) All telephone rough in boxes and pullstrings (Tenant shall
be responsible for the installation of its own phone and data cable).
(iv) All nonstandard light fixtures and any increase to the
number of building standard light fixtures and related circuitry, panel boards,
etc.
(v) Any provision for supplying power to the Demised Premises
beyond the watts per rentable square foot specified in the Building Standard
Services, or circuiting at less than 8 outlets per 16 AMP circuit, or circuited
at more than one (1) pole of 20 volt, single phase circuit per 252 square feet
of rentable area, including necessary metering to measure excess electrical
usage.
(vi) All exit light fixtures and exit signs.
(c) Ceiling construction. Any modification to or deviation from the
building standard ceiling construction.
(d) Sprinkler system. Any modification to or deviation from the
building standard sprinkler system including relocations of or additions to the
number of sprinkler heads provided or the provision of a non-standard sprinkler
head.
(e) All plumbing work for facilities such as toilets and sinks in the
Demised Premises.
(f) All partitions including finish of the core walls or any demising
partitions or corridor walls which are within the Demised Premises, including
the finish thereof, and the finish to the inside of the Building's perimeter
walls.
(g) All doors and frames.
(h) All hardware.
(i) All floor finish including base.
(j) Any special construction as shown on the drawings and
specifications approved by Landlord.
(k) Tenant's identification sign conforming to Landlord's standards,
at entrances to Demised Premises.
(1) All fire alarm devices, including speakers, required within the
Demised Premises by applicable building code.
4. Prior to commencing any work, Landlord, for Landlord's contractor will
submit to Tenant written estimates of the cost of the work described in
Paragraph 3 hereof. If Tenant shall fail to approve any such estimate within one
(1) week, the same shall be deemed disapproved in all respects by Tenant and
Landlord shall not be authorized to proceed thereon.
5. Tenant agrees to pay Landlord promptly upon invoice therefor the cost of
the work described in Paragraph 3 hereof, less the amount of the Construction
Allowance, if any, stated in Article 1(m) of this lease. Tenant agrees that the
same shall be collectible as additional rent and in default of payment thereof
Landlord shall (in addition to all other remedies) have the same rights as in
the event of default of
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payment of Base Rental. Tenant further agrees to pay to the Tenant Development
Manager designated by Landlord, a fee for program management in an amount equal
to 5% of the cost of the work described in Paragraph 3 hereof. The failure to
pay such fee promptly after being billed therefor shall constitute a default
under this Lease.
6. If (a) Tenant shall fail to furnish approved plans and specifications in
accordance with Paragraph I hereof, or (b) Landlord shall be delayed in
substantially completing Landlord's construction as a result of:
(1) Tenant's request for materials, finishes or installations other
than Landlord's standard; or
(2) Tenant's changes in said plans or specifications; or
(3) The performance of work by a person, firm or corporation employed
by Tenant and delays in the completion of said work by said person, firm or
corporation;
then Tenant agrees to pay to Landlord, in addition to, any sum due under
Paragraph 5 above, a sum equal to any additional cost to Landlord in completing
Landlord's construction resulting from any of the foregoing failures, acts or
omissions of Tenant. Any such sums shall be in addition to any sums payable
pursuant to Paragraph 3 hereof and may be collected by Landlord as additional
rent from time to time, upon demand, and in default of payment thereof, Landlord
shall (in addition to all other remedies) have the same rights as in the event
of default of payment of Base Rental.
7. Tenant shall not make any alterations, additions or improvements in or to
the Demised Premises without Landlord's prior written consent, which consent
shall not be unreasonably withheld. Except for construction as provided in
Paragraphs 2 and 3 hereof, the Demised Premises are delivered to Tenant "as is"
without any warranty or representation whatsoever. Any alterations, additions or
improvements requested by Tenant and approved by Landlord shall be performed (i)
by Landlord's contractor or another contractor approved by Landlord, (ii) in a
good and workmanlike manner, and (iii) in accordance with all applicable codes,
laws, ordinances, rules and regulations of governmental authorities having
jurisdiction over the Demised Premises.
8. Any approval by Landlord of or consent by Landlord to any plans,
specifications or other items to be submitted to and/or reviewed by Landlord
pursuant to this Lease shall be deemed to be strictly limited to an
acknowledgment of approval or consent by Landlord thereto and, whether or not
the work is performed by Landlord or by Tenant's contractor, such approval or
consent shall not constitute the assumption by Landlord of any responsibility
for the accuracy, sufficiency or feasibility of any plans, specifications or
other such items and shall not imply any acknowledgment, representation or
warranty by Landlord that the design is safe, feasible, structurally sound or
will comply with any legal or goverrunental requirements, and Tenant shall be
responsible for all of the same.
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EXHIBIT "D"
CONFIRMATION NOTICE
RE: Lease Agreement ("Lease") dated as of________ ___, 199_, by and
between___________, as Landlord, and _____________, as Tenant.
Dear Sirs:
Pursuant to Article 3 of the captioned Lease, please be advised as follows:
1. The Rental Commencement Date is the____day of ________, 199__, and the
expiration date of the Lease Term is the___day of_____, ___, subject
however to the terms and provisions of the Lease.
2. Terms denoted herein by initial capitalization shall have the meanings
ascribed thereto in the Lease.
"LANDLORD":
DANIEL MEADOW BROOK SOUTH, L.L.C.
By:
------------------------------------
Title:
---------------------------------
(CORPORATE SEAL)
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EXHIBIT "E"
BUILDING STANDARD SERVICES
Landlord shall furnish the following services to Tenant during the lease Term
(the "Building Standard Services"):
(a) Common-use restrooms (with cold and tempered domestic water) and
toilets at locations provided for general use and as reasonably deemed by
Landlord to be in keeping with the first-class standards of the Building, and
soap, toilet tissue and paper towels or hand dryers for such common-use
restrooms.
(b) Subject to curtailment as required by governmental laws, rules or
mandatory regulations, central heat and air conditioning in season, at such
temperatures and in such amounts as are reasonably deemed by Landlord to be in
keeping with the first-class standards of the Building and in contemplation of
mean climate conditions. Such heating and air conditioning shall be furnished
between 8:00 a.m. and 6:00 p.m. on weekdays (from Monday through Friday,
inclusive) and between 8:00 a.m. and 1:00 p.m. on Saturdays, all exclusive of
Holidays, as defined below (the "Building Operating Hours").
(c) Electric lighting service for all public areas and special service
areas of the Building in the manner and to the extent reasonably deemed by
Landlord to be in keeping with the first-class standards of the Building.
(d) Janitor service shall be provided five (5) days per week (Monday
through Friday), exclusive of Holidays (as hereinbelow defined), in a manner
that Landlord reasonably deems to be consistent with the first-class standards
of the Building.
(e) Sufficient electrical capacity at the building core electrical
panels to operate (i) incandescent lights, typewriters, calculating machines,
photocopying machines, personal computers and other machines of the same low
voltage electrical consumption (120/208 volts), provided that the total rated
electrical design load for said lighting and machines of low electrical voltage
shall not exceed 2.0 watts per square foot of rentable area; and (ii) lighting
(277/480 volts), provided that the total rated electrical design load for said
lighting shall not exceed 2.0 watts per square foot of rentable area (each such
rated electrical design load to be hereinafter referred to as the "Building
Standard Rated Electrical Design Load").
Should Tenant's total rated electrical design load exceed the
Building Standard Rated Electrical Design Load for either low or high voltage
electrical consumption, or if Tenant's electrical design requires low voltage or
high voltage circuits in excess of Tenant's share of the Building Standard
circuits, Landlord will (at Tenant's expense) install such additional circuits
and associated high voltage panels and/or additional low voltage panels with
associated transformers (which additional circuits, panels and transformers
shall be hereinafter referred to as the "Additional Electrical Equipment"). If
the Additional Electrical Equipment is installed because Tenant's low or high
voltage rated electrical design load exceeds the applicable Building Standard
Rated Electrical Design Load, then a meter shall also be added (at Tenant's
expense) to measure the electricity used through the Additional Electrical
Equipment.
