<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-71031
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 4
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. [ ]
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 JULY 9, 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
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<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.
- --------------------------------------------------------------------------------
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
Application Services Provider
Administrative Services Outsourcer
for Managed Care Organizations & Physician Practice Groups
using Internet-Based Technology & Network
Customer Benefits
Administrative Cost Control
Enterprise-Level Software
Business Scalability
Fast Implementation
Marketplace Connectivity
Highly-Automated Processes
Operational Expertise
<PAGE> 4
Inside front page gate-fold portrays the following diagram with lines
connecting the paragraphs of text to indicate interconnectivity:
Nichols TXEN
<TABLE>
<CAPTION>
Managed Care Customers Physician Practice Customers
<S> <C> <C> <C>
Software Application Administrative Software Application Administrative
Services Outsourcing Services Outsourcing Services Outsourcing Services Outsourcing
- -Our Technology & -Our Technology & -Our Technology & -Our Technology &
Customer's Personnel Our Personnel Customer's Personnel Our Personnel
WebSTEPP* MDrWebSTEPP*
Intranet Portal Site Application Intranet Portal Site Application
</TABLE>
Internet Protocols
TXENet
Secure private network/intranet
Nichols TXEN Data Center
<TABLE>
<CAPTION>
Nichols TXEN Software 3rd Party Content & Applications
- ----------------------------------- --------------------------------
<S> <C>
Managed Care Administration Medical Informatics
Medical Utilization Management Medical Education
Medical Case Management* Claim Editing
Managed Care Decision Support DRG Code Finder
Physician Practice Administration Automated Medical Criteria
Physician Practice Decision Support Automated Fee Schedules
</TABLE>
TXENetlink
Internet
<TABLE>
<CAPTION>
Nichols TXEN Business-to-Business e-commerce Expanded Connectivity to
- -------------------------------------------- -------------------------------
<S> <C>
Provider Claim Inquiry* Our Customers' Clients
Eligibility Verification Our Customers' Suppliers
Benefit Inquiry* Other Healthcare Internet Sites
Direct Employer Enrollment* Other Payors
Employer Benefit Inquiry* Other Healthcare Participants
Member Inquiry/Update+
</TABLE>
Creating Efficiencies in Healthcare Administration
* currently testing
+ under development
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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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................................. 20
Business.................................................... 30
Management.................................................. 49
Relationships and Related Transactions...................... 55
Principal Stockholders...................................... 57
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 59
Underwriting................................................ 60
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 63
Index to Financial Statements............................... F-1
</TABLE>
<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 services provider and an administrative
outsourcing services provider. We use TXENet, our secure network, to provide 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.
Our customers are connected to our centralized network data center through
authorized access to TXENet, our intranet. An intranet is a secure network with
the characteristics of the Internet and is designed to be used within a company
or group of organizations or by others with authorization. TXENet uses the same
technology and standardized methods of communication or protocols as the
Internet. Customers can connect to our intranet using Internet-based protocols
as well as traditional methods of electronic communications which are not based
on Internet technology. As of May 31, 1999, approximately 66% of our managed
care customers and approximately 19% of our physician practice customers
accessed our intranet using Internet-based technologies and protocols. We
believe that Internet-based technology is well suited to handle complex
communications because of the Internet's open architecture, accessibility and
acceptance. Although we plan to migrate our customers to Internet-based
technology, our customers may continue to access our network data center over
telephone lines and other methods which do not employ Internet protocols.
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. 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
believe that our solutions provide the following benefits to our customers:
- access to enterprise-level, or company-wide, software applications through a
secure network;
- efficient administrative functions;
- electronic communications, or connectivity, via Internet-based technology or
direct connections for transmittal and retrieval of information among
healthcare industry participants;
- assistance with cost controls;
- scalability, which is the ability to more easily expand business operations;
and
- fast implementation of new business and technology because of our
knowledgeable personnel, secure intranet and flexible outsourcing method.
3
<PAGE> 7
OUR MARKET OPPORTUNITY
In response to rising healthcare costs, membership in all forms of managed care
plans is increasing, creating many new start-up organizations and fueling rapid
growth in existing organizations. The increase in managed care programs using a
variety of benefits and reimbursement models has resulted in administrative
complexities which further add to 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.
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.
OUR STRATEGY
Our objective is to become the leading software application services provider
and the leading administrative services provider to managed care organizations
and physician groups. To accomplish this objective we intend to continue using
and developing Internet-based technology and increasing our healthcare
administrative efficiencies. Our strategy includes the following key elements:
- focus additional resources on providing administrative services outsourcing;
- expand our high recurring revenue model;
- increase efficiencies through expanded Internet-based connectivity,
additional Internet-based software applications and process automation;
- establish contractual relationships with Internet-based healthcare
participants to provide access to additional content and services; 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.
Our 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.
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 793,500 shares of common stock issuable upon exercise of employee
and director stock options outstanding on July 6, 1999, pursuant to the
Nichols TXEN Corporation 1998 Stock Option Plan and the Nichols TXEN
Corporation 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.
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 became effective on June 18, 1999. 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), TXENet(TM), TXENetlink(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.
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;
- enhance our electronic communications, or connectivity;
- 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 "Relationships and
Related Transactions -- Corporate Services Agreement," "-- Voting Agreement" and
"-- Tax Sharing Agreement."
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<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 terms 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. Between September 1998
and February 1999, we experienced early termination of technology outsourcing
services by two significant physician practice customers, and during this same
period, several of our managed care customers 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 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 COULD BE LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET
In the future, customers may be able to download information from the Internet
through our intranet. As a result, there is the potential that claims will be
made against us for copyright or trademark infringement or other theories based
on the nature and content of such materials. Similar claims have been brought,
sometimes successfully, against companies providing services similar to ours. In
addition we could be subject to liability with respect to content that may be
accessible through third-party Web sites linked to our software.
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<PAGE> 13
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 customers' plans or
contracts 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."
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."
IF WE ARE UNABLE TO DEVELOP AND IMPLEMENT SOFTWARE ALLOWING ACCESS TO OUR
APPLICATIONS USING AN INTERNET BROWSER, WE MAY NOT ACHIEVE OUR STRATEGY AND OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
One important aspect of our strategy involves enabling our customers to access
our core processing software and applications using a standard Internet browser.
If we are unable to develop and implement this software in a timely fashion, we
may not realize the full benefit of our Internet strategy. This could adversely
affect our competitive position and result in a loss of anticipated revenue.
ALL OF OUR ANCILLARY INTERNET-BASED SOFTWARE PRODUCTS ARE IN THE DEVELOPMENT
STAGE AND WE MAY EXPERIENCE DIFFICULTIES DEVELOPING AND COMMERCIALIZING THESE
PRODUCTS.
We are currently developing and testing ancillary Internet-based software
applications that our customers may purchase in addition to the software
applications available on TXENet. These products are designed to enable our
customers to access and share secure, selected sets of information over the
Internet. We 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 these
types of Internet-based 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 these ancillary products
and services. There can be no assurance that our ancillary Internet-based
software 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.
10
<PAGE> 14
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
economic, 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 second 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 that the recorded value of goodwill or other intangible assets will
ever be realized. Our future ability to realize the value of our intangible and
other long-lived 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, significant programming
errors 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.
11
<PAGE> 15
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 BUSINESS RELATIONSHIPS MAY NOT PROVIDE ANTICIPATED BENEFITS.
As a part of our strategy, we have entered into eight contractual relationships
and may enter into new relationships in the future. We have entered into these
relationships to provide our customers with additional healthcare related
products and services and to make our products and services more attractive to
our customers. We expect these relationships to generate revenues from our
customers through monthly fees, revenue sharing or per transaction fees. Five of
our business relationships presently generate revenues. Our business
relationships with Healthstream, Inc., The Potomac Group and HealthGate Data
Corp. do not presently generate revenues. 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 those companies with which we form relationships may decide to
compete with us. InterQual, one of the companies with which we have a business
relationship, was recently purchased by McKesson HBOC, Inc., one of our
competitors. If any of our current or future business 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 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. If we are unable to protect the technology upon which we rely, our
business could be adversely affected. 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 received a
letter from legal counsel representing the owner of patented technology
allegedly possessing functionality similar to that of our non-patented
technology involving healthcare transactions transmitted electronically and
related activities such as utilization review. The patent referred to in this
letter is the basis for an infringement lawsuit commenced by the patent owner to
which we are not a party. In the letter we received, we were offered an
opportunity to obtain a license for the use of this patented technology, but we
did not enter into the license. If it is determined that the functionality of
our technology overlaps this or other technology, we
12
<PAGE> 16
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."
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, private
review agent, or utilization 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 impose additional licensure obligations on Nichols TXEN and our
physicians and nurses, or require restructuring of physician arrangements. Costs
incurred by such increased regulations or restructuring could have a material
adverse effect on our business. 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."
13
<PAGE> 17
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. Our infrastructure may be
vulnerable to physical break-ins, computer viruses or similar disruptive
problems. If our security measures are circumvented, proprietary and
confidential information could be misappropriated or our operations interrupted.
In addition, any security breach could damage our reputation and cause us to
lose customers. 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 or any damage to our reputation 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 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 793,500 shares of common stock
which may be issued upon exercise of options outstanding as of July 6, 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.
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. 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 $2.26 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 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>
<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.
18
<PAGE> 22
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>
19
<PAGE> 23
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,
20
<PAGE> 24
$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
21
<PAGE> 25
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. Following the applicable accounting rules, we
prepared an undiscounted cash flow analysis over the estimated recovery period
to determine the recoverability of the purchased assets. Our analysis
encompassed the acquired operations and identified an impairment charge. Based
on the guidance offered by Statement of Financial Accounting Standard No. 121
issued by the Financial Accounting Standards Board, the goodwill was reduced
prior to the carrying amounts of the impaired long-lived assets.
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.
22
<PAGE> 26
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 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
23
<PAGE> 27
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
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
24
<PAGE> 28
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 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. On average during fiscal years 1997 and 1998, the Physician
Practice Services division experienced collections within 65 days of billing. We
believe that by continuing to apply the collection procedures used in the
Physician Practice Services division to the
25
<PAGE> 29
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 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>
26
<PAGE> 30
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 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.
27
<PAGE> 31
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> 32
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> 33
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. We believe that
our outsourcing solutions provide customers with significant benefits,
including:
- access to enterprise-level application software;
- efficient administrative functions;
- variable rate operating cost structure;
- fast implementation of new business and technology;
- 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 because we supply the technology;
- 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. Although we believe that we have an established base of
business, our customers represent a small percentage of the healthcare industry.
30
<PAGE> 34
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 have 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 require 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> 35
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
provider 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 additional resources on providing administrative services
outsourcing. 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 opportunities and electronic business transactions, or
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> 36
- Establish additional business relationships with other Internet-based
healthcare companies. We are pursuing additional business relationships with
other Internet-based healthcare companies to broaden our portfolio of
applications and services. We believe our existing connectivity with our
customer base can be leveraged through additional product offerings provided
through these business 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
Present network architecture
Our outsourcing services are delivered to customers through authorized access to
TXENet, our secure private network. Over the last two years, we have converted
our network architecture to Internet-based technology and protocols. As of May
31, 1999, approximately 66% of our managed care customers and approximately 19%
of our physician practice customers accessed TXENet using Transmission Control
Protocol/Internet Protocol, or TCP/IP. This Internet networking protocol
controls the transmission of information over the Internet and is the foundation
for Internet-based technology. The remaining customers access our network using
electronic communications which are not based on Internet technology. We expect
that most of our customers will be converted to Internet-based technology by
December 2000. Our customers may, however, continue to access our network using
methods that do not employ Internet protocols.
Our network strategy
We expect that by December 1999, we will be able to offer our customers the
ability 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. Our customers may access additional products and services by
purchasing TXENetlink, which securely connects TXENet users to the Internet.
Customers using WebSTEPP will be able to obtain additional Internet applications
and Internet content from other companies with which we may have business
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 include
our software applications, third-party applications and third-party content. We
expect to derive revenues from these activities by charging our customers a
monthly fee or by sharing revenues with those companies with which we have
business relationships. TXENetlink customers will also receive basic Internet
services, such as electronic mail, Web site hosting and general Internet access.
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<PAGE> 37
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.
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<PAGE> 38
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
| |
| WebSTEPP* |
| Intranet Portal Site Application |
---------------------------------------------
|
|
|
TXENet
secure private network/intranet
Network Data Center Software Application Services
<TABLE>
<CAPTION>
Nichols TXENetlink 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 Editing
- -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 Internet 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+
Pharmacies Patients
Medical Informatics Hospitals
Healthcare Participants
* Currently Testing
+ In Development
35
<PAGE> 39
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
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<PAGE> 40
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> 41
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
- perform eligibility checks; timely data through electronic connectivity.
- 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.
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<PAGE> 42
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
| |
| WebSTEPP* |
| Intranet Portal Site Application |
---------------------------------------------
|
|
|
TXENet
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+
Pharmacies Patients
Medical Informatics Hospitals
HEALTHCARE PARTICIPANTS
* Currently Testing
+ In Development
39
<PAGE> 43
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> 44
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, we have 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.
BUSINESS RELATIONSHIPS
In addition to outsourcing application technology developed by Nichols TXEN, our
managed care and physician practice customers may also access additional
applications and content offered by other companies with which we have business
relationships. These applications and content are provided to us and are
integrated into our applications and network. We pay fees and provide marketing
services in return for access to these applications and content. These companies
include:
Beech Street/CAPP Care Corporation. Provides online electronic access to the
fee schedules and data base of 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> 45
ENVOY Corporation. Provides electronic data interchange services and offers
batch claims submission and online eligibility verification, claims status and
referral processing.
HealthGate Data Corporation. Provides over 27 million pages of health and
medical information over the Internet. HealthGate assists healthcare
professionals, patients and health conscious consumers obtain healthcare
information.
HealthStream, Inc. Provides over the Internet a comprehensive library of
continuing education courses for physicians, nurses and allied healthcare
professionals.
InterQual, Inc. Provides automated clinical decision support criteria for
managing the demand for, and quality of, healthcare services.
Medicode. Provides 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.
Minnesota Mining and Manufacturing Company. Provides software that assigns
patient records to diagnosis related groups, or DRGs, and identifies potential
coding errors.
The Potomac Group. Provides online electronic access to the eligibility
databases of over 40 commercial and government payors.
We consider our most significant business relationship contracts to be those
with ENVOY and Medicode. Our contract with ENVOY, dated June 14, 1995, provides
for electronic transmissions services with fees payable to ENVOY on a per
transaction basis. The contract is terminable upon 6 months notice by either
party. Our contract with Medicode, dated September 2, 1998, provides that we
will integrate Medicode's products with our products and that we will market
Medicode's data base products. We are paid fees based on our customers' use of
Medicode's data base. The contract is for a period of 3 years.
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
because our customers are not required to purchase capital equipment or employ
large staffs to process their administrative transactions. In addition, 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
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<PAGE> 46
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.
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 were customer-sponsored
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<PAGE> 47
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. We believe that the graphical user 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 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 services 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 services 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.
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<PAGE> 48
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 received a letter from legal counsel representing the owner of
patented technology allegedly possessing functionality similar to that of our
non-patented technology involving healthcare transactions transmitted
electronically and related activities such as utilization review. The patent
referred to in this letter is the basis for an infringement lawsuit commenced by
the patent owner to which we are not a party. In the letter we received, we were
offered an opportunity to obtain a license for the use of this patented
technology, but we did not enter into the license. 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. 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.
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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.
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, it is possible that state law could be
changed to impose additional professional practice obligations on our physicians
conducting utilization reviews and to bring our utilization review activities
within the definition of the practice of medicine.
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
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<PAGE> 50
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>
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
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<PAGE> 51
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.
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, cash flows, 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 Practice Management Division for 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> 53
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> 54
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 the Nichols TXEN Corporation 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
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> 55
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 that 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> 56
- 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.
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
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<PAGE> 57
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> 58
RELATIONSHIPS AND RELATED 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> 59
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 July 6, 1999, options covering 793,500 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......................................... 32,500
John D. McKay............................................. 32,500
Chris H. Horgen........................................... 40,000
Allen E. Dillard.......................................... 5,000
Patsy L. Hattox........................................... 5,000
Other officers and employees of Nichols TXEN................ 356,500
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> 61
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.
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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<PAGE> 62
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.
59
<PAGE> 63
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>
60
<PAGE> 64
While the amount of underwriting discount is subject to negotiation until the
underwriting agreement is executed, it is currently anticipated that it will be
approximately 7%.
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.
61
<PAGE> 65
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. beneficially owned
an aggregate of 33,696 shares of Nichols Research common stock, including 23,002
shares owned by Mr. Wynn. 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.
62
<PAGE> 66
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.
63
<PAGE> 67
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> 68
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,
except for paragraph 4 of Note 1,
as to which the date is
June 18, 1999
F-2
<PAGE> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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 28, 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> 82
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 purchased assets related to the 1995
physician practice 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 the recoverability of
the purchased assets. Management's analysis encompassed the acquired operations
and identified indicators that an impairment existed. Based on the guidance
offered by SFAS 121 the goodwill was reduced prior to the carrying amounts of
the impaired long-lived assets. 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. Although Nichols TXEN can give no assurance that the terms of any
offered licenses will be acceptable to Nichols TXEN, management does not believe
that this contingency will have a material impact on its financial position,
results of operations or cash flows.
F-16
<PAGE> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
Inside Back Cover
Nichols TXEN
TXEN MD.COM* (Photo: Screen Print of TXEN MD.COM)
- ------------
provides 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
NextSTEPP* (Photo: Screen Print of NextSTEPP)
- ----------
is a Java and Internet-enabled version of
TXEN-MHS which helps manage and
control premium billing, capitation,
benefit plans, membership data, claims,
provider contracts, eligibility, referrals,
authorizations and accounts payable
MDrSTEPP* (Photo: Screen Print of MDrSTEPP)
- ---------
is a Java and Internet-enabled version of
MDr98 which helps to manage and
control appointment scheduling, medical
billing, electronic remittance, payment
processing, electronic claims submission,
and insurance follow-up
* currently testing
<PAGE> 95
- --------------------------------------------------------------------------------
(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> 96
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> 97
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> 98
<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
10.19+ -- NEIC Agreement for Network Services between ENVOY-NEIC and
TXEN, Inc., dated June 14, 1995, and addendum
10.20+ -- Medicode Reseller Software Development and Maintenance
Agreement, dated September 2, 1998, between Medicode, Inc.
and Nichols TXEN Corporation
10.21 -- NEIC Networked Partner Agreement for Clearinghouse Services
between National Electronic Information Corporation and
Nichols Select
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.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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.
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> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Amendment No. 4 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Birmingham, State of Alabama, on the
9th day of July, 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. 4
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 July 9, 1999
- ------------------------------------------------ Director (Principal Executive
Paul D. Reaves Officer)
* Chairman of the Board July 9, 1999
- ------------------------------------------------
Thomas L. Patterson
* President, Chief Operating Officer July 9, 1999
- ------------------------------------------------ and Director
H. Grey Wood
* Director July 9, 1999
- ------------------------------------------------
Chris H. Horgen
* Director July 9, 1999
- ------------------------------------------------
James D. Kever
* Director July 9, 1999
- ------------------------------------------------
James I. Harrison, Jr.
John D. McKay Chief Financial Officer (Principal July 9, 1999
- ------------------------------------------------ Financial and Accounting Officer)
John D. McKay
*By: John D. McKay
- ------------------------------------------------
John D. McKay
Attorney-in-fact
</TABLE>
II-5
<PAGE> 101
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> 102
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> 103
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
10.19+ -- NEIC Agreement for Network Services between ENVOY-NEIC and
TXEN, Inc., dated June 14, 1995, and addendum
10.20+ -- Medicode Reseller Software Development and Maintenance
Agreement, dated September 2, 1998, between Medicode, Inc.
and Nichols TXEN Corporation
10.21 -- NEIC Networked Partner Agreement for Clearinghouse Services
between National Electronic Information Corporation and
Nichols Select
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 1.1
2,625,000 Shares
NICHOLS TXEN CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
July , 1999
-----
CIBC World Markets Corp.
Friedman, Billings, Ramsey & Co.
The Robinson-Humphrey Company, LLC
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
Nichols TXEN Corporation, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions contained herein, to
sell to you and the other underwriters named on Schedule I to this Agreement
(the "Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of 2,625,000 shares (the "Firm Shares") of the
Company's Common Stock, $0.01 par value (the "Common Stock"). The respective
amounts of the Firm Shares to be purchased by each of the several Underwriters
are set forth opposite their names on Schedule I hereto. In addition, the
Company proposes to grant to the Underwriters an option to purchase up to an
additional 375,000 shares (the "Option Shares") of Common Stock from it for the
purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the "Shares."
1. Sale and Purchase of the Shares.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at a
1
<PAGE> 2
price of $_____ per share (the "Initial Price"), the number of Firm
Shares set forth opposite the name of such Underwriter under the
column "Number of Firm Shares to be Purchased from the Company" on
Schedule I to this Agreement, subject to adjustment in accordance
with Section 11 hereof.
(b) The Company grants to the several Underwriters an option
to purchase, severally and not jointly, all or any part of the Option
Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted
by the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only
to cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on
or before 12:00 noon, New York City time, on the business day before
the Firm Shares Closing Date (as defined below), and from time to
time thereafter within 30 days after the date of this Agreement, in
each case upon written, facsimile or telegraphic notice, or verbal or
telephonic notice confirmed by written, facsimile or telegraphic
notice, by the Representatives to the Company no later than 12:00
noon, New York City time, on the business day before the Firm Shares
Closing Date or at least two business days before the Option Shares
Closing Date (as defined below), as the case may be, setting forth
the number of Option Shares to be purchased and the time and date (if
other than the Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm
Shares to the Representatives for the respective accounts of the Underwriters,
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (same day) funds drawn to the order of the
Company for the shares purchased from the Company, against delivery of the
respective certificates therefor to the Representatives, shall take place at the
offices of CIBC World Markets Corp., at CIBC World Markets Tower, World
Financial Center, New York, New York 10281, at 10:00 a.m., New York City time,
on the third business day following the date of this Agreement, or at such time
on such other date, not later than 10 business days after the date of this
Agreement, as shall be agreed upon by the Company and the Representatives (such
time and date of delivery and payment are called the "Firm Shares Closing
Date").
In the event the option with respect to the Option Shares is
exercised in whole or in part on one or more occasions, delivery by the Company
of the Option Shares to the Representatives for the respective accounts of the
Underwriters and payment of the purchase price thereof in immediately available
funds by wire transfer or by certified or official bank check or checks payable
in New York Clearing House (same day) funds to the Company shall take place at
the offices of CIBC World Markets Corp. specified above at the time and on the
date (which may be the same date as, but in no event shall be earlier than, the
Firm Shares Closing Date) specified in the notice referred to in Section 1(b)
(such time and date of delivery and payment are called the "Option Shares
Closing Date"). The Firm Shares Closing Date and the Option Shares
2
<PAGE> 3
Closing Date are called, individually, a "Closing Date" and, together, the
"Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request at
least two full business days before the Firm Shares Closing Date or, in the case
of Option Shares, on the day of notice of exercise of the option as described in
Section l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a Registration Statement (as hereinafter
defined) on Form S-1 (No. 333-71031), including a preliminary prospectus
relating to the Shares, and such amendments thereof as may have been required to
the date of this Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related Preliminary Prospectus (as hereinafter
defined) have heretofore been delivered by the Company to you. The term
"Preliminary Prospectus" means any preliminary prospectus (as described in Rule
430 of the Rules) included at any time as a part of the Registration Statement
or filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules. The term "Registration
Statement" as used in this Agreement means the initial registration statement
(including all exhibits, financial schedules and information deemed to be a part
of the Registration Statement through incorporation by reference or otherwise),
as amended at the time and on the date it becomes effective (the "Effective
Date") and as thereafter amended by post effective amendments. If the Company
has filed an abbreviated registration statement to register additional Shares
pursuant to Rule 462(b) under the Rules (the "462(b) Registration Statement")
then any reference herein to the Registration Statement shall also be deemed to
include such 462(b) Registration Statement. The term "Prospectus" as used in
this Agreement means the prospectus in the form included in the Registration
Statement at the time of effectiveness or, if Rule 430A of the Rules is relied
on, the term Prospectus shall also include the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules.