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The design and installation of any Additional Electrical Equipment
(or any related meter) required by Tenant shall be subject to the prior approval
of Landlord (which approval shall not be unreasonably withheld) and the terms
and conditions of the Lease and the Rules and Regulations attached hereto. All
expenses incurred by Landlord in connection with the review and approval of any
Additional Electrical Equipment shall also be reimbursed to Landlord by Tenant.
Tenant shall also pay on demand the actual metered cost of electricity consumed
through the Additional Electrical Equipment (if applicable), plus any actual
accounting expenses incurred by Landlord in connection with the metering
thereof.
Tenant agrees that if Tenant uses data processing or other
electronic equipment which incorporates the use of switched mode power supplies
or any other type device causing harmonic distortion on Landlord's power
distribution system, Tenant shall install filters at Tenant's cost to eliminate
the harmonic distortion. In addition, any damage to Landlord's equipment
resulting from harmonic distortion caused by Tenant's electronic equipment shall
be repaired at Tenant's expense. Total harmonic distortion shall not exceed
thirteen percent (13%).
If any of Tenant's electrical equipment requires conditioned
air in excess of Building Standard air conditioning, the same shall be installed
by Landlord (on Tenant's behalf), and Tenant shall pay all design, installation,
metering and operating costs relating thereto.
If Tenant requires that certain areas within Tenant's Demised
Premises must operate in excess of the normal Building Operating Hours (as
hereinabove defined), the electrical service to such areas may be separately
circuited and metered (at Tenant's expense) such that Tenant shall be billed the
costs associated with electricity consumed during hours other than Building
Operating Hours. In the event separately metering is not practicable, such
additional electrical service shall be reasonably estimated by Landlord and
charged to Tenant as additional Rent. In the event of disagreement as to the
reasonableness of such charge, the opinion of the appropriate local utility
company or an independent professional engineering firm shall prevail.
(f) All Building Standard fluorescent bulb and ballast replacement in
all areas and all incandescent bulb replacement in public areas, toilet and
restroom areas, and stairwells. Tenant shall be responsible for the cost and
installation expense of any special lamps and ballasts in the Demised Premises
which are not Building Standard.
(g) Non-exclusive passenger elevator service to the floor(s) of the
Demised Premises during Building Operating Hours (as hereinabove defined) and
one (1) cab passenger service to the floor(s) on which the Demised Premises are
located twenty-four (24) hours per day (all subject to temporary cessation for
ordinary repair and maintenance and during times when life safety systems
override normal building operating systems), with such elevator service
available upon reasonable prior notice for purposes of receiving and taking out
furniture, fixtures and equipment.
(h) Security services for the Building comparable as to coverage,
control and responsiveness (but not necessarily as to means for accomplishing
same) to other similarly sized first-class, multi-tenant office buildings in the
area in which the Building is located; provided, however, Landlord shall have no
responsibility to prevent, and shall not be liable to Tenant for, any liability
or loss to Tenant, its agents, employees and visitors arising out of losses due
to theft, burglary, or damage or injury to persons or property caused by persons
gaining access to the Building and/or the Demised Premises, and Tenant hereby
releases Landlord from all liability for such losses, damages or injury.
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To the extent the services described above require
electricity and water supplied by public utilities, Landlord's covenants
thereunder shall only impose on Landlord the obligation to use its reasonable
efforts to cause the applicable public utilities to furnish same. Except for
deliberate and willful acts of Landlord, failure by Landlord to furnish the
services described herein, or any cessation thereof, shall not render Landlord
liable for damages to either person or property, nor be construed as an eviction
of Tenant, nor work an abatement of rent, nor relieve Tenant from fulfillment of
any covenant or agreement hereof. In addition to the foregoing, should any of
the equipment or machinery, for any cause, fail to operate, or function
properly, Tenant shall have no claim for rebate of rent or damages on account of
an interruption in service occasioned thereby or resulting therefrom; provided,
however, Landlord agrees to use reasonable efforts to promptly repair said
equipment or machinery and to restore said services during normal business
hours.
The following dates shall constitute "Holidays" as that term is used in this
Lease: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, Christmas, and any other holiday generally recognized as such by landlords
of office space in the metropolitan area of the Building, as determined by
Landlord in good faith. If in the case of any specific holiday mentioned in the
preceding sentence, a different day shall be observed than the respective day
mentioned, then that day which constitutes the day observed by national banks in
the Birmingham, Alabama area on account of said holiday shall constitute the
Holiday under this Lease.
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EXHIBIT "F"
RULES AND REGULATIONS
1. Except as to interior door signs, no sign, picture, advertisement or notice
visible from the exterior of the Demised Premises shall be installed, affixed,
inscribed, painted or otherwise displayed by Tenant on any part of the Demised
Premises or the Building. Tenant's interior door sign shall be subject to
Landlord's approval and shall be painted or installed for Tenant at Tenant's
cost by Landlord or by a party approved by Landlord. No awnings, curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with any window or door of the Demised Premises without the prior consent of the
Landlord, including approval by the Landlord of the quality, type, design, color
and manner of attachment. In the event of any breach of the foregoing, Landlord
may remove the applicable item, and Tenant agrees to pay the cost and expense of
such removal, and any repairs necessitated by such installation and removal.
2. Tenant agrees that its use of electrical current shall never exceed the
capacity of existing feeders, risers or wiring installation.
3. The Demised Premises shall not be used for storage of merchandise held for
sale to the general public.
4. Tenant shall not do or permit to be done in or about the Demised Premises or
Building anything which shall increase the rate of insurance on said Building or
obstruct or interfere with the rights of other tenants of Landlord or annoy them
in any way, including, but not limited to, using any musical instrument, making
loud or unseemly noises, or singing, etc. Tenant shall not do or permit to be
done in the Demised Premises anything, or bring or keep anything therein, which
would conflict with the laws relating to fires, or with the regulations of the
applicable Fire Department, or conflict with any of the rules and ordinances of
the applicable Board of Health.
5. The Demised Premises shall not be used for overnight sleeping or lodging.
6. No cooking or related activities shall be done or permitted by Tenant in the
Demised Premises except with permission of Landlord. Tenant will be permitted to
use for its own employees within the Demised Premises a small microwave oven and
Underwriters' Laboratory approved equipment for brewing coffee, tea, hot
chocolate and similar beverages, provided that such use is in accordance with
all applicable federal, state, county and city laws, codes, ordinances, rules
and regulations, and provided that such use shall not result in the emission of
odors from the Demised Premises into the common area of the Building, and
provided that Tenant keeps the areas used for such purposes in a clean, orderly
and sanitary condition and free of insects, rodents, cats, and other vermin. No
vending machines of any kind will be installed, permitted or used on any part of
the Demised Premises without the prior consent of Landlord.
7. Tenant agrees to comply with all laws, ordinances, orders, regulations and
requirements of all county, municipal, state, federal and other governmental
authorities affecting the use and occupancy of the Demised Premises and the
cleanliness, safety, or operation thereof. Tenant agrees to be the responsible
entity for instituting a plan of compliance to ensure that the Demised Premises
are in compliance with the Americans with Disabilities Act of 1990 (the "ADA")
and Tenant shall make, at its
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sole cost, any and all alterations which may be required to bring the Demised
Premises into compliance with the ADA. No part of said Building or Demised
Premises shall be used for gambling, immoral or other unlawful purposes. No
intoxicating beverage shall be sold in said Building or Demised Premises.
8. No area outside of the Demised Premises shall be used for storage purposes at
any time without the prior written consent of Landlord.