The Company understands that the Underwriters propose to make
a public offering of the Shares, as set forth in and pursuant to the Prospectus,
as soon after the Effective Date and the date of this Agreement as the
Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each Preliminary Prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. Representations and Warranties of the Company. The Company
hereby represents and warrants to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement
complied, and on the
3
<PAGE> 4
date of the Prospectus, the date any post-effective amendment to the
Registration Statement becomes effective, the date any supplement or
amendment to the Prospectus is filed with the Commission and each
Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and
the Rules and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder. The Registration Statement did not, as of the Effective
Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and on the other
dates referred to above neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. When any related
preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment thereto
or pursuant to Rule 424(a) of the Rules) and when any amendment
thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus as amended or supplemented complied in
all material respects with the applicable provisions of the
Securities Act and the Rules and did not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading. Notwithstanding the foregoing, none of the
representations and warranties in this paragraph 4(a) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon, and in conformity with, information
herein or otherwise furnished in writing by the Representatives on
behalf of the several Underwriters for use in the Registration
Statement or the Prospectus. With respect to the preceding sentence,
the Company acknowledges that the only information furnished in
writing by the Representatives on behalf of the several Underwriters
for use in the Registration Statement or the Prospectus is the
statements contained under the caption "Underwriting" in the
Prospectus.
(b) The Registration Statement is effective under the
Securities Act and no stop order preventing or suspending the
effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are threatened
under the Securities Act; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules has been
or will be made in the manner and within the time period required by
such Rule 424(b).
(c) The financial statements of the Company (including all
notes and schedules thereto) included in the Registration Statement
and Prospectus present fairly the financial position, the results of
operations, the statements of cash flows and the statements of
stockholders' equity and the other information purported to be shown
therein of the Company at the respective dates and for the respective
periods to which they apply; and such financial statements and
related schedules and notes have been
4
<PAGE> 5
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of the results for such
periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown
therein as at the respective dates and for the respective periods
specified and the summary and selected financial data have been
presented on a basis consistent with the consolidated financial
statements so set forth in the Prospectus and other financial
information.
(d) Ernst & Young LLP, whose reports are filed with the
Commission as a part of the Registration Statement, are and, during
the periods covered by their reports, were independent public
accountants as required by the Securities Act and the Rules.
(e) The Company and each of the Subsidiaries (as hereinafter
defined) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation. The Company and each such subsidiary or other entity
controlled directly or indirectly by the Company (collectively,
"Subsidiaries") is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted by it or location of the assets or
properties owned, leased or licensed by it requires such
qualification, except for such jurisdictions where the failure to so
qualify would not, individually or in the aggregate, have a material
adverse effect on the assets or properties, business, results of
operations or financial condition of the Company (a "Material Adverse
Effect"). The Company does not own, lease or license any asset or
property or conduct any business outside the United States of
America. The Company and each of its Subsidiaries has all requisite
corporate power and authority, and all necessary authorizations,
approvals, consents, orders, licenses, certificates and permits of
and from all governmental or regulatory bodies or any other person or
entity (collectively, the "Permits"), to own, lease and license its
assets and properties and conduct its business, all of which are
valid and in full force and effect, as described in the Registration
Statement and the Prospectus, except where the lack of such Permits
would not have a Material Adverse Effect; the Company and each of its
Subsidiaries has fulfilled and performed in all material respects all
its material obligations with respect to such Permits and no event
has occurred that allows, or after notice or lapse of time would
allow, revocation or termination thereof or results in any other
material impairment of the rights of the Company thereunder. Except
as may be required under the Securities Act and state and foreign
Blue Sky laws, no other Permits are required to enter into, deliver
and perform this Agreement and to issue and sell the Shares.
(f) Each of the Company and its Subsidiaries owns or possesses
adequate and enforceable rights to use all trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, patents, licenses, know-how and other similar rights
and proprietary knowledge (collectively, "Intangibles") necessary for
the conduct of its business. Other than as set forth in the
Registration Statement and the Prospectus, neither the Company nor
any of its Subsidiaries has received any notice of, or is aware of,
any infringement of or conflict with asserted rights of others with
5
<PAGE> 6
respect to any Intangibles.
(g) The Company and each of its Subsidiaries has good and
marketable title in fee simple to all items of real property and good
and marketable title to all personal property described in the
Prospectuses as being owned by it and any real property and buildings
described in the Prospectuses as being held under lease by the
Company and each of its Subsidiaries is held by it under valid,
existing and enforceable leases, free and clear of all liens,
encumbrances, claims, security interests and defects, except such as
are described in the Registration Statement and the Prospectus or
would not have a Material Adverse Effect.
(h) There are no litigation or governmental proceedings to
which the Company or its Subsidiaries is subject or which is pending
or, to the knowledge of the Company, threatened, against the Company
or any of its Subsidiaries, which might have a Material Adverse
Effect, affect the consummation of this Agreement or which is
required to be disclosed in the Registration Statement and the
Prospectus that is not so disclosed.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
described therein, (a) there has not been any material adverse change
with regard to the assets or properties, business, results of
operations or financial condition of the Company; (b) neither the
Company nor its Subsidiaries has sustained any loss or interference
with its assets, businesses or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree which would
have a Material Adverse Effect; and (c) since the date of the latest
balance sheet included in the Registration Statement and the
Prospectus, except as reflected therein, neither the Company nor its
Subsidiaries has (i) issued any securities or incurred any liability
or obligation, direct or contingent, for borrowed money, except such
liabilities or obligations incurred in the ordinary course of
business, (ii) entered into any transaction not in the ordinary
course of business or (iii) declared or paid any dividend or made any
distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its stock.
(j) There is no document, contract or other agreement of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required by the Securities Act or
Rules. Each description of a contract, document or other agreement in
the Registration Statement and the Prospectus accurately reflects in
all respects the terms of the underlying document, contract or
agreement. Each agreement described in the Registration Statement and
Prospectus or listed in the Exhibits to the Registration Statement is
in full force and effect and is valid and enforceable by and against
the Company or a Subsidiary, as the case may be, in accordance with
its terms. Neither the Company nor a Subsidiary, if the Subsidiary is
a party, nor to the Company's
6
<PAGE> 7
knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse
of time or both would constitute such a default, in any such case
which default or event would have a Material Adverse Effect. No
default exists, and no event has occurred which with notice or lapse
of time or both would constitute a default, in the due performance
and observance of any term, covenant or condition, by the Company or
a Subsidiary, if the Subsidiary is a party thereto, of any other
agreement or instrument to which the Company or a Subsidiary is a
party or by which the Company, the Subsidiary or their properties or
business may be bound or affected which default or event would have a
Material Adverse Effect.
(k) Neither the Company nor any of its Subsidiaries is in
violation of any term or provision of its charter or by-laws or of
any franchise, license, permit, judgment, decree, order, statute,
rule or regulation, where the consequences of such violation would
have a Material Adverse Effect.
(l) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or
require any consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any properties or
assets of the Company or any Subsidiary pursuant to the terms of, any
indenture, mortgage, deed of trust or other agreement or instrument
to which the Company or any Subsidiary is a party or by which either
the Company or any Subsidiary or any of their properties or
businesses is bound, or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation applicable to the Company
or any Subsidiary or violate any provision of the charter or by-laws
of the Company or any Subsidiary, except for such consents or waivers
which have already been obtained and are in full force and effect.
(m) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus.
The certificates evidencing the Shares are in due and proper legal
form and have been duly authorized for issuance by the Company. All
of the issued and outstanding shares of Common Stock have been duly
and validly issued and are fully paid and nonassessable. There are no
statutory preemptive or other similar rights to subscribe for or to
purchase or acquire any shares of Common Stock of the Company or its
Subsidiaries or any such rights pursuant to its Certificate of
Incorporation or by-laws or any agreement or instrument to or by
which the Company or any of its Subsidiaries is a party or bound. The
Shares, when issued and sold pursuant to this Agreement, will be duly
and validly issued, fully paid and nonassessable and none of them
will be issued in violation of any preemptive or other similar right.
Except as disclosed in the Registration Statement and the Prospectus,
there is no outstanding option, warrant or other right calling for
the issuance of, and
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<PAGE> 8
there is no commitment, plan or arrangement to issue, any share of
stock of the Company or its Subsidiaries or any security convertible
into, or exercisable or exchangeable for, such stock. The Common
Stock and the Shares conform in all material respects to all
statements in relation thereto contained in the Registration
Statement and the Prospectus. All outstanding shares of capital stock
of each Subsidiary have been duly authorized and validly issued, and
are fully paid and nonassessable and are owned directly by the
Company or by another wholly-owned subsidiary of the Company free and
clear of any security interests, liens, encumbrances, equities or
claims, other than those described in the Prospectus.
(n) No holder of any security of the Company has the right to
have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such
holder during the period ending 180 days after the date of this
Agreement. Each stockholder, director and executive officer of the
Company, Nichols Research Corporation ("Parent") and each executive
officer and director of Parent has delivered to the Representatives
his enforceable written lock-up agreement in the form attached to
this Agreement ("Lock-Up Agreement").
(o) All necessary corporate action has been duly and validly
taken by the Company and the Parent to authorize the execution,
delivery and performance of this Agreement and the issuance and sale
of the Shares. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitute and will
constitute legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective
terms, except (i) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles and (ii) to the extent that rights to
indemnity or contribution under this Agreement may be limited by
Federal and state securities laws or the public policy underlying
such laws.
(p) The Company or any of its Subsidiaries are is not involved
in any labor dispute nor, to the knowledge of the Company, is any
such dispute threatened, which dispute would have a Material Adverse
Effect. The Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or
contractors which would have a Material Adverse Effect. The Company
is not aware of any threatened or pending litigation between the
Company or its Subsidiaries and any of its officers which, if
adversely determined, could have a Material Adverse Effect and has no
reason to believe that such officers will not remain in the
employment of the Company.
(q) No transaction has occurred between or among (i) the
Company and (ii) the Parent, any affiliate of the Company or Parent
and any of the Company's officers or directors or any affiliate or
affiliates of any such officer or director that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
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<PAGE> 9
(r) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale
or resale of any of the Shares.
(s) The Company and its Subsidiaries has filed all Federal,
state, local and foreign tax returns which are required to be filed
through the date hereof, or has received extensions thereof, and has
paid all taxes shown on such returns and all assessments received by
it to the extent that the same are material and have become due, and
there are no tax audits or investigations pending, which if adversely
determined would have a Material Adverse Effect; nor are there any
material proposed additional tax assessments against the Company and
any of its Subsidiaries.
(t) The Shares have been duly authorized for quotation on
Nasdaq National Market, subject to official Notice of Issuance, and a
registration statement has been filed on Form 8-A pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which registration statement complies in all material respects
with the Exchange Act.
(u) The Company has complied with all of the requirements and
filed the required forms as specified in Florida Statutes Section
517.075.
(v) The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results
of operations of, the Company and its Subsidiaries. The Company and
each of its Subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(w) The Company and its Subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are customary in the businesses in which they are
engaged or propose to engage after giving effect to the transactions
described in the Prospectus; and neither the Company nor any
Subsidiary of the Company has reason to believe that it will not be
able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect. Neither the Company nor any
Subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
9
<PAGE> 10
(x) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative
or other governmental body necessary in connection with the execution
and delivery by the Company of this Agreement and the consummation of
the transactions herein contemplated required to be obtained or
performed by the Company (except such additional steps as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or may be necessary to qualify the Shares for public offering
by the Underwriters under the state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(y) There are no affiliations or associations with the NASD
among the Company, the Company's officers or directors or the Parent,
except as set forth in the Registration Statement or otherwise
disclosed in writing to the Representatives of the Underwriters.
(z) (i) Each of the Company and its Subsidiaries is in
compliance in all material respects with all rules, laws and
regulation relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment
("Environmental Law") which are applicable to its business; (ii) none
of the Company or its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under
Environmental Laws; (iii) each of the Company and its Subsidiaries
has received all permits, licenses or other approvals required of it
under applicable Environmental Laws to conduct its business and is in
compliance with all terms and conditions of any such permit, license
or approval; (iv) to the Company's knowledge, no facts currently
exist that will require the Company or its Subsidiaries to make
future material capital expenditures to comply with Environmental
Laws; and (v) no property which is or has been owned, leased or
occupied by the Company or its Subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation of Liability Act of 1980, as amended (42 U.S.C. Section
9601, et. seq.) or otherwise designated as a contaminated site under
applicable state or local law.
(aa) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of proceeds
thereof as described in the Prospectus, will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(bb) Other than as set forth in the Prospectus, the Company's
information technology, which includes, without limitation, its
internal systems, software, hardware and the network connections it
maintains, is Year 2000 Compliant. To the knowledge of the Company,
the information technology of the Company's suppliers, customers,
sub-contractors, payment clearing houses and payors with whom it
electronically interacts, are Year 2000 Compliant, other than
non-compliance which, individually or in the aggregate, would not
have a Material Adverse Effect. "Year 2000 Compliant" means the
information technology is designed to be used prior to, during and
after the calendar Year 2000, and the information technology used
during each such time period will accurately receive,
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<PAGE> 11
provide and process date/time data (including, but not limited to,
calculating, comparing and sequencing) from, into and between the
20th and 21st centuries, including the years 1999 and 2000, and
leap-year calculations and will not malfunction, cease to function,
or provide invalid or incorrect results as a result of date/time
data. The Company has conducted surveys of its managed care clients,
physician practice management clients, suppliers, sub-contractors,
payment clearing houses and payors with whom it electronically
interacts regarding Year 2000 compliance.
(cc) Neither the Company, its Subsidiaries nor any other
person associated with or acting on behalf of the Company or its
Subsidiaries including, without limitation, any director, officer,
agent or employee of the Company or its Subsidiaries has, directly or
indirectly, while acting on behalf of the Company or its Subsidiaries
(i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political
activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended;
or (iv) made any other unlawful payment.
(dd) The Company and each of its Subsidiaries have operated
and currently operate their business in conformity with all
applicable laws, rules and regulations of each jurisdiction in which
it is conducting business, including all state and federal health
care laws, except where the failure to so be in compliance would not
reasonably be expected to have a Material Adverse Effect.
(ee) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable
event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company would have
any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
5 Conditions of the Underwriters' Obligations. The
obligations of the Underwriters under this Agreement are several and not joint.
The respective obligations of the Underwriters to purchase the Shares are
subject to each of the following terms and conditions:
(a) Notification that the Registration Statement has become
effective shall have been received by the Representatives and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 6(a) of this Agreement.
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<PAGE> 12
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be
in effect and no order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission, and
any requests for additional information on the part of the Commission
(to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Commission and the Representatives.
(c) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered
pursuant to Section 5(d) shall be true and correct when made and on
and as of each Closing Date as if made on such date and the Company
shall have performed all covenants and agreements and satisfied all
the conditions contained in this Agreement required to be performed
or satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each Closing
Date a certificate, addressed to the Representatives and dated such
Closing Date, of the chief executive or chief operating officer and
the chief financial officer or chief accounting officer of the
Company to the effect that (i) the signers of such certificate have
carefully examined the Registration Statement, the Prospectus and
this Agreement and that the representations and warranties of the
Company in this Agreement are true and correct on and as of such
Closing Date with the same effect as if made on such Closing Date and
the Company has performed all covenants and agreements and satisfied
all conditions contained in this Agreement required to be performed
or satisfied by it at or prior to such Closing Date, and (ii) no stop
order suspending the effectiveness of the Registration Statement has
been issued and to the best of their knowledge, no proceedings for
that purpose have been instituted or are pending under the Securities
Act.
(e) [Intentionally Blank]
(f) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date
a signed letter from Ernst & Young LLP addressed to the
Representatives and dated, respectively, the Effective Date, the date
of this Agreement and each such Closing Date, in form and substance
reasonably satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Securities Act
and the Rules, that the response to Item 10 of the Registration
Statement is correct insofar as it relates to them and stating in
effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Securities Act and the Rules;
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<PAGE> 13
(ii) on the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the
headings "Summary Financial Information" and "Selected
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Financial
Information," and "Selected Financial Data" included in
the Registration Statement and the Prospectus do not
agree with the corresponding amounts in the audited and
unaudited financial statements from which such amounts
were derived; or
(B) with respect to the Company, there were, at
a specified date not more than five business days prior
to the date of the letter, any increases in the current
liabilities and long-term liabilities of the Company or
any decreases in net income or in working capital or
the stockholders' equity in the Company, as compared
with the amounts shown on the Company's audited balance
sheet for the fiscal year ended 1998 and the nine
months ended May 31, 1999 included in the Registration
Statement; and
(iii) they have performed certain other procedures as
may be permitted under Generally Acceptable Auditing Standards
as a result of which they determined that certain information
of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information
derived from the general accounting records of the Company)
set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with the
accounting records of the Company.
(iv) based upon the procedures set forth in clauses
(ii) and (iii) above and a reading of the amounts included in
the Registration Statement under the headings "Summary
Financial and Other Data" and "Selected Financial Data"
included in the Registration Statement and Prospectus and a
reading of the financial statements from which certain of such
data were derived, nothing has come to their attention that
gives them reason to believe that the "Summary Financial and
Other Data" and "Selected Financial Data" included in the
Registration Statement and Prospectus do not comply as to the
form in all material respects with the applicable accounting
requirements of the Securities
13
<PAGE> 14
Act and the Rules or that the information set forth therein is
not fairly stated in relation to the financial statements
included in the Registration Statement or Prospectus from
which certain of such data were derived are not in conformity
with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and Prospectus.
References to the Registration Statement and the
Prospectus in this paragraph (f) are to such documents as
amended and supplemented at the date of the letter.
(g) The Representatives shall have received on each Closing
Date from Lanier Ford Shaver & Payne, P.C., counsel for the Company,
an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) Each of the Company and its Subsidiaries has been
duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its
incorporation. Each of the Company and its Subsidiaries is
duly qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature
of its businesses makes such qualification necessary, except
for such jurisdictions where the failure to so qualify would
not have a Material Adverse Effect.
(ii) Each of the Company and its Subsidiaries has all
requisite corporate power and authority to own, lease and
license its assets and properties and conduct its business as
now being conducted and as described in the Registration
Statement and the Prospectus and, with respect to the Company,
to enter into, deliver and perform this Agreement and to issue
and sell the Shares other than those required under the
Securities Act and state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital
stock as set forth in the Registration Statement and the
Prospectus under the caption "Capitalization"; the
certificates evidencing the Shares are in due and proper legal
form and have been duly authorized for issuance by the
Company; all of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and
are fully paid and nonassessable and none of them was issued
in violation of any preemptive or other similar right. The
Shares when issued and sold pursuant to this Agreement will be
duly and validly issued, outstanding, fully paid and
nonassessable and none of them will have been issued in
violation of any preemptive or other similar right. To the
best of such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there are no
preemptive rights or any restriction upon the voting or
transfer of any securities of the Company pursuant to the
Company's
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<PAGE> 15
Certificate of Incorporation or by-laws or other governing
documents or any other instrument to which the Company is a
party or by which it may be bound. To the best of such
counsel's knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option,
warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any share of stock
of the Company or any security convertible into, exercisable
for, or exchangeable for stock of the Company. The Common
Stock and the Shares conform in all material respects to the
descriptions thereof contained in the Registration Statement
and the Prospectus. The issued and outstanding shares of
capital stock of each of the Company's Subsidiaries have been
duly authorized and validly issued, are fully paid and
nonassessable and are owned by the Company or by another
wholly owned subsidiary of the Company, free and clear of any
perfected security interest or, to the knowledge of such
counsel, any other security interests, liens, encumbrances,
equities or claims, other than those contained in the
Registration Statement and the Prospectus.
(iv) Each of the Lock-Up Agreements executed by the
Company's directors and officers, the Parent and the executive
directors and officers of Parent has been duly and validly
delivered by such persons and constitutes the legal, valid and
binding obligation of each such person enforceable against
each such person in accordance with its terms, except as the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(v) All necessary corporate action has been duly and
validly taken by the Company and the Parent to authorize the
execution, delivery and performance of this Agreement and the
issuance and sale of the Shares. This Agreement has been duly
and validly authorized, executed and delivered by the Company
and this Agreement constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in
accordance with their respective terms except (A) as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and
by general equitable principles and (B) to the extent that
rights to indemnity or contribution under this Agreement may
be limited by Federal or state securities laws or the public
policy underlying such laws.
(vi) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of
the transactions contemplated hereby (including, without
limitation, the issuance and sale by the Company of the
Shares) will give rise to a right to terminate or accelerate
the due date of any payment due under, or conflict with or
result in the breach of any term or provision of, or
constitute a default (or any event which with notice
15
<PAGE> 16
or lapse of time, or both, would constitute a default) under,
or require consent or waiver under, or result in the execution
or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company or any Subsidiary pursuant
to the terms of any indenture, mortgage, deed trust, note or
other agreement or instrument of which such counsel is aware
and to which the Company or any Subsidiary is a party or by
which either the Company or any Subsidiary or any of their
properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation
of which such counsel is aware or violate any provision of the
charter or by-laws of the Company or any Subsidiary.
(vii) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any term, covenant or condition
by the Company of any indenture, mortgage, deed of trust, note
or any other agreement or instrument to which the Company is a
party or by which it or any of its assets or properties or
businesses may be bound or affected, where the consequences of
such default would have a Material Adverse Effect.
(viii) To the best of such counsel's knowledge, the
Company and its Subsidiaries are not in violation of any term
or provision of its charter or by-laws or any franchise,
license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation would
have a Material Adverse Effect.
(ix) No consent, approval, authorization or order of
any court or governmental agency or regulatory body is
required for the execution, delivery or performance of this
Agreement by the Company or the consummation of the
transactions contemplated hereby or thereby, except such as
have been obtained under the Securities Act and such as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
several Underwriters.
(x) Other than as set forth in the Registration
Statement and the Prospectus, to the best of such counsel's
knowledge, there is no litigation or governmental or other
proceeding or investigation, before any court or before or by
any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the Company
which would have a Material Adverse Effect.
(xi) The statements in the Prospectus under the
captions "Description of Capital Stock," "Liquidity and
Capital Resources," "Risk Factors-If Customers Terminate or
Modify Existing Contracts, It Could Adversely Affect Our
Earnings," "Shares Eligible for Future Sale,"
"Management-Director
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<PAGE> 17
Compensation," "Management-Employment Agreements,"
"Management-Employee Benefit Plans," and "Relationships and
Related Transactions," insofar as such statements constitute a
summary of documents referred to therein or matters of law,
are fair summaries in all material respects and accurately
present the information called for with respect to such
documents and matters. Accurate copies of all contracts and
other documents required to be filed as exhibits to, or
described in, the Registration Statement have been so filed
with the Commission or are fairly described in the
Registration Statement, as the case may be.
(xii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or
supplement thereto (except for the financial statements and
schedules and other financial and statistical data included
therein, as to which such counsel expresses no opinion) comply
as to form in all material respects with the requirements of
the Securities Act and the Rules.
(xiii) The Registration Statement is effective under
the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or
are threatened, pending or contemplated. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule
424(b) under the Securities Act has been made in the manner
and within the time period required by such Rule 424(b).
(xiv) The Shares have been approved for listing on the
Nasdaq National Market.
(xv) The capital stock of the Company conforms in all
material respects to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock."
(xvi) The Company is not an "investment company" or an
entity controlled by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.
(xvii) The agreements to which the Company or any of
the Subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by
the Company and the Subsidiaries (as applicable), except as
the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(xviii)(A) Each of the Company and its Subsidiaries is
in compliance in all material respects with any and all
applicable Environmental Laws; (B) none of the Company or its
Subsidiaries has received any notice from any governmental
17
<PAGE> 18
authority or third party of an asserted claim under any
Environmental Law; (C) each of the Company and its
Subsidiaries has received all permits, licenses or other
approvals required of it under applicable Environmental Laws
to conduct its business and is in compliance with all terms
and conditions of any such permit, license or approval, except
where such failure to receive required permits, licenses or
other approvals or failure to comply with the terms and
conditions of such permits, licenses or other approvals would
not, singly or in the aggregate, have a Material Adverse
Effect; and (D) no property which is or has been owned, leased
or occupied by the Company or its Subsidiaries has been
designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation of Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or
local law.