9. No birds, cats, or animals of any kind shall be brought into the Building
(other than trained assist dogs required to be used by the visually impaired).
No bicycles, motorcycles or other motorized vehicles (other than motorized
wheelchairs) shall be brought into the Building.
10. The sidewalks, entrances, passages, corridors, halls, elevators, and
stairways in the Building shall not be obstructed by Tenant or used for any
purposes other than those for which same were intended as ingress and egress. No
windows, floors or skylights within the common area that reflect or admit light
into the Building shall be covered or obstructed by Tenant and no windows,
floors or skylights within the Demised Premises that reflect or admit light into
the Building shall be covered or obstructed by Tenant except with window
coverings or treatments approved by Landlord, and no articles shall be placed on
the window sills of the Building.
11. Toilets, wash basins and sinks shall not be used for any purpose other than
those for which they were constructed, and no sweeping, rubbish, or other
obstructing or improper substances shall be thrown therein. Any damage resulting
to them, or to heating apparatus, from misuse by Tenant or its employees, shall
be borne by Tenant.
12. Only one key for each office or locked area in the Demised Premises will be
required to be furnished to Tenant without charge. Landlord may make a
reasonable charge for any additional keys. No additional lock, latch or bolt of
any kind shall be placed upon any door nor shall any changes be made in existing
locks without written consent of Landlord, and Tenant shall in each such case
furnish Landlord with a key for any such lock. At the termination of the Lease,
Tenant shall return to Landlord all keys furnished to Tenant by Landlord, or
otherwise procured by Tenant, and in the event of loss of any keys so furnished,
Tenant shall pay to Landlord the cost thereof.
13. Landlord shall have the right to prescribe the weight, position and manner
of installation of heavy articles such as safes, machines and other equipment
brought into the Building. Tenant agrees to notify Landlord of Tenant's intent
to install in or bring into the Demised Premises any heavy equipment. Landlord
shall have the right to designate where such heavy equipment is to be placed
within the Demised Premises and to disallow any equipment or fixtures which
would exceed the load limit of the floor of the Demised Premises. Tenant shall
not allow the building structure within the Demised Premises, nor shall Tenant
cause the elevators of the Building, to be loaded beyond rated capacities. No
safes, furniture, boxes, large parcels or other kind of freight shall be taken
to or from the Demised Premises or allowed in any elevator, hall or corridor
except at times allowed by Landlord. Tenant shall make prior arrangements with
Landlord for use of elevators for the purpose of transporting such articles and
such articles may be taken in or out of said Building only between or during
such hours as may be arranged with and designated by Landlord. The persons
employed to move the same must be approved by Landlord. Landlord reserves the
right to inspect and, where deemed appropriate by Landlord, to open all freight
coming into the Building and to exclude from entering the Building all freight
which is in violation of any of these Rules and Regulations and all freight as
to which inspection is not permitted. All hand trucks used by Tenant or its
service providers for the delivery or receipt of any freight shall be equipped
with rubber tires.
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14. Tenant shall not cause or permit any gases, liquids or odors to be produced
upon or permeate from the Demised Premises, and no flammable, combustible or
explosive fluid, chemical or substance shall be brought into the Building.
Smoking shall not be permitted in any portion of the Building or within the
Project, other than in any area outside of the Building which, at Landlord's
election, is designated by Landlord for permitted smoking. If Tenant shall
assert that the air quality in the Demised Premises is unsatisfactory or if
Tenant shall request any air quality testing within the Demised Premises,
Landlord may elect to cause its consultant to test the air quality within the
Demised Premises and to issue a report regarding same. If the report from such
tests indicates that the air quality within the Demised Premises is comparable
to the air quality of other first-class office buildings in the market area of
the Building, or if the report from such tests indicates that the air quality
does not meet such standard as a result of the activities caused or permitted by
Tenant in the Demised Premises, Tenant shall reimburse Landlord for all costs of
the applicable tests and report. Additionally, in the event Tenant shall cause
or permit any activity which shall adversely affect the air quality in the
Demised Premises, in the common area of the Building or in any other premises
within the Building, Tenant shall be responsible for all costs of remedying
same.
15. Every person, including Tenant, its employees and visitors, entering and
leaving the Building may be questioned by a watchman as to that person's
business therein and may be requried to sign such person's name on a form
provided by Landlord for registering such person; provided that, expect for
emergencies or other estraordinary circumstances, such procudures shall not be
required between the hours of 7:00 a.m. and 7:00 p.m., on all days except
Saturdays, Sundays and Holidays. Landlord may also implement a card access
security system to control access to the Building during such other times.
Landlord shall not be liable for excluding any person from the Building during
such other times, or for admission of any person to the Building at any time, or
for damages or loss for theft resulting therefrom to any person, including
Tenant.
16. Unless agreed to in writing by Landlord, Tenant shall not employ any person
other than Landlord's contractors for the purpose of cleaning and taking care of
the Demised Premises. Cleaning service will not be furnished on nights when
rooms are occupied after 6:30 p.m., unless, by agreement in writing, service is
extended to a later hour for specifically designated rooms. Landlord shall not
be responsible for any loss, theft, mysterious disappearance of or damage to,
any property, however occurring. For security purposes, only persons authorized
by the Landlord may furnish ice, drinking water or other beverages, towels, and
other similar services within the Building and only at hours and under
regulations fixed by Landlord.
17. No connection shall be made to the electric wires or gas or electric
fixtures, without the consent in writing on each occasion of Landlord. All
glass, locks and trimmings in or upon the doors and windows of the Demised
Premises shall be kept whole and in good repair. Tenant shall not injure,
overload or deface the Building, the woodwork or the walls of the Demised
Premises, nor permit upon the Demised Premises any noisome, noxious, noisy or
offensive business.
18. If Tenant requires wiring for a bell or buzzer system, such wiring shall be
done by the electrician of the Landlord only, and no outside wiring personnel
shall be allowed to do work of this kind unless by the written permission of
Landlord or its representatives. If telegraph, telephonic or computer service is
desired, the wiring or cabling for same shall be approved by Landlord, and no
boring or cutting for wiring shall be done unless approved by Landlord or its
representatives, as stated. The electric current shall not be used for power in
excess of general office requirements or for heating, unless written permission
to do so shall first have been obtained from Landlord or its representatives in
writing, and at an agreed cost to Tenant.
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19. No electrical or electronic or electromagnetic equipment, machines or
devices now existing or hereafter invented shall be installed or used in the
Demised Premises unless installed completely at Tenant's sole cost and expense,
in accordance with all the terms and conditions of this Lease, and the rules,
regulations and requirements of all governmental and quasi-governmental
authorities having jurisdiction thereof, and not unless the same is properly
electrically filtered and insulated so that there is no interference in the
Building with telephonic, video, fiber optic, data processing, radio, television
or other similar or dissimilar communication, transmission or reception,
whether now existing or hereafter invented. Tenant hereby accepts the risks of
and all responsibility for any injury or damage which may result from the
operation or failure of operation of any such equipment and devices.
20. Tenant and its employees and invitees shall observe and obey all parking and
traffic regulations as imposed by Landlord. All vehicles shall be parked only in
areas designated therefor by Landlord. Notwithstanding anything to the contrary
in this Lease, in no event shall Tenant, its employees, agents, contractors,
visitors and invitees in the aggregate utilize more than 1 parking space for
each 250 square feet of the Rentable Floor Area of the Demised Premises.
21. Canvassing, peddling, soliciting and distribution of handbills or any other
written materials in the Building are prohibited, and Tenant shall cooperate to
prevent the same.
22. Tenant agrees to participate in any waste recycling programs implemented by
Landlord for the Building, including any programs and procedures for recycling
writing paper, computer paper, shipping paper, boxes, newspapers and magazines
and aluminum cans. If Landlord elects to provide collection receptacles for
recyclable paper and/or recyclable aluminum cans in the Demised Premises, Tenant
shall designate an appropriate place within the Demised Premises for placement
thereof, and Tenant shall cause its employees to place their non-confidential
recyclable papers and/or cans into the applicable such receptacles on a daily
basis.