To the extent deemed advisable by such counsel, they may rely
as to matters of fact on certificates of responsible officers of the Company and
public officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the State of Alabama, the General Corporation Law of the State of Delaware and
the Federal laws of the United States; provided that such counsel shall state
that in their opinion the Underwriters and they are justified in relying on such
other opinions. Copies of such certificates and other opinions shall be
furnished to the Representatives and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
specified in the foregoing opinion), on the basis of the foregoing, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective (except with
respect to the financial statements and notes and schedules thereto and other
financial data, as to which such counsel need express no belief) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus as amended or supplemented (except with respect to the
financial statements, notes and schedules thereto and other financial data, as
to which such counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) All proceedings taken in connection with the sale of the
Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives,
and their counsel and the Underwriters shall have received from
Alston & Bird LLP a favorable opinion, addressed to the
Representatives and dated such Closing Date, with respect to the
Shares, the Registration Statement and
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<PAGE> 19
the Prospectus, and such other related matters, as the
Representatives may reasonably request, and the Company shall have
furnished to Alston & Bird LLP such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
(i) If the Shares have been qualified for sale in Florida, the
Representatives shall have received on each Closing Date
certificates, addressed to the Representatives, and dated such
Closing Date, of an executive officer of the Company, to the effect
that the signer of such certificate has reviewed and understands the
provisions of Section 517.075 of the Florida Statutes, and represents
that the Company has complied, and at all times will comply, with all
provisions of Section 517.075 and further, that as of such Closing
Date, neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located
in Cuba.
(j) The Representatives shall have received copies of the
Lock-up Agreements executed by each entity or person described in
Section 4(n).
(k) The Company and the Parent shall have furnished or caused
to be furnished to the Representatives such further certificates or
documents as the Representatives shall have reasonably requested.
6. Covenants of the Company.
(a) The Company covenants and agrees as follows:
(i) The Company shall prepare the Prospectus in a form
approved by the Representatives and file such Prospectus
pursuant to Rule 424(b) under the Securities Act not later
than the Commission's close of business on the second business
day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (i) when any amendment to the
Registration Statement shall have become effective, (ii) of
any request by the Commission for any amendment of the
Registration Statement or the Prospectus or for any additional
information, (iii) of the prevention or suspension of the use
of any preliminary prospectus or the Prospectus or of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (iv) of
the receipt by the Company of any notification with respect to
the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall not file any
amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and
shall not
19
<PAGE> 20
file any such proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use its
best efforts to prevent the issuance of any such stop order
and, if issued, to obtain as soon as possible the withdrawal
thereof.
(iii) If, at any time when a prospectus relating to the
Shares is required to be delivered under the Securities Act
and the Rules, any event occurs as a result of which the
Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the
light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend or supplement
the Prospectus to comply with the Securities Act or the Rules,
the Company promptly shall prepare and file with the
Commission, subject to the second sentence of paragraph (ii)
of this Section 7(a), an amendment or supplement which shall
correct such statement or omission or an amendment which shall
effect such compliance.
(iv) The Company shall make generally available to its
security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12-month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs (or 90 days
if such 12-month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the
Company, covering such 12-month period, which shall satisfy
the provisions of Section 11(a) of the Securities Act or Rule
158 of the Rules.
(v) The Company shall furnish to the Representatives
and counsel for the Underwriters, without charge, signed
copies of the Registration Statement (including all exhibits
thereto and amendments thereof) and to each other Underwriter
a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery
of a prospectus by an Underwriter or dealer may be required by
the Securities Act or the Rules, as many copies of any
preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representatives may
reasonably request.
(vi) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale in connection with the offering
under the laws of such jurisdictions as the Representatives
may designate and shall maintain such qualifications in effect
so long as required for the distribution of the Shares;
provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a
foreign corporation or to execute a general consent to service
of process in any jurisdiction or subject itself to taxation
as doing business in any jurisdiction.
20
<PAGE> 21
(vii) For a period of five years after the date of
this Agreement, the Company shall supply to the
Representatives, and to each other Underwriter who may so
request in writing, copies of such financial statements and
other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class
of its capital stock and to furnish to the Representatives a
copy of each annual or other report it shall be required to
file with the Commission (including the Report on Form SR
required by Rule 463 of the Rules).
(viii) Without the prior written consent of CIBC World
Markets Corp., for a period of 180 days after the date of this
Agreement, the Company and each of its individual directors
and executive officers shall not issue, sell or register with
the Commission (other than on Form S-8 or on any successor
form), or otherwise dispose of, directly or indirectly, any
equity securities of the Company (or any securities
convertible into, exercisable for or exchangeable for equity
securities of the Company), except for the issuance of the
Shares pursuant to the Registration Statement and the issuance
of shares pursuant to the Company's existing stock option plan
or bonus plan as described in the Registration Statement and
the Prospectus. In the event that during this period, (i) any
shares are issued pursuant to the Company's existing stock
option plan or bonus plan that are exercisable during such 180
day period or (ii) any registration is effected on Form S-8 or
on any successor form relating to shares that are exercisable
during such 180 period, the Company shall obtain the written
agreement of such grantee or purchaser or holder of such
registered securities that, for a period of 180 days after the
date of this Agreement, such person will not, without the
prior written consent of CIBC World Markets Corp., offer for
sale, sell, distribute, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, or exercise any
registration rights with respect to, any shares of Common
Stock (or any securities convertible into, exercisable for, or
exchangeable for any shares of Common Stock) owned by such
person.
(ix) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market (including
any required registration under the Exchange Act).
(x) The Company shall file timely and accurate
reports in accordance with the provisions of Florida Statutes
Section 517.05, or any successor provision, and any regulation
promulgated thereunder, if at any time after the Effective
Date, the Company or any of its affiliates commences engaging
in business with the government of Cuba or any person or
affiliate located in Cuba.
(xi) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of
Proceeds" in the Prospectus.
21
<PAGE> 22
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and
expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement
including those relating to: (i) the preparation, printing, filing
and distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (ii) the
preparation and delivery of certificates for the Shares to the
Underwriters; (iii) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the
various jurisdictions referred to in Section 7(a)(vi), including the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including
costs of shipping and mailing) to the Representatives and to the
Underwriters of copies of each preliminary prospectus, the Prospectus
and all amendments or supplements to the Prospectus, and of the
several documents required by this Section to be so furnished, as may
be reasonably requested for use in connection with the offering and
sale of the Shares by the Underwriters or by dealers to whom Shares
may be sold; (v) the filing fees of the NASD in connection with its
review of the terms of the public offering and reasonable fees and
disbursements of counsel for the Underwriters in connection with such
review; (vi) the furnishing (including costs of shipping and mailing)
to the Representatives and to the Underwriters of copies of all
reports and information required by Section 6(a)(vii); (vii)
inclusion of the Shares for quotation on the Nasdaq National Market;
and (viii) all transfer taxes, if any, with respect to the sale and
delivery of the Shares by the Company to the Underwriters. Subject to
the provisions of Section 9, the Underwriters agree to pay, whether
or not the transactions contemplated hereby are consummated or this
Agreement is terminated, all costs and expenses incident to the
performance of the obligations of the Underwriters under this
Agreement not payable by the Company pursuant to the preceding
sentence, including, without limitation, the fees and disbursements
of counsel for the Underwriters.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding
or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other Federal
or state law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities arise out of or are based
upon (i) any untrue statement or alleged
22
<PAGE> 23
untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto, or arise out of or are based
upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) in whole or in part upon any
breach of the representations and warranties set forth in Section 4
hereof, or (iii) in whole or in part upon any failure of the Company
to perform any of its obligations hereunder or under law; provided,
however, that such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account
of any losses, claims, damages or liabilities arising from the sale
of the Shares to any person by such Underwriter if such untrue
statement or omission or alleged untrue statement or omission was
made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon and
in conformity with information furnished in writing to the Company by
the Representatives on behalf of any Underwriter specifically for use
therein. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company and each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of
the Company, and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only insofar as such
losses, claims, damages or liabilities arise out of or are based upon
any untrue statement or omission or alleged untrue statement or
omission which was made in any preliminary prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, contained in the last paragraph of the cover page
and the statements contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each
Underwriter to indemnify the Company (including any controlling
person, director or officer thereof) shall be limited to the net
proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party
in respect of which a claim is to be made against an indemnifying
party or parties under this Section, notify each such indemnifying
party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided
for in Section 8(a) or 8(b) shall be available to any party who shall
fail to give notice as provided in this Section 8(c) if the party to
whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give
such notice but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party for contribution
or otherwise than under this Section. In case any such action, suit
or proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of
23
<PAGE> 24
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense
thereof and the approval by the indemnified party of such counsel,
the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses, except as provided below and except
for the reasonable costs of investigation subsequently incurred by
such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by
the indemnifying parties, (ii) the indemnified party shall have
reasonably concluded that there may be a conflict of interest between
the indemnifying parties and the indemnified party in the conduct of
the defense of such action (in which case the indemnifying parties
shall not have the right to direct the defense of such action on
behalf of the indemnified party) or (iii) the indemnifying parties
shall not have employed counsel to assume the defense of such action
within a reasonable time after notice of the commencement thereof, in
each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying parties. An indemnifying party shall not
be liable for any settlement of any action, suit, proceeding or claim
effected without its written consent, which consent shall not be
unreasonably withheld or delayed.
8. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 7(a) or 7(b) is due in accordance with its terms but for any reason is
held to be unavailable to or insufficient to hold harmless an indemnified party
under Section 7(a) or 7(b), then each indemnifying party shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled hereunder
to contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company or
the Underwriters shall be determined by reference to, among
24
<PAGE> 25
other things, whether the untrue or alleged untrue statement of a material fact
related to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters) be
liable or responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder; and (ii) the
Company shall be liable and responsible for any amount in excess of such
underwriting discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of the Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) in the immediately preceding sentence of this Section 8. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with respect
to the Shares to be purchased on a Closing Date by the Representatives by
notifying the Company at any time
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the
future materially disrupt, the securities markets; (ii) if there has
occurred any new outbreak or material escalation of hostilities or
other calamity or crisis the effect of which on the financial markets
of the United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as
to make it, in the judgment of the Representatives, inadvisable or
25
<PAGE> 26
impracticable to market the Shares; (iv) if trading in the Shares has
been suspended by the Commission or trading generally on the New York
Stock Exchange, Inc., on the American Stock Exchange, Inc. or the
Nasdaq National Market has been suspended or limited, or minimum or
maximum ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities have been required, by said
exchanges or by order of the Commission, the National Association of
Securities Dealers, Inc., or any other governmental or regulatory
authority; or (v) if a banking moratorium has been declared by any
state or Federal authority; or (vi) if, in the judgment of the
Representatives, there has occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company shall not be under any liability to any Underwriter, and
no Underwriter shall be under any liability to the Company, except that (y) if
this Agreement is terminated by the Representatives or the Underwriters because
of any failure, refusal or inability on the part of the Company to comply with
the terms or to fulfill any of the conditions of this Agreement, the Company
will reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in contemplation
of performing their obligations hereunder and (z) no Underwriter who shall have
failed or refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.
10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 10) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated
to purchase such Shares on the terms herein set forth in proportion
to their respective obligations hereunder; provided, that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section
11 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
26
<PAGE> 27
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to one additional business day
within which it may, but is not obligated to, find one or more
substitute underwriters reasonably satisfactory to the
Representatives to purchase such Shares upon the terms set forth in
this Agreement.
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of not
more than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(b),
7, 8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its respective
officers and of the Underwriters set forth in or made pursuant to this Agreement
shall remain in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or the Company or any of the officers, directors
or controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing
and mailed or delivered or by telephone or telegraph if subsequently confirmed
in writing, (a) if to the Representatives, c/o CIBC World Markets Corp., CIBC
World Markets Tower, World Financial Center, New York, New York 10281 Attention:
Peter J. Crowley, with a copy to Alston & Bird LLP, One Atlantic Center, 1201
West Peachtree Street, Atlanta, Georgia 30309-3424 Attention: J. Vaughan Curtis,
and (b) if to the Company, to its agent for service as such agent's address
27
<PAGE> 28
appears on the cover page of the Registration Statement with a copy to Lanier
Ford Shaver & Payne, P.C., P.O. Box 2087, Huntsville, Alabama 35804 Attention:
John R. Wynn.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
28
<PAGE> 29
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
NICHOLS TXEN CORPORATION
By
--------------------------
Title:
Confirmed:
CIBC WORLD MARKETS CORP.
- -----------------------------------
Acting severally on behalf of itself and as representative of the several
Underwriters named in Schedule I annexed hereto.
By CIBC WORLD MARKETS CORP.
By
------------------------------
Title:
29
<PAGE> 30
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares to
Name Be Purchased
---- ------------
<S> <C>
CIBC World Markets Corp.
Friedman, Billings, Ramsey & Co.
The Robinson-Humphrey Company, LLC
-----------------------------------
---------------
=======
Total
</TABLE>
30
<PAGE> 1
EXHIBIT 10.21
NEIC NETWORKED PARTNER AGREEMENT
FOR CLEARINGHOUSE SERVICES
AGREEMENT between National Electronic Information Corporation with an address
at 500 Plaza Drive, Secaucus, New Jersey 07094 (hereinafter called "NEIC") and
Nichols Select with an address at 1801 First Avenue South, Birmingham, AL 35233
(hereinafter called "Vendor").
A. DEFINITIONS AND FEES
1. Effective Date for all purposes of this agreement shall mean ____________
or, if no date is stated, the date this document is signed by NEIC.
2. NEIC Services
For all purposes of this agreement, the term NEIC Services shall mean
those services selected below as described in the NEIC Service Description
Documentation for such Services identified in Section B.3.1 ("Service
Documentation") and related documentation and materials in connection with
transactions submitted to entities which may NEIC's standard fees to receive
transactions from the NEIC Services ("NEIC Standard Payors") or to entities
which pay NEIC reduced fees to receive transactions from the NEIC Services
("NEIC Pass Through Payors") as each category is identified from time to time
in the NEIC Transaction Specifications ("Transaction Specifications") then in
effect, which NEIC Standard Payors and NEIC Pass Through Payors are hereinafter
called NEIC Participating Payors:
a. Batch: [X] Medical Claims [ ] Rosters
[ ] Hospital Claims [ ] Encounters
[ ] Dental Claims [ ] Other
b. On-Line: [ ] Eligibility [ ] Utilization Management
[ ] Other
c. Other: [X] All Payor Services for transactions with payors which
are not NEIC Participating Payors -- Terms and Fees
Governed by Separate Rider
[X] Electronic Remittance Advice ("ERA") -- Terms and Fees
Governed by Separate Rider
[ ] NEIC ACU-CLAIM(R) Software -- Terms and Fees Governed
by Separate Rider
3. Annual Service Fees: First Year $3,600
Subsequent Year [X] $3,600 [ ] $5,000
4. Changes in Services and Fees
The services and fees set forth above may be changed from time to time by
a writing signed by both parties without otherwise changing any of the terms or
conditions of this agreement, except as may be stated in such writing.
<PAGE> 2
B. GENERAL TERMS AND CONDITIONS
1. License
1.1 Subject to the terms and conditions of this agreement, NEIC grants to
Vendor a non-exclusive and non-transferable right for the term of this
agreement to use the NEIC Services only in accordance with the Service
Documentation. No rights are granted to the NEIC Services except as explicitly
set forth in this agreement. Any software furnished to Vendor by NEIC in
connection with the NEIC Services (other than NEIC ACU-CLAIM which, if selected
pursuant to Section A.2.c above, shall be governed by a separate Rider) shall
not be governed by this agreement but instead shall be governed by the
agreement accompanying such software.
1.2 This license is valid for use of the NEIC Services only at one physical
site owned or managed by or under the control of Vendor for transactions
generated by Vendor or its customers ("Customers").
1.3 NEIC reserves the right from time to time in its sole discretion, without
any liability to Vendor or its Customers, to suspend, revise, modify, or update
any part of the NEIC Services; provided, however, that NEIC shall use
reasonable efforts to notify Vendor of any such event 90 days prior to its
effective date and NEIC shall furnish Vendor with appropriate documentation in
connection therewith with reasonable promptness.
2. Fees
2.1 The first year's Annual Service Fee Identified in Section A.3 is payable to
NEIC upon execution by Vendor of this agreement and shall be for services
during the period from the Effective Date through December 31, 1996. The Annual
Service Fee for each subsequent year shall be due on January 1 of such year and
shall be for services from that date through the following December 31.
Notwithstanding the foregoing, the Annual Service Fee (other than the first
year's Annual Service Fee) shall be (i) waived if for the entire 12 month
period preceding the date such Fee is due or such portion thereof during which
Vendor submitted claims to the NEIC Services pursuant to this agreement (either
hereinafter called the "Measurement Period"), Vendor was qualified as either a
Gold Level or Platinum Level Networked Vendor, or (ii) reduced (to a maximum of
the amount of such fee) by 3 cents for each claim submitted to and accepted by
the NEIC Services from Vendor during the Measurement Period, which claim is to
be submitted by the NEIC Services to NEIC Standard Payors, provided no more
than 10,000 claims of a specific claim type in any calendar month may be applied
to such reduction.
2.2 Any transaction charge pursuant to Sections B.7.6 and B.9.3 imposed on
Vendor shall be invoiced by NEIC on a monthly basis. Accompanying such invoice
shall be a report identifying the number of transactions on which such invoice
is based.
2.3 All fees and any other charges hereunder are subject to increase by NEIC
once each calendar year, provided that NEIC gives 90 days prior notice to
Vendor of any such increase and, provided further, that the fees and charges
then imposed on Vendor by NEIC shall not exceed those then imposed on any other
entity using the NEIC Services and providing substantially similar services as
Vendor ("NEIC Vendor") with substantially equivalent transaction volume and
arrangements with NEIC. Any change in the Annual Service Fee shall be effective
with respect to the next such Fee due from Vendor hereunder.
2.4 Any technical support services requested in writing by Vendor which are
not required to be performed by NEIC hereunder shall be subject to the
availability of NEIC's technical staff and shall be billed at NEIC's then
standard time and material rates plus out-of-pocket expenses.
2.5 Any optional enhancements, modifications, features, modules or products
that may from time to time be announced by NEIC with respect to the NEIC
Services will be offered to Vendor and, if Vendor accepts such enhancements,
modifications, features, modules or products, Vendor will be responsible for
the charge, if any, imposed by NEIC therefor.
2.6 Vendor shall be responsible for any state, local and federal taxes
(excluding any such taxes imposed on NEIC's income) applicable to any of the
services or materials furnished by NEIC under this agreement, whether imposed
now or later by the applicable taxing authority, even if such imposition occurs
after the termination of this agreement.
2.7 All charges hereunder will be due within 30 days of the date of invoice
therefor.
3. NEIC Deliverables and Obligations
3.1 NEIC has previously delivered to Vendor the Service Documentation and
shall provide Vendor reasonably promptly after the Effective Date the following:
a. One copy of the applicable NEIC Transaction Specifications
("Transaction Specifications"); and
b. One copy of the NEIC Information Handbook (the "NEIC Handbook").
3.2 NEIC will provide Vendor with a local telephone number or alternative 800
number for access by Vendor (on a dial-up telecommunications basis) to the NEIC
central processing facility for use of the NEIC Services.
3.3 The NEIC Services will operate during hours reasonably specified by NEIC
from time to time in the then relevant Service Documentation.
3.4 NEIC shall provide Vendor ongoing support through telephone consultation
for each of the NEIC Services as described in the then relevant Service
Documentation. NEIC shall provide a local telephone number or 800 number for
access to the NEIC technical support facility for this purpose. Vendor shall be
responsible for any of its long distance telephone charges in connection with
this support. In addition, if determined to be necessary by NEIC, NEIC shall
provide on-site visits to assist Vendor in the use of the NEIC Services. NEIC
reserves the right to charge for such visits requested by Vendor at NEIC's then
time and material rates.
3.5 NEIC shall use reasonable efforts to correct any errors identified by
Vendor in any documentation provided by NEIC and NEIC shall update such
documentation periodically as NEIC determines to be necessary to correct any
documentation errors or to reflect changes in the NEIC Services.
4. NEIC's Marketing Support for Networked Vendors
4.1 NEIC shall identify Vendor to NEIC Participating Payors as an NEIC
Networked Vendor for the NEIC Services in case any such Payor wishes to make a
referral to a vendor.
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4.2 NEIC shall offer to Vendor participation in the following special NEIC
Networked Vendor Support Programs as described in and subject to the terms and
conditions of the Networked Vendor Program Document then in effect:
a. National advertising;
b. Availability on request of NEIC developed marketing materials;
c. Account management and sales support;
d. Participation in applicable NEIC sponsored seminars;
e. Referral to Vendor of sales leads for the NEIC Services in Vendor's
applicable geographic territory which are received by NEIC through
unsolicited telephone calls or in responses to NEIC general
advertising; and
f. 25% discount on admission fees charged at any NEIC sponsored
conferences for two participants.
4.3 If Vendor qualifies as a Gold Level Networked Vendor for one or more
claim types, NEIC shall offer to Vendor in addition to the Programs identified
in Section B.4.2 the following additional programs as described in and subject
to the terms and conditions of the Networked Vendor Program Document then in
effect:
a. Participation in NEIC promotional programs for the applicable claim
type(s) such as incentive programs, direct mail and trade show
support;
b. Participation in NEIC regional advertising for the applicable
claim type(s);
c. Additional copies of NEIC marketing material; and
d. An additional 25% discount (totaling 50% discount) on admission
fees charged at any NEIC sponsored conferences for two
participants.
4.4 If Vendor qualifies as a Platinum Level Networked Vendor for one or
more claim types, in addition to the Programs identified in Sections B.4.2 and
B.4.3, Vendor shall participate in the following additional programs as
described in and subject to the terms and conditions of the Networked Vendor
Program Document then in affect:
a. Telemining support for the applicable claim type(s);
b. Free attendance for two participants at any NEIC sponsored
conferences in lieu of the discounts referenced in Section B.4.2.f
and B.4.3.d; and
c. Additional copies of NEIC marketing materials.
5. NEIC Financial Support for Networked Vendors
5.1 NEIC shall pay to Vendor the following amounts for each claim submitted
by Vendor to the NEIC Services and accepted by the NEIC Services in any calendar
month, which claims is to be submitted by the NEIC Services to an NEIC Standard
Payor (a "Qualifying Claim") above the thresholds per claim type (i.e. hospital,
medical or dental) identified below:
a. If Vendor qualifies as a Silver Level Networked Vendor, NEIC shall
pay 3 cents for each such Qualifying Claim above 10,000 Qualifying
Claims of such claim type submitted and accepted during such month;
b. If Vendor qualifies as a Gold Level Networked Vendor, NEIC shall
pay 5 cents for each such medical or hospital Qualifying Claim and
3 cents for each such dental Qualifying Claim above 10,000
Qualifying Claims of the applicable claim type submitted and
accepted during such month; and
c. If Vendor qualifies as a Platinum Level Networked Vendor, NEIC
shall pay 5 cents for each such medical or hospital Qualifying
Claim and 3 cents for each such dental Qualifying Claim with
respect to qualifying Claims in excess of 10,000 Qualifying Claim
of the applicable claim type but less than 25,001 qualifying
Claims of such claim type submitted and accepted during such
month and 7.5 cents for each such medical or hospital Qualifying
Claim and 5 cents for each such dental Qualifying Claim in excess
of 25,000 qualifying Claims of the applicable claim type submitted
and accepted in such month.
5.2 If Vendor is submitting more than 25,000 Qualifying Claims in any
calendar month of a particular claim type, NEIC shall pay Vendor the amount due
Vendor pursuant to Section 8.5.1 with respect to Qualifying Claims of such
month within 35 days following the end of such month. Otherwise, NEIC shall pay
Vendor the amount due Vendor pursuant to Section B.5.1 with respect to
Qualifying Claims of such month at the later of the date Vendor is to receive a
payment from NEIC pursuant to the prior sentence of this Section B.5.2 or
within 35 days following the end of that calendar quarter. Each payment made
pursuant to this Section 8.5.2 shall be accompanied by a report identifying the
qualifying Claims on which such payment is based.
6. Vendor Acknowledgments and Authorizations
6.1 Vendor acknowledges that it has reviewed the Service Documentation,
has determined it to be satisfactory for its needs as is and accepts the
current performance of the NEIC Services as described in said Documentation.
6.2 Vendor acknowledges that (i) the NEIC Services will reject any
transaction which fails to satisfy NEICs then current standard edits published
in NEICs then relevant Transaction Specifications for such transaction; and
(ii) NEIC Participating Payors have the right to reject or pend any transaction
that fails to meet administration criteria then ordinarily employed by such
Payor for such transaction.
6.3 Vendor acknowledges that all programs, specifications, materials and
forms (including any training materials, the NEIC Handbook and the Transaction
Specifications) supplied to Vendor by NEIC hereunder (hereafter called +NEIC
Materials+) are proprietary to NEIC, shall be subject to the protections of
Section B.14.2 and that NEIC retains all rights to and ownership of such
Materials.