23. Any special work or services requested by Tenant to be provided by Landlord
may be provided by Landlord, but only upon request received at the Project
management office. Tenant shall not request or require building personnel to
perform any work or provide any services outside of their regular duties unless
special instructions have been issued from Landlord or its managing agent.
24. Landlord shall have the right to change the name of the Building and to
change the street address of the Building, provided that in the case of a change
in the street address, Landlord shall give Tenant not less than 180 days' prior
notice of the change, unless the change is required by governmental authority.
25. The directory of the Building will be provided for the display of the name
and location of the tenants. Any additional name which Tenant shall desire to
place upon said directory must first be approved by Landlord, and if so
approved, a reasonable charge may be made therefor. Additional access to the
directory of the Building may be limited by the size and location thereof.
26. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular lessee, but no such waiver by Landlord shall be
construed as a waiver of such Rules and Regulations in favor of any other
lessee, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all of the other lessees of the Building.
27. These Rules and Regulations are supplemental to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of any lease of any premises in the Building.
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<PAGE> 45
28. Landlord reserves the right to make such other and reasonable Rules and
Regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building, the Land and the Project, and for the
preservation of good order therein.
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<PAGE> 46
EXHIBIT "G"
SPECIAL STIPULATIONS
1.01 Moving and Relocation Planning Allowance: Provided Tenant has not assigned
or subleased all or any portion of the Demised Premises, and Tenant is not in
default in the performance of or with respect to any of the terms, covenants and
conditions of the Lease beyond any applicable cure period, Landlord shall
provide Tenant a Moving Allowance equal to $1.50 per square foot of Rentable
Floor Area of the Demised Premises occupied on the Rental Commencement Date. The
Moving Allowance shall be paid to Tenant within 30 days of the Rental
Commencement Date and upon receipt by Landlord of copies of the invoices for the
costs associated with Tenant's move to the Building.
1.01 A. Additional Consideration Prior to the Rental Commencement Date: So long
as Tenant is not in default under this Lease, Landlord shall pay Tenant's rental
obligation at 10 Inverness Center in Birmingham, Alabama in the amounts set
forth below (the "Payments") for the months of June, 1998 through March, 1999:
<TABLE>
<CAPTION>
<S> <C>
June 1998 $22,987
July 1998 $22,987
August 1998 $22,987
September 1998 $22,987
October 1998 $36,666
November 1998 $36,666
December 1998 $36,666
January 1999 $36,666
February 1999 $36,666
March 1999 $36,666
</TABLE>
In consideration for Landlord making the Payments, beginning on the Rental
Commencement Date, Tenant shall pay to Landlord as Additional Rental the sum of
$4,291.37 per month for each month during the initial Rental Term of the Lease.
If this Lease is terminated prior to the expiration of the initial Rental Term
for any reason other than the default of Landlord, Tenant shall pay to Landlord
within ten (10) days following demand an amount equal to the total amount which
would have been payable by Tenant but for the termination of the Lease reduced
to present value at a rate of ten percent (10%).
2.01 Refurbishment Allowance during the Rental Term: Provided Tenant has not
assigned or subleased all or any portion of the Demised Premises, and Tenant is
not in default in the performance of or with respect to any of the terms,
covenants and conditions of the Lease beyond any applicable cure period,
Landlord shall provide Tenant a Refurbishment Allowance equal to $1.00 per
square foot of Rentable Floor Area of the Demised Premises on each of two
occasions during the Rental Term. The calculation for the Refurbishment
Allowance shall be based on the square footage of the Demised Premises occupied
on the Rental Commencement Date, reduced by any portion of said Demised Premises
taken by virtue of the provisions of Articles 22 or 36 of this Lease. The
Refurbishment Allowance shall be made available at the end of the 42nd month of
the initial Rental Term, at the end of the 84th month of the initial Rental
Term. In each instance, the Refurbishment Allowance shall be equal to $1.00
multiplied by the number of square feet of Rentable Floor Area as set forth
above in this Section 2.01 of this Exhibit "G". Tenant shall be eligible for the
Refurbishment Allowance payment by submitting to Landlord invoices evidencing
the completion of refurbishment work performed in the Demised Premises in an
amount equal to or greater than the amount of the Refurbishment Allowance.
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<PAGE> 47
3.01 Option to Extend: Provided Tenant has not assigned or subleased all or
any portion of the Demised Premises, and Tenant is not in default in the
performance of or with respect to any of the terms, covenants and conditions of
the Lease beyond any applicable cure period, Tenant shall have the right to
extend this Lease (herein the "Extension Option") for one (1) additional term of
five (5) years commencing immediately upon the expiration of the initial Rental
Term (hereinafter referred to as the "Extension Term"). Said right to extend
shall be subject to and in strict accordance with the terms and conditions
hereinafter set forth.
(a) In order to exercise the Extension Option, Tenant must provide
Landlord with written notice at least eighteen months (18) prior to the
expiration of the Term hereof of its intent to so extend the term.
(b) All of the terms, covenants, and conditions of this Lease shall
continue in full force and effect during the Extension Term of the Lease, as if
the Extension Term were part of the original Lease Term, except that the Base
Rental Rate for the Demised Premises during the Extension Term shall be the
"then current market rate", as defined in subparagraph (c) below.
(c) The "current market rate" shall mean the Landlord's determination of
the amount per square foot of the Rentable Floor Area of the Demised Premises
that a willing, non-equity, non-renewal, non-expansion new tenant would pay and
a willing landlord would accept at arm's length for space in a comparable
building or buildings with comparable tenant improvements, in a comparable
location in the "Highway 280/I-459" submarket of Birmingham, Alabama, giving
appropriate consideration to rental rates per rentable square foot, the presence
or absence of rent escalation clauses such as operating expense and tax pass-
throughs, length of lease term, size and location of premises being leased, if
any, and other generally applicable terms and conditions of the tenancy for a
similar building or buildings; provided, that the value of any improvements made
to the Demised Premises by Tenant at Tenant's expense shall not be considered
for the purpose of valuing the current market rate of the Premises.
4.01 Option to Expand: Provided Tenant has not assigned or subleased all or
any portion of the Demised Premises, and Tenant is not in default in the
performance of or with respect to any of the terms, covenants and conditions of
the Lease beyond any applicable cure period, Tenant, at its election, shall have
the right to expand the Demised Premises in accordance with either of the
following alternatives, provided that Tenant shall deliver written notice of its
election and its choice of option to Landlord on or before October 31, 1998.
5.01 Option to Convert to Net Lease: At such time during the Rental
Term of this Lease as Tenant occupies the entire Building, Tenant may notify the
Landlord that it proposes to convert the Lease from its current "gross" lease
standard to a "net" or "modified net" standard. In such event Landlord and
Tenant agree to negotiate in good faith to convert the Lease to such a "net" or
"modified net" standard. Such conversion will include restating the Base Rental
Rate to a "net" or "modified net" form and revising the operating expense
reimbursement provisions of this Lease to specify those expenses (i) that Tenant
will pay directly, (ii) that Tenant will reimburse Landlord for, and (iii) will
be included in common area maintenance charges for the Meadow Brook South
development or for Meadow Brook Corporate Park. Upon the mutual agreement of
Landlord and Tenant on a "net" or "modified net" conversion, the Lease Agreement
shall be amended to reflect such changes.
6.01 Exterior Tenant Signage: Tenant may be permitted to display signage
graphics in one location on the exterior surface of the Building in a location
designated by Landlord. The size and style of the sign shall be subject to
approval by Landlord and the Architectural Review Committee of Meadow Brook
Corporate Park. The fabrication and installation of the sign shall be at
Tenant's sole expense.
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<PAGE> 48
Any signage placed on or adjacent to the Building in accordance with this
Section 7.01 must comply with all codes and requirements imposed by governing
authorities with jurisdiction over the Building. Tenant shall be responsible for
the ongoing maintenance of the sign and shall be responsible for removing the
sign upon vacating the Demised Premises in accordance with the provisions of
this Lease. Additionally, if Tenant's Demised Premises shall be reduced, for any
reason, below 50,000 square feet of Rentable Floor Area, Tenant shall be
responsible for removing the signage on the Building at Tenant's sole cost.
Tenant shall repair any damage to the Building or Land caused during the
installation, maintenance or removal of the signage as set forth above.
1. Expansion Option 1 (Must Take Expansion): Tenant shall expand its Demised
Premises into the remaining 24,638 square feet of rentable area in the Building
no later than April 1, 2000 (hereinafter referred to as "Expansion Option 1").
Said Expansion Option 1 shall be subject to and in strict accordance with the
terms and conditions hereinafter set forth.
(a) After Tenant has notified Landlord of its intent to exercise
Expansion Option 1, Landlord and Tenant shall promptly proceed to amend the
Lease to reflect the addition of the "Expansion Space" (as hereinafter defined)
to the Demised Premises upon Tenant's election to actually exercised its option
to expand, as described below.
(b) Expansion Option 1 shall apply to the entire remaining rentable area
in the Building (the "Expansion Space") so that upon the Expansion Space
Commencement Date, as defined below, Tenant shall occupy the entire Building.
(c) Rent for the Expansion Space shall commence on the date ("Expansion
Space Commencement Date") which is the earlier of (i) the date on which Tenant
occupies the Expansion Space for conduct of business or (ii) April 1, 2000.
(d) The term for the Expansion Space shall be co-terminus with the Rental
Term of this Lease ("Expansion Term").
(e) Subject to the provisions of this Paragraph 4.01 of Exhibit "G" of
the Lease, the provisions of Exhibit "C" of this Lease shall apply to Tenant's
build-out of the Expansion Space.
(f) All of the terms, covenants and conditions of this Lease shall
continue in full force and effect, except that there shall be no Refurbishment
Allowance for the Expansion Space and except that the Base Rental and Tenant's
Additional Rental under the Lease shall be adjusted to reflect the addition to
the Demised Premises of the Expansion Space as of the Expansion Space
Commencement Date.
(g) In connection with the Expansion Space, Landlord shall provide Tenant
(i) the Construction Allowance set forth in Article 1 (m) above and (ii) the
Additional Tenant Allowance set forth in paragraph 1.01 of this Exhibit "G",
each of which shall be adjusted by multiplying by a fraction, the numerator of
which shall be the number of months remaining in the Rental Term as of the
Expansion Space Commencement Date and the denominator of which shall be 120.
2. Expansion Option 2 (Option to Expand): Provided Tenant has not assigned
or subleased all or any portion of the Demised Premises, and Tenant is not in
default in the performance of or with respect to any of the terms, covenants and
conditions of the Lease beyond any applicable cure period, Tenant shall have the
right during the first twelve (12) months following the Rental Commencement Date
to exercise an option to expand its Demised Premises into the remaining 24,638
square feet of rentable area in the Building (hereinafter referred to as
"Expansion Option 2"). Said Expansion Option 2 shall
44
<PAGE> 49
be subject to and in strict accordance with the terms and conditions hereinafter
set forth.
(a) If Tenant has notified Landlord of its intent to exercise Expansion
Option 2, Landlord and Tenant shall promptly proceed to amend the Lease to
reflect the addition of the Expansion Space to the Demised Premises upon
Tenant's election to actually exercise its option to expand, as described below.
(b) Expansion Option 2 shall apply to the entire Expansion Space so that
upon the Expansion Space Commencement Date, as defined below, Tenant shall
occupy the entire rentable area of the Building.
(c) Rent for the Expansion Space shall commence on the Expansion Space
Commencement Date, as defined in 4.01-1 above.
(d) The term for the Expansion Space shall be co-terminus with the Rental
Term of this Lease ("Expansion Term").
(e) Subject to the provisions of this Paragraph 4.01 of Exhibit "G" of
the Lease, the provisions of Exhibit "C" of this Lease shall apply to Tenant's
build-out of the Expansion Space.
(f) All of the terms, covenants and conditions of this Lease shall
continue in full force and effect except that the Base Rental and Tenant's
Additional Rental under the Lease shall be adjusted to reflect the addition to
the Demised Premises of the Expansion Space as of the Expansion Space
Commencement Date.
(g) In connection with the Expansion Space, Landlord shall provide Tenant
(i) the Construction Allowance set forth in Article 1(m), (ii) the Additional
Tenant Allowance set forth in paragraph 1.01 of this Exhibit "G", and (iii) the
Refurbishment Allowance as set forth in paragraph 2.01 of this Exhibit "G", each
of which shall be adjusted by multiplying by a fraction, the numerator of which
shall be the number of months remaining in the Rental Term as of the Expansion
Space Commencement Date and the denominator of which shall be 120.
(h) Notwithstanding anything contained in this Lease to the contrary, if
Tenant elects Expansion Option 2, the Base Rental Rate set forth in Article 1(j)
above shall be increased to $17.75 per square foot of Rentable Floor Area of the
entire Demised Premises, including the Expansion Space, per year commencing on
the Rental Commencement Date, subject to adjustment in accordance with Article 7
above, except that the following Base Rental Rates shall be substituted for
those contained in Article 7(b):
<TABLE>
<CAPTION>
<S> <C>
Second Lease Year $18.13 per square foot of Rentable Floor Area
Third Lease Year $18.51 per square foot of Rentable Floor Area
Fourth Lease Year $18.91 per square foot of Rentable Floor Area
Fifth Lease Year $19.32 per square foot of Rentable Floor Area
Sixth Lease Year $19.74 per square foot of Rentable Floor Area
Seventh Lease Year $20.18 per square foot of Rentable Floor Area
Eighth Lease Year $20.62 per square foot of Rentable Floor Area
Ninth Lease Year $21.08 per square foot of Rentable Floor Area
Tenth Lease Year $21.56 per square foot of Rentable Floor Area
</TABLE>
45
<PAGE> 50
EXHIBIT "H"
ABSOLUTE, UNCONDITIONAL AND CONTINUING GUARANTY
OF PAYMENT OF LEASE OBLIGATIONS
1. FOR VALUE RECEIVED, and in consideration of and as an express
inducement, to the execution, acknowledgement and delivery of that certain:
Lease Agreement by and between Daniel Meadow Brook South, L.L.C.
(herein referred to as "Lessor"), and Nichols TXEN Corporation (herein
referred to as "Lessee"), dated as of May 8, 1998.
(herein referred to as the "Lease Agreement") for the lease of that certain
tract or parcel of real property, together with the improvements located
thereon, situated and lying and being located at Meadow Brook, in the City of
Hoover, County of Shelby, State of Alabama (herein referred to as the "Leased
Premises"), the undersigned, Nichols Research Corporation, a Delaware
corporation, as Guarantor (herein referred to as "Guarantor") hereby
absolutely, unconditionally and continually guarantees to Daniel Meadow Brook
South, L.L.C., Lessor, the due, full, prompt and punctual payment when due or
at any time thereafter of:
All rents, costs, expenses, late charges, penalties and other sums due
and payable by Lessee under the Lease Agreement, including, without
limitation, the repayment of the Relocation Planning Allowance, whether
now or hereafter owed by Lessee pursuant to the Lease Agreement (herein
referred to, separately and severally, and collectively, as the "Lease
Obligations"),
of every kind and character, direct or indirect, absolute or contingent,
whether written, oral and/or otherwise, and whether the Lease Obligations are
from time to time reduced and thereafter increased, or entirely extinguished
and thereafter reincurred, or whether the Lease Obligations arise with or
without notice to the Guarantor.