6.4 Vendor hereby authorizes NEIC to use Vendor's name in any and all
promotion, marketing or advertising which NEIC will be utilizing for any of the
NEIC Services.
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7. Vendor General Obligations
7.1 Vendor shall not use, disclose, reproduce or exploit NEIC Materials
except as required for the use of the NEIC Services for itself or its
Customers, Vendor shall not disclose specifications to any Customer or other
entity, and Vendor shall not make or reproduce excerpts of any NEIC Materials.
Vendor further agrees to protect all NEIC Materials in accordance with means
which shall be no less protective than the means Vendor then uses to protect its
own confidential information and Vendor shall not permit any claims, items or
encumbrances to be created against such Materials. Vendor shall also cooperate
with NEIC (at NEIC's expense) in any claim or litigation against third parties
that NEIC may determine to be appropriate to protect or enforce NEIC's rights
respecting any NEIC Materials or Services.
7.2 Vendor shall use the NEIC Services only in accordance with the
procedures, data element standards, formats, codes, protocols and edits set
forth in the then relevant Transaction Specifications for the applicable
transactions and only to entities specifically identified by NEIC for such
purpose in writing or electronically. Vendor shall also maintain data
transmitted through the NEIC Services for a period of 30 days from the date of
transmittal and retransmit any such data upon request from NEIC given during
such 30-day period.
7.3 Vendor shall promptly report to NEIC any performance problems related to
the NEIC Services including a description of the circumstances surrounding
their occurrence.
7.4 All materials prepared by or on behalf of Vendor that contains any
reference to NEIC or any NEIC Services must be approved in writing by NEIC
prior to release. In addition, Vendor shall preserve on all copies of NEIC
Materials prepared by it or on its behalf with respect to any aspect of the
NEIC Services all copyright or trademark notices placed by NEIC on the original
of such Materials.
7.5 Vendor shall be solely responsible for acquiring, operating and
maintaining the hardware and software required for its use of the NEIC
Services. Vendor shall conform to changes in the Transaction Specifications
resulting from any non-optional change, feature, enhancement or module of the
NEIC Services furnished without charge by NEIC in or to the NEIC Services
within the number of days (not less than 90) which NEIC shall designate in the
notice regarding such change. All expenses of any nature incurred by Vendor in
connection with its use of the NEIC Services or satisfying its obligations
under this agreement, including costs of any systems modifications and
enhancements necessary for implementing Vendor's interface with or use of the
NEIC Services shall be the responsibility of Vendor.
7.6 Vendor agrees to an NEIC Services rejected transaction rate of 2% or less
with respect to all transactions within 90 days after Vendor begins to submit
transactions through NEIC. A rejected transaction for this purpose shall mean a
transaction which fails to be transmitted through the NEIC Services as a result
of a failure to comply with the requirements of Section B.7.2. NEIC service
personnel shall provide reasonable assistance to Vendor personnel to identify
the reasons for transaction rejection and actions that will remedy the problem
and Vendor shall use its best efforts to take such actions. If within 30 days
following NEIC's notice to Vendor of its excessive rejected transaction rate
such transaction rate is not brought to 2% or less, NEIC shall have the right to
charge Vendor thereafter a fee of 25 cents for each rejected transaction in
excess of 2% in any month.
7.7 Vendor shall submit transactions to NEIC within 24 hours of receipt
thereof. Alternatively, Vendor may inform its Customers in writing that the
submission interval is less frequent than daily, and provide a copy of such
communication to NEIC.
7.8 Vendor shall reference NEIC in all applicable advertising, promotion or
marketing material and contracts related to Vendor's transaction submission
service. A special NEIC logo will be provided to Vendor for its use (subject to
requirements for use of such logo then set forth in the Networked Vendor
Program Document) in advertising, promotion or marketing materials once NEIC
receives 1000 transactions successfully transmitted by Vendor's Customers.
7.9 Vendor's system and services shall enable all of its Customers to use all
of the NEIC Services including the capacity to receive all reports furnished by
such Services.
7.10 Vendor shall submit to the NEIC Services all electronic media
transactions handled by Vendor in the course of its business that are to be
sent to NEIC Participating Payors. Furthermore, Vendor shall not market or
contract for direct transmission of electronic transactions to or with any
entity which is capable of becoming an NEIC Participating Payor unless Vendor
first gives NEIC notice thereof and, if NEIC within 20 days of Vendor's notice
advises Vendor in writing that NEIC wishes to contract with such entity. Vendor
shall give NEIC 90 days from the date of Vendor's notice to effect a contract
with such entity to become an NEIC Participating Payor before Vendor markets
to or contracts with such entity for direct transmission of electronic
transactions.
7.11 Vendor shall make no representations or warranties to any other entity
with respect to the NEIC Services which are inconsistent with the
representations or warranties provided by NEIC hereunder.
8. Vendor's Obligations With Respect to Customers
8.1 Vendor shall inform each and every one of its Customers or prospective
Customers that a right to submit transactions through the NEIC Services may be
acquired through agreement with Vendor.
8.2 Vendor shall furnish to each Customer whose transactions are or may be
submitted through the NEIC Services all training and instruction, including
retraining and all necessary information, that may be necessary or appropriate
to enable assigned employees of such Customer to act to cause the timely,
complete and error-free submission of such transactions through the NEIC
Services in accordance with the then applicable NEIC technical and edit
requirements for such submission. Vendor further agrees to provide all
appropriate ongoing support to its Customers for the use of the NEIC Services,
including instructions and training on how to retrieve and interpret the NEIC
output reports.
8.3 Vendor shall inform each Customer wishing to have its transactions
submitted through the NEIC Services that (i) NEIC will reject any transaction
which fails to satisfy NEIC's then current technical and edit requirements for
such transaction, and (ii) NEIC Participating Payors have the right to reject
or pend any transactions that fail to meet administration criteria ordinarily
employed by such Payor for such transaction.
8.4 Vendor shall require each Customer to comply with any then applicable
law or industry practice and to secure any authorizations then required by
applicable law, industry practice or otherwise in connection with its
transaction submission process, and to maintain transaction data transmitted
through NEIC and afford NEIC Participating Payors access thereto in accordance
with the procedures then required by applicable law or industry practice.
8.5. Vendor hereby acknowledges and agrees that none of its Customers shall
directly use the NEIC Services or be given access to any NEIC Materials, with
NEIC's prior written consent.
8.6 Vendor shall distribute NEIC's output reports to its Customers within
one business day of Vendor's receipt of such reports from NEIC. Alternatively,
Vendor may inform its Customers in writing that the distribution interval will
be less frequent than daily, and provide a copy of such communication to NEIC.
8.7 Vendor shall fully support claims status messaging, NEIC's Network News,
and all relevant provider reports as specified in the then applicable
Transaction Specifications.
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9. SPECIAL OBLIGATIONS RELATING TO ON LINE SERVICES
If Vendor and NEIC have agreed by marking the applicable box in Section A.2.b
of this agreement that Vendor shall enable its Customers, and shall have the
right to license its Customers, to use the On Line Services as part of the NEIC
Services pursuant to the then applicable Transaction Specifications for such
Services, the following provisions shall apply only to such On Line Services:
9.1 If requested by Vendor in writing, NEIC shall furnish to Vendor a monthly
Customer specific report setting forth the number of transactions submitted by
each Customer of Vendor during the applicable month.
9.2 Vendor shall comply with any and all password security requirements of the
then applicable Transaction Specifications for On Line Services transactions
applicable to Vendor and shall require each of its Customers to comply with the
password security requirements of the then applicable Transaction
Specifications for On Line Services transactions applicable to such Customer.
9.3 Vendor shall cause each of its Customers to direct all eligibility
requests only to the Payor which such Customer reasonably believes is the
applicable Payor for the applicable patient. It is acknowledged that such
Customer in compliance with this requirement should not make an eligibility
request to more than three non-governmental Payors for the same patient within
any 24 hour period. Accordingly, without limiting any other remedy NEIC may then
have including the right of termination, NEIC shall have the right to charge
Vendor $1.50 for each eligibility request submitted by one of Vendor's
Customers to a non-governmental Payor beyond the first three non-governmental
Payors for the same patient within any 24 hour period.
10. SPECIAL OBLIGATIONS TO ACHIEVE GOLD OR PLATINUM NEIC NETWORKED LEVELS
10.1 To qualify as a Gold Level Networked Vendor with respect to one or more
claim types selected in Section A.2.(a):
a. Vendor must support, promote and enable all of its applicable Customers
to use on a continuous basis through its system one of the following
transaction types through the NEIC Services from which NEIC receives
each calendar month at least 1000 transactions of such transaction type
which are not rejected: ERA, Rosters, Eligibility or Utilization
Management; and
b. 10,000 or more claims of the applicable claim type(s) per calendar month
must be submitted by Vendor to and accepted by the NEIC Services.
10.2 To qualify as a Platinum Level Networked Vendor with respect to one or
more claim types selected in Section A.2.(a);
a. Vendor must support and enable its Customers to use on a continuous
basis through its system all of the following of the transaction types
through the NEIC Services from which NEIC receives each calendar month
at least 1000 transactions of each such transaction type which are not
rejected: ERA, Rosters (if applicable to Vendor's Customers),
Eligibility and any new transaction type applicable to Vendor's
Customers within six months from the date NEIC is effecting live
transactions of such transaction type; and
b. 25,000 or more claims of the applicable claim type(s) per calendar month
must be submitted by Vendor to and accepted by the NEIC Services.
10.3 Vendor shall be automatically moved from Silver, Gold or Platinum Levels
set forth herein to a higher Level commencing on the first day of a calendar
month based on Vendor's satisfaction of the special criteria for such higher
Level during the prior month. In the event that Vendor fails to satisfy any of
its obligations to qualify for its then Level as set forth herein, NEIC may, in
its discretion, reduce Vendor's status in a lower Level, provided that, prior
to such reduction, NEIC has given notice to Vendor of Vendor's failure to
comply with the obligations of its then existing Level and Vendor has failed to
remedy the failure within 30 days of such notice. Any such movement to a lower
Level shall take effect automatically commencing with the first day of the next
calendar month after such 30 day period.
11. REPRESENTATIONS AND WARRANTIES
11.1 NEIC represents and warrants that the NEIC Services shall perform in a
reasonable manner in accordance with the specifications set forth in the
Service Documentation. In the event that a documented and reproducible flaw in
the NEIC Services inconsistent with this warranty is discovered, NEIC's sole
responsibility shall be to use all reasonable efforts to correct such flaw in a
timely manner.
11.2 The above warranty does not apply to any media or documentation which has
been subjected to damage or abuse or to any claim resulting from changes in the
operating characteristics of computer hardware or computer operating systems
which are made after the release of the applicable NEIC Service or from an
event identified in Section B.13.2.b below.
12. LIMITATIONS OF LIABILITY
12.1 NEIC'S ONLY WARRANTIES ARE THOSE SET FORTH IN ARTICLE B11 OF THIS
AGREEMENT AND NEIC EXPLICITLY DISCLAIMS ALL OTHER WARRANTIES, INCLUDING
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE. IN NO EVENT
SHALL NEIC BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES AND ANY
CLAIM NOT PRESENTED WITHIN ONE YEAR FROM THE DISCOVERY OF THE CLAIM SHALL BE
DEEMED WAIVED, NEIC'S LIABILITY TO VENDOR AND ITS CUSTOMERS UNDER THIS
AGREEMENT OR WITH RESPECT TO SERVICES PERFORMED OR MATERIALS FURNISHED
HEREUNDER (WHETHER UNDER CONTRACT, TORT, OR ANY OTHER THEORY OF LAW) SHALL IN
NO EVENT EXCEED $10,000. THE FOREGOING LIMITATION OF LIABILITY REPRESENTS THE
ALLOCATION OF RISK OF FAILURE BETWEEN THE PARTIES AS REFLECTED IN THE PRICING
OF THE LICENSE HEREUNDER AND IS AN ESSENTIAL ELEMENT OF THE BASIS OF THE
BARGAIN BETWEEN THE PARTIES.
12.2 Neither party will be responsible for delays or failures in performance
resulting from acts or events beyond its control, including but not limited to,
acts of nature, governmental actions, fire, labor difficulties or shortages,
civil disturbances, transportation problems, interruptions of power, supply or
communications or natural disasters, provided such party takes reasonable
efforts to minimize the effect of such acts or events.
13. TERMS AND RIGHTS UPON TERMINATION
13.1 This agreement will be effective for an initial period from the Effective
Date through December 31, 1998. If neither party has notified the other at
least 30 days before the end of the initial period of its intention not to
renew this agreement, this agreement will be automatically renewed for a
renewal period of one year following the initial period. In like manner, this
agreement will be automatically renewed each successive year thereafter unless
one party notifies the other at least 30 days before the end of a renewal
period of its intention not to renew this agreement.
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13.2 Without limiting the foregoing, either party shall have the further
right to terminate this agreement upon notice that the other party has
committed a material breach of its obligations under this agreement and has
failed to cure such breach within 15 days of notice of such breach. NEIC shall
have the further right to terminate this agreement or any specific NEIC
Services effective immediately upon the occurrence of any of the following
events:
a. Upon notice by NEIC to Vendor that NEIC is no longer offering
or providing support for the applicable Service; or
b. In the event Vendor fails to conform with any non-optional
portion of the Transaction Specifications then in effect or utilizes any aspect
of the NEIC Services on equipment or with software which is not then authorized
for such use by NEIC.
13.3 Failure by Vendor to fully satisfy any of its obligations with respect
to any specific NEIC Service shall give NEIC the right to terminate the use by
Vendor of such Service and to maintain the rest of this agreement in full force
and effect with respect to the other NEIC Services. This provision, however,
does not limit NEIC's right to treat such failure as the basis for termination
of this agreement in whole or to exercise any other right or remedy which NEIC
may have as a result of such failure.
13.4 Upon termination of this agreement or any specific NEIC Services for
any reason, Vendor shall promptly cease all use of the affected Service and, at
Vendor's expense, cause to be returned to NEIC all NEIC Materials (including
any and all documentation) provided by NEIC (and all copies thereof) with
respect to the terminated Service.
14. General
14.1 Each party shall comply with any applicable law or industry practice
and shall secure any authorization required by applicable law, industry
practice or otherwise in connection with the aspect of the transaction
submission process for which it is responsible under this agreement.
14.2 Supplementing Sections B.6.3 and B.7.1, each party shall retain in
confidence the terms of this agreement and any and all confidential or
proprietary information regarding the other party or the NEIC Services
transmitted by the other party which is marked "Confidential" (all of which are
hereinafter called "Information"). Each party shall make no use of information
except as required to perform in accordance with the terms of this agreement.
Information shall be protected by each party in a manner which shall be no less
protective than the manner such party then uses to protect its own confidential
information, and such information shall not be disclosed to any person other
than one for whom such knowledge is essential for the purposes of this
agreement, and then only to the degree such disclosure is so essential and only
if the recipient expressly agrees to be bound by provisions of confidentiality
which are no less than the confidentiality provisions of this Section B.14.2.
This provision shall survive the termination or expiration of this agreement.
14.3 Vendor shall make its operations, methods, documentation and
appropriate personnel accessible to NEIC as NEIC may reasonably require to
enable NEIC to confirm Vendor's compliance with Vendor's obligations pursuant
to this agreement in accordance with the standards and quality contemplated by
this agreement.
14.4 At any time, NEIC may request by notice the right to have access to
healthcare administrators (other than NEIC Payors) connected to Vendor for
which Vendor is compensated for all transactions submitted through the NEIC
Services (including the On Line Services) on terms and conditions to NEIC which
shall be no less favorable than the terms and conditions which NEIC then
affords to Vendor for transactions submitted to the NEIC Services. If within 60
days of such NEIC request, an agreement for such access is not executed by
Vendor and NEIC, NEIC shall have the right on 60 days prior notice to terminate
this agreement.
14.5 The parties will act as independent contractors, and this agreement
does not constitute either party as the agent or partner of the other party.
14.6 Notices required hereunder will be in writing signed by an officer of
the notifying party and delivered personally or by overnight courier service or
sent by registered or certified mail, charges prepaid, to the address noted at
the top of this agreement (or to such other address as the recipient may have
previously designated by notice), and will be deemed given when so delivered or
four days after the date of mailing, whichever occurs first.
14.7 This agreement and the rights and obligations hereunder may not be
assigned or sublicensed by either party, in whole or in part, without the prior
written consent of the other party, which consent shall not be unreasonably
withheld.
14.8 No representations have been made to induce either party to enter into
this agreement except for the representations explicitly stated in this
agreement. This agreement supersedes all prior or contemporaneous agreements or
expressions of intent or understanding and is the entire agreement between the
parties with respect to its subject matter.
14.9 All terms, conditions or provisions which may appear on any purchase
or sales order or invoice issued pursuant to this agreement shall, to the
extent inconsistent with the terms and conditions of this agreement, be of no
force or effect, notwithstanding the fact that such order or invoice may have
been executed subsequent to the date of this agreement and, in any event,
preprinted terms of any such order or invoice shall have no force or effect.
14.10 In the event of a breach of any provision of this agreement by either
party, the other party, in addition to any other remedy it may have, shall be
entitled to recover reasonable attorneys fees and expenses incurred as a result
of such breach.
14.11 No provision of this agreement may be waived, except by a writing
signed by an executive officer of the party charged with such waiver and any
such waiver shall be limited to the terms of such writing.
14.12 This agreement may not be changed or terminated (other than as
expressly set forth in this agreement) except by a writing signed by an
authorized officer of NEIC and by an authorized officer of Vendor.
14.13 This agreement is governed as to interpretation and enforcement by the
laws of the State of New Jersey and the parties hereby consent to the
jurisdiction of such State as the exclusive forum for litigating any dispute
arising out of this agreement or out of its subject matter.
By signing below, the parties agree to all of the terms and conditions set
forth above.
- ------------------------------------ NATIONAL ELECTRONIC
[VENDOR] INFORMATION CORPORATION
Name -------------------------- Name --------------------------
Signature -------------------------- Signature --------------------------
Title -------------------------- Title --------------------------
Date -------------------------- Date --------------------------
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NEIC MEDICAL CLAIMS ALL PAYOR NETWORK SERVICES RIDER
TO VENDOR PARTICIPATION AGREEMENT REGARDING
VENDOR'S USE OF THE NEIC SERVICES (THE "AGREEMENT")
The Agreement is hereby amended to enable Vendor to use the NEIC
Medical Claims All Payor Network Services effective on the date of the last
signature to this Rider (the "Effective Date") on the following terms and
conditions:
1. Vendor hereby elects to participate in the NEIC Medical Claims All
Payor Network Services pursuant to which:
A. Vendor shall have the right to submit electronic medical claims
to the NEIC Transaction Services (through any format then used by Vendor for
such claims) for delivery to entities who are not electronically connected to
NEIC, which claims NEIC shall cause to be printed to paper and delivered to
such entities ("Print to Paper Claims");
B. Vendor shall have the right to submit electronic medical claims
to the NEIC Transaction Services (through any format then used by Vendor for
such claims) for delivery to entities who are electronically connected to NEIC
either directly or indirectly but which do not pay NEIC to receive such claims
("Non-Participating Payors"). NEIC shall from time to time furnish to Vendor a
list of the then Non-Participating Payors. Attached to this Addendum is the
current list of the Non-Participating Payors. Vendor's right under this Section
1B shall be conditioned upon Vendor executing any and all documents and
complying with any and all applicable procedures, rules and regulations which
the Non-Participating Payor may require for delivery by NEIC to its system of
Vendor's medical claims; and
C. Vendor shall have the right to submit electronic medical claims
to the NEIC Transaction Services through the format set forth in the applicable
NEIC Transaction Specifications (the "NEIC Format") for delivery to entities
who are electronically connected to NEIC either directly or indirectly and
which pay NEIC to receive such claims ("Participating Payors").
2. Vendor shall pay NEIC for medical claims submitted by Vendor to the
NEIC Medical Claims All Payor Network Services the following per claim fees:
A. There is no per claim charge imposed on Vendor for medical claims
submitted by Vendor in the NEIC Format to the NEIC Transaction Services for
delivery to Participating Payors.
B. Vendor shall pay forty nine (49) cents for each Print to Paper
Claim submitted by Vendor; and
C. Vendor shall pay twenty two (22) cents for each medical claim
submitted by Vendor for delivery to a Non-Participating Payor.
The charge set forth in Section 2C above shall be applicable to medical claims
sent to Non-Participating Payors in lieu of any conflicting charge set forth
in the Agreement with respect to Medicare claims.
3. The claim charges set forth in Section 2 above shall be involved by
NEIC on a monthly basis. Accompanying each such invoice shall be a report
identifying the number of claims on which such invoice is based.
4. The definitions of terms appearing in the Agreement shall apply to
such terms as used in this Rider.
5. Except as modified by this Rider, the terms and conditions of the
Agreement remain in full force and effect and shall be applicable to the NEIC
Medical Claims All Payor Network Services set forth herein and this Rider shall
be deemed part of the Agreement. In the event of a conflict between a provision
of this Rider and a provision of the Agreement, the provision of this Rider
shall govern.
Rider Accepted:
Nichols Select NATIONAL ELECTRONIC INFORMATION
- --------------------------------------- CORPORATION
[VENDOR]
NAME John R. Gray Name
---------------------------------- ------------------------------
Signature John R. Gray Signature
------------------------------ -------------------------
Title V.P. Network Services Title
--------------------------------- -----------------------------
Date 2-18-1997 Date
---------------------------------- ------------------------------
<PAGE> 8
NEIC ERA SERVICES RIDER TO AGREEMENT
BETWEEN NEIC AND VENDOR REGARDING VENDOR'S
USE OF THE NEIC SERVICES (THE "AGREEMENT")
The Agreement is hereby amended to enable Vendor to use the NEIC ERA
Services as described in the NEIC Transaction Specifications for ERA Services
effective on the date of the last signature to this Rider (the "Execution
Date") on the following terms and conditions:
1. Vendor hereby elects to participate in the NEIC ERA Services pursuant
to which Vendor shall have the right to receive electronic remittance advice
("ERA") transactions (pursuant to the NEIC ERA Services through the format and
in accordance with the specifications then set forth in the applicable NEIC
Transaction Specifications for NEIC ERA Services) in connection with (i) claims
which were not delivered through the NEIC Services ("Non-NEIC Claims"), (ii)
claims which were delivered electronically by the NEIC Services to an entity
identified on NEIC's then current list of Non-Participating Payors (provided to
Vendor from time to time) which are entities who do not pay NEIC to receive
such claims ("Non-Participating Payor Claims") and (iii) claims which were
delivered electronically by the NEIC Services to an entity not identified as a
Non-Participating Payor ("Participating Payor Claims").
2. Vendor shall pay NEIC 10 cents for each Participating Payor Claim, 20
cents for each Non-Participating Payor Claim and 20 cents for each Non-NEIC
Claim covered by an ERA transaction.
3. The claim charges set forth in Section 2 above shall be invoiced by
NEIC on a monthly basis. Accompanying each such invoice shall be a report
identifying the number of claims on which such invoice is based.
4. Notwithstanding the foregoing, in the event that the total charges
imposed on Vendor hereunder for Vendor's use of the NEIC ERA Services in any
month following the first three full calendar months of Vendor's use of such
Services is less than $50, in lieu of such charges, NEIC shall invoice Vendor
and Vendor shall pay $50 for its use of such Services in such month.
5. The definitions of terms appearing in the Agreement shall apply to
such terms as used in this Rider.
6. Except as modified by this Rider, the terms and conditions of the
Agreement remain in full force and effect and shall be applicable to the NEIC
ERA Services set forth herein and this Rider shall be deemed part of the
Agreement. In the event of a conflict between a provision of this Rider and a
provision of the Agreement, the provision of this Rider shall govern.
Rider Accepted:
<TABLE>
<S> <C>
Nichols Select NATIONAL ELECTRONIC
- --------------------------------------- INFORMATION CORPORATION
[VENDOR]
Name: /s/ John R. Gray Name:
--------------------------------- -------------------------------
Signature: /s/ John R. Gray Signature:
---------------------------- ---------------------------
Title: V.P. Network Systems Title:
-------------------------------- -------------------------------
Date: 2-18-1997 Date:
--------------------------------- -------------------------------
</TABLE>
<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, (except for paragraph 4 of footnote 1,
as to which the date is June 18, 1999) in Amendment No. 4 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
July 9, 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. 4 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
July 9, 1999