2. This Guaranty is, and is intended to be, an absolute, unconditional and
continuing guaranty of payment which shall not be affected by any act or thing
whatsoever except as herein provided, and which shall be independent of and in
addition to any other guaranty, endorsement or collateral held by the Lessor
with respect to the Leased Premises, the Lease Agreement and/or any or all of
the Lease Obligations.
3. This Guaranty shall remain in full force and effect until the Lease
Obligations have been fully paid irrespective of any cancellation, expiration
or termination of this Lease Agreement and/or any change in the condition,
nature, occupancy or state of the Leased Premises.
4. Lessor shall have the right from time to time and at any time, without
in any way affecting, diminishing, impairing, releasing and/or terminating in
any manner Lessor's rights against Guarantor's obligations hereunder and/or any
of the conditions, provisions and terms of the Lease Agreement, and/or of
Lessee's obligations thereunder, and without demand or notice, or consent of
Guarantor:
(a) To amend, change, and/or modify, whether by action or inaction,
any one or more of the conditions, provisions and terms of the Lease Agreement
including, but not limited to, the Lease
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<PAGE> 51
Obligations;
(b) To allow, grant and/or permit, whether by action or inaction, any
extensions, indulgences and/or waives to one or more of the conditions,
provisions and terms of the Lease Agreement including, but not limited to, the
Lease Obligations;
(c) To allow, consent to and/or permit, whether by action or inaction,
any assignment of the Lease Agreement and/or any sublease of the Leased
Premises;
(d) To assert against Lessee any one or more of the rights or remedies
reserved to Lessor pursuant to or by virtue of the Lease Agreement or any
amendment, change or modification thereto;
(e) To release any obligor or other guarantor of the Lease Agreement
and/or the Lease Obligations, or any part thereof, in whole or in part;
(f) To amend, change, extend, increase, mature, modify, renew and/or
otherwise change any one or more of the conditions, provisions and/or terms of
the Lease Agreement and/or the terms and/or the time for payment of the Lease
Obligations, with or without the use of amendments, documents, instruments,
modifications or other writings;
(g) To receive, exchange or release any collateral securing the Lease
Agreement and/or the payment of any of the Lease Obligations, or any part of any
of them;
(h) To make any agreement extending, reducing or terminating the term of
the Lease Agreement, or otherwise affecting or altering the payment of all or
any part of the Lease Obligations, and to grant indulgences with respect to
these matters;
(i) To exercise or refrain from exercising or waiving any right Lessor
might have pertaining to the Leased Premises and/or under the Lease Agreement;
(j) To accept security of any kind from Lessee;
(k) To consent to a changed or different use of the Leased Premises;
(1) To terminate the Lease Agreement and relet the Leased Premises to a
new tenant (i) upon breach or default by Lessee under the Lease Agreement and/or
(ii) upon Lessee abandoning the Leased Premises, all as provided in the Lease
Agreement and subject to such conditions set forth therein.
Guarantor agrees that despite any of the foregoing, Guarantor is and shall
remain at all times absolutely, fully and unconditionally liable to Lessor for
payment of the Lease Obligations.
5. Guarantor waives notice of the acceptance of this Guaranty, presentment,
protest, notice of protest and any and all demands for performance or any and
all notice of non-performance which might otherwise be a condition precedent to
the liability of Guarantor under this Guaranty. Guarantor agrees and covenants
that Lessor may proceed directly against Guarantor, without first proceeding or
making claim or exhausting any remedy against Lessee or pursuing any particular
remedy or remedies available to Lessor.
6. Until such time as the Lease Obligations shall have been paid in full,
Guarantor, as an insider of the Lessee, waives and agrees not to assert any
claim Guaranty may now or later have against Lessee
47
<PAGE> 52
for any payment or transfer of anything of value which Guarantor has made, or
may be obligated to make, for any reason. Guarantor agrees that Guarantor will
have no claim against Lessee and no right of recourse to or with respect to any
assets or property of Lessee until Lessor shall have fully paid all of the Lease
Obligations as and when due. Nothing herein, however, shall be deemed to
preclude any Guarantor from (i) receiving or asserting the right to receive any
payment due to Guarantor as the parent corporation of the Lessee provided such
payment does not render the Lessee unable to make any payments then or
thereafter due under the Lease Agreement, and (ii) receiving or asserting the
right to receive from the Lessee any payment made by Guarantor pursuant to this
Guaranty provided that Lessee has not been in default with respect to any
obligation for payment under the Lease Agreement for a period of six (6)
consecutive months and such payment will not render the Lessee unable to make
payments then or thereafter due under the Lease Agreement. Guarantor agrees that
this paragraph is intended to benefit Lessee and is relied upon by Lessor. (As
used in this paragraph, the terms "insider" and "claim" are defined and shall
have the same meaning as set forth in the United States Bankruptcy Code, 11
U.S.C, ss.101 et. seq.)
7. Subrogation rights or any other rights of any kind of Guarantor, in its
capacity as Guarantor, against Lessee, if any, shall not become available to
Guarantor until all of the Lease Obligations are fully paid.
8. Guarantor agrees that upon the occurrence of any one or more of the
following events:
(a) Lessee's default in payment of any of the Lease Obligations;
(b) Lessee shall become insolvent or shall be adjudicated a bankrupt;
(c) Lessee shall file a petition for reorganization, arrangement or
similar relief under any present or future provision of the Bankruptcy Code;
(d) A petition for reorganization, arrangement or similar relief under
any present or future provision of the Bankruptcy Code filed by creditors of
Lessee shall be approved by a court;
(e) Lessee shall seek a judicial readjustment of the rights of Lessee's
creditors under any present or future federal or state law; or
(f) A receiver of all or any part of Lessee's property and asserts is
appointed by any state or federal court, and in any such proceeding the Lease
Agreement shall be terminated or rejected or the Lease Obligations of Lessee
under the Lease Agreement shall be modified.
then Guarantor will pay to Lessor:
(i) Immediately upon the occurrence of one or more such events, an amount
equal to all Lease Obligations accrued to the date of such event(s), plus
(ii) Subsequent to the occurrence of one or more of such events, the
Lease Obligations due under the Lease Agreement for the balance of the term
thereof as and when such payments become due reduced by any payments received by
Lessor as a result of the reletting of the Leased Premises.
9. Neither Guarantor's obligations to make payment in accordance with the
terms of this Guaranty, nor any remedy for the enforcement of this Guaranty,
shall be impaired, modified, changed, released or limited in any manner
whatsoever by any impairment, modification, change, release or limitation of the
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<PAGE> 53
liability of Lessee or Lessee's estate in bankruptcy or of any remedy for the
enforcement resulting from the operation of any present or future provision of
the federal Bankruptcy Code or from the decision of any court.
10. Guarantor shall pay all reasonable costs and expenses of Lessor in
attempting to collect and actually collecting the indebtedness due from Lessee,
and in attempting to enforce and actually enforcing performance of the
Obligations, and in enforcing the Lease Agreement and/or this Guaranty,
including, but not limited to, reasonable attorney's fees and court costs.
11. This Guaranty may not be canceled by Guarantor, this Guaranty shall
remain continually in full force and effect until the Lease Obligations have
been fully paid irrespective of any cancellation, expiration or termination of
the Lease Agreement and/or any change in the condition, nature, occupancy or
state of the Leased Premises.
12. All notices and/or demands given or made pursuant to this Agreement shall
be given or made either by (a) United States First Class Certified Mail, Return
Receipt Requested, Postage Prepaid, or (b) by expedited courier service (such as
Federal Express) and shall be deemed given when addressed to and received by (i)
Lessor at the address specified in the Lease Agreement and (ii) Guarantor at
the address set forth under its signature on this Agreement.
13. The word "Lessor" wherever used in this Guaranty and the Lease Agreement
shall include successors and assigns of Lessor as if each time fully expressed.
The word "Guarantor" wherever used in this Guaranty shall include the respective
successors of the Guarantor as if each time fully expressed.
14. If, for any reason, any provision of this Guaranty should be declared
null and void or unconstitutional or unenforceable by a final, non-appealable
order of any court of competent jurisdiction, the remainder of this Guaranty
shall not be impaired and shall remain in full force and effect.
15. As this Guaranty has been drafted jointly by Lessor and by Guarantor,
after extensive consultation with their respective counsel, no presumption
against the draftsman of this Guaranty shall be indulged in the construction
and/or interpretation hereof.
16. This Guaranty is to be construed, controlled, enforced, governed, and
interpreted by the laws of the State of Alabama.
17. Each and every provision of this Guaranty inures and shall inure to the
benefit of Lessor's successors, assigns, grantees, and successors in interest.
18. Guarantor's successors and assigns shall be fully bound by this Guaranty
and all provisions hereof, just as Guarantor is bound.
19. This Guaranty embodies the entire agreement and understanding of Lessor
and Guarantor as to the matters set forth herein, and mergers herein all
agreements, covenants, representations, statements and understandings heretofore
made by and between Lessor and Guarantor as to such matters, whether written,
oral or both. Any agreements, covenants, representations, statements or
understandings as to such matters not incorporated herein, are, and shall be,
null and void and of no force and effect.
20. Neither this Guaranty nor any condition, provision or term hereof, shall
be amended, changed, or modified in any respect, nor may any estoppel, novation
or waiver regarding the same be effectuated, without Lessor and Guarantor first
executing a writing, in equal dignity to this Guaranty, embodying their
49
<PAGE> 54
complete and full agreement and understanding as to such amendment, change,
modification, estoppel, novation, or waiver.
21. Guarantor acknowledges, agrees, covenants, represents and warrants to
Lessor that the Guarantor is the parent corporation of Lessee, and that it is
of material advantage and benefit to Guarantor for Lessor and Lessee to enter
into the Lease Agreement.
22. This Guaranty is executed, acknowledged and delivered by Guarantor prior
to, or simultaneously with, the execution, acknowledgement and delivery of the
Lease Agreement by Lessor and Lessee, and to expressly induce Lessor to
execute, acknowledge and deliver the Lease Agreement, well knowing and
understanding that Lessor would not do so without this Guaranty being in full
force and effect.
IN WITNESS WHEREOF, Guarantor has caused these presents to be executed as of
the 8 day of May, 1998.
CAUTION--IT IS IMPORTANT THAT YOU THOROUGHLY READ THE
CONTRACT BEFORE YOU SIGN IT.
GUARANTOR:
NICHOLS RESEARCH CORPORATION,
a Delaware corporation
By: /s/ Michael J. Murray
-------------------------
Its: CEO/President
-------------------------
Guarantor's Address:
4040 Memorial parkway, Southwest
Huntsville, Alabama 35802
Accepted and approved as of the 8 day of May, 1998.
LESSOR:
DANIEL MEADOW BROOK SOUTH, L.L.C.
a Delaware corporation
By: Charles ???????
----------------------
Its: Senior Vice-President
----------------------
50
<PAGE> 55
STATE OF ALABAMA )
COUNTY OF MADISON )
I, Patty R. Baugher, a Notary Public in and for said County in said State,
hereby certify that Michael J. Mnuz whose name as CEO/President of Nichols
Research Corporation, a Delaware corporation, is signed to the foregoing,
and who is known to me, acknowledged before me on this day that, being
informed of the contents of the foregoing, he, as such officer and with
full authority, executed the same voluntarily for and as the act of the
said Nichols Research Corporation, a Delaware corporation, on the day the
same bears date.
GIVEN UNDER MY HAND and official seal on this the 28th day of April, A.D.,
1998.
/s/ PATTY R. BAUGHER
----------------------------------------
Patty R. Baugher
Notary Public
My Commission Expires: State of Alabama
8/2/98 County of Madison (SEAL)
STATE OF ALABAMA )
COUNTY OF JEFFERSON )
I, Jennifer C. Palmer, a Notary Public in and for said County in said State,
hereby certify that Charles T. Carlisle, Jr., whose name as Senior Vice
President of Daniel Meadow Brook South, L.L.C., a Delaware corporation, is
signed to the foregoing, and who is known to me, acknowledged before me on this
day that, being informed of the contents of the foregoing, he, as such officer
and with full authority, executed the same voluntarily for and as the act of
the said Nichols Research Corporation, a Delaware corporation, on the day the
same bears date.
GIVEN UNDER MY HAND and official seal on this the 11th day of May, A.D., 1998.
/s/ JENNIFER C. PALMER
----------------------------------------
Jennifer C. Palmer
Notary Public
My Commission Expires: State of Alabama
12/99 County of Jefferson (SEAL)
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<PAGE> 56
FIRST AMENDMENT TO LEASE AGREEMENT
TENANT EXPANSION AGREEMENT
THIS First Amendment to Lease ("First Amendment") made and entered into
as of this 9th day of December, 1998, by and between Meadow Brook South 2500,
L.L.C. ("Landlord"), and Nichols TXEN Corporation ("Tenant").
WITNESSETH
WHEREAS, Landlord's predecessor in interest, Daniel Meadow Brook
South, L.L.C., has heretofore entered into that certain lease (the "Lease")
dated the 8th day of May, 1998 for premises (the "Demised Premises") initially
containing approximately 73,915 square feet of Rentable Floor Area, in the
building known as 2500 Corporate Drive (the "Building") the address of which is
2500 Corporate Drive.
WHEREAS, Tenant has requested (a) that additional space in the Building
consisting of approximately 23,908 square feet of Rentable Floor Area shown on
Exhibit "B" attached hereto and incorporated herein (the "Expansion Space") be
added to the Demised Premises, so that Tenant will occupy the entire Rentable
Floor Area of the Building, and (b) that the location of the Demised Premises
and Expansion Space as defined in the Lease be altered.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and other good and valuable consideration, the
parties do hereby agree as follows. Capitalized terms used herein not otherwise
defined shall have the same meaning as set forth in the Lease.
1. RELOCATION OF DEMISED PREMISES AND EXPANSION SPACE. The Demised
Premises shall be relocated as shown on Exhibit "A-1 " and "A-2" attached
hereto. The Expansion Space shall be relocated as shown on Exhibit "B" attached
hereto.
2. ADJUSTMENT OF RENTABLE FLOOR AREA. The parties hereto acknowledge
and agree that the Rentable Floor Areas of the Building and the Demised
Premises have changed. Accordingly, the Rentable Floor Area of the Demised
Premises set forth in Article 1 (g) of the Lease shall be 74,308 square feet
and the Rentable Floor Area of the Building set forth in Article 1 (h) of the
Lease shall be 98,216 square feet.
3. EXPANSION. Commencing on the earlier of (a) April 1, 2000 or (b)
the date on which the Tenant occupies the Expansion Space and operates
therefrom (the "Expansion Space Commencement Date"), the Expansion Space shall
be added to and become a part of the Demised Premises, subject to all of the
terms and conditions of the Lease currently in effect, except as expressly
modified herein. On the Expansion Space Commencement Date set forth above, the
Demised Premises, including the Expansion Space, shall be increased to 98,216
square feet of Rentable Floor Area. The Expansion Space Commencement Date shall
be subject to adjustment as described in Paragraph 5, below.
4. RENTALS AND OTHER CHARGES. Effective as of the Expansion Space
Commencement Date, the Rent under the Lease, as defined in Article 5 (a) of the
Lease, for the Demised Premises shall be adjusted to reflect the addition of
the Expansion Space to the Demised Premises.
The Rent respecting the Expansion Space is sometimes herein called the
"Expansion Space Rent".
5. Possession. Tenant agrees to accept the Expansion Space without any
agreements, representations, understanding or obligations on the part of
Landlord to perform any alterations, repairs
<PAGE> 57
or improvements except as expressly provided for in the Work Letter, attached
to the Lease as Exhibit C. Tenant covenants and agrees to cause the plans and
specifications (as set forth in paragraph 1 (b) of Exhibit C of the Lease) for
the Expansion Space to be delivered to Landlord upon the earlier to occur of
the date which is (a) 150 days prior to the anticipated Expansion Space
Commencement Date, or (b) November 1, 1999. Any construction, alterations or
improvements made to the Expansion Space by Tenant shall be subject to
Landlord's prior written approval including without limitation, approval of the
plans, specifications, contractors and subcontractors therefor, and all
applicable terms and conditions of the Lease relating to construction,
alterations or improvements of the Demised Premises, and such other reasonable
requirements or conditions as Landlord may impose. During any period that
Tenant shall be permitted to enter the Expansion Space prior to the Expansion
Space Commencement Date other than to occupy the same in the normal conduct of
business (e.g., to perform alterations or improvements), Tenant shall comply
with all terms and provisions of the Lease, except those provisions requiring
payment of Expansion Space Rent. If Tenant shall enter the Expansion Space
prior to the Expansion Space Commencement Date for the purpose of occupying the
same in the normal conduct of business, Expansion Space Rent shall commence on
such date.
The Expansion Space Commencement Date shall be delayed and Expansion
Space Rent shall be abated to the extent that Landlord fails: (a) to
substantially complete any improvements to the Expansion Space required to be
performed by Landlord under Exhibit C of the Lease in connection herewith, or
(b) to deliver possession of the Expansion Space for any other reason, except
to the extent that Tenant, its contractors, agents, or employees in any way
contribute to either such failures. Any such delay in the Expansion Space
Commencement Date shall not subject Landlord to any liability for any loss or
damage resulting therefrom, and Tenant's sole remedy with respect thereto shall
be the abatement of Expansion Space Rent.
6. TENANT ALLOWANCES. Landlord shall provide Tenant a Construction
Allowance for the Expansion Space equal to $15.00 per rentable square foot of
the Expansion Space multiplied by a fraction, the numerator of which shall be
the number of months remaining in the initial Rental Term as of the Expansion
Space Commencement Date and the denominator of which shall be 120.
Additionally, Landlord shall provide Tenant a Moving Allowance for the
Expansion Space equal to $1.50 per rentable square foot of the Expansion Space
multiplied by a fraction, the numerator of which shall be the number of months
remaining in the initial Rental Term as of the Expansion Space Commencement
Date and the denominator of which shall be 120. The Moving Allowance shall be
paid to Tenant within thirty (30) days of the Expansion Space Commencement Date
and upon receipt by Landlord of copies of the invoices for the costs associated
with Tenant's move into the Expansion Space.
7. WHOLE AGREEMENT. This First Amendment, together with its
attachments and Exhibits, sets forth the entire agreement between the parties
with respect to the matters set forth herein. Other than the Lease, there have
been no additional oral or written representations or agreements nor shall any
agreement between the parties be valid unless it is set forth in writing and
duly signed by each party. As amended herein, the Lease between the parties
shall remain in full force and effect. In case of any inconsistency between the
provisions of the Lease and this First Amendment, the provisions of this First
Amendment shall govern and control.
8. GUARANTORS. This First Amendment shall be of no force or effect
unless and until accepted by any guarantors of the Lease, who by signing below
agree that their guarantee shall apply to the Lease as amended herein.
<PAGE> 58
IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this First
Amendment as of the day and year first above written.
LANDLORD:
MEADOW BROOK SOUTH 2500, L.L.C. a
Delaware limited liability company
By:/s/
-------------------------------------
Its: Senior Vice President
------------------------------------
TENANT:
NICHOLS TXEN CORPORATION a
Delaware corporation
By:/s/
--------------------------------------
Its: President
-------------------------------------
GUARANTOR:
NICHOLS RESEARCH CORPORATION
a Delaware corporation
By:/s/
--------------------------------------
Its: Chief Financial Officer
-------------------------------------
<PAGE> 59
EXHIBIT "A-1" FIRST FLOOR PLAN
<PAGE> 60
EXHIBIT "A-2" SECOND FLOOR PLAN
<PAGE> 61
EXHIBIT "B" SECOND FLOOR PLAN
<PAGE> 62
SECOND AMENDMENT TO LEASE AGREEMENT
THIS Second Amendment to Lease (the "Second Amendment") made and
entered into as of this ____ day of ____________ 19___, by and between Meadow
Brook South 2500, L.L.C. ("Landlord"), and Nichols TXEN Corporation ("Tenant").
WITNESSETH
WHEREAS, Landlord's predecessor in interest, Daniel Meadow Brook South,
L.L.C., has heretofore entered into that certain lease (the "Lease") dated the
8th day of May, 1998, which was amended on December 9, 1998 (the "First
Amendment"), for office space (the "Demised Premises") in the building known as
2500 Corporate Drive (the "Building") the address of which is 2500 Corporate
Drive;
WHEREAS, Tenant and Landlord have further agreed to Amend the Lease;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the parties do
hereby agree as follows. Capitalized terms used herein not otherwise defined
shall have the same meaning as set forth in the Lease.
1. Section 1.01 A of Exhibit G of the Lease shall be modified in
accordance with the following:
a) The title of Section 1.01 A of Exhibit G of the Lease shall be
changed to "Rental Reimbursement for Tenant's lease obligation
at Inverness Center.
b) The last paragraph of Section 1.01 A of Exhibit G of the
Lease which begins with "In consideration for" and ends with
"of ten percent (10%)." shall be deleted.
2. Beginning on the April 1, 1999, Tenant shall pay to Landlord as
Additional Rental the sum of $4,291.37 per month (the "Installments") for each
month during the initial Rental Term of the Lease. If this Lease is terminated
prior to the expiration of the initial Rental Term for any reason, Tenant shall
pay to Landlord (in addition to all other amounts due Landlord at such time) on
the date of such termination an amount equal to the present value of the
otherwise remaining monthly amounts of the Installments set forth under this
paragraph. The present value payment shall be computed using a discount rate
equal to the monthly equivalent of 10% per annum.
3. WHOLE AGREEMENT. This Second Amendment sets forth the entire
agreement between the parties with respect to the matters set forth herein.
Other than the Lease and the First Amendment, there have been no additional
oral or written representations or agreements nor shall any agreement between
the parties be valid unless it is set forth in writing and duly signed by each
party. As amended herein, the Lease between the parties shall remain in full
force and effect. In case of any inconsistency between the provisions of the
Lease and this Second Amendment, the provisions of this Second Amendment shall
govern and control.
<PAGE> 63
4. GUARANTORS. This Second Amendment shall be of no force or effect
unless and until accepted by any guarantors of the Lease, who by signing below
agree that their guarantee shall apply to the Lease as amended herein.
IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Second
Amendment as of the day and year first above written.
LANDLORD:
MEADOW BROOK SOUTH 2500, L.L.C.
a Delaware limited liability company
By:
--------------------------------------
Its:
-------------------------------------
TENANT:
NICHOLS TXEN CORPORATION
a Delaware corporation
By:/s/
--------------------------------------
Its: President
-------------------------------------
GUARANTOR:
NICHOLS RESEARCH CORPORATION
a Delaware corporation
By:
--------------------------------------
Its:
-------------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 7, 1999, in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-71031) and related Prospectus of Nichols TXEN
Corporation for the registration of 2,625,000 shares of its common stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
June 18, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 1, 1997, with respect to the financial
statements of TXEN, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-71031) and related Prospectus of Nichols TXEN
Corporation for the registration of 2,625,000 shares of its common stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
June 18, 1999
