NICHOLS TXEN CORP, S-1/A, 1999-04-09

NICHOLS TXEN CORP
S-1/A, 1999-04-09
MANAGEMENT SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1999

REGISTRATION NO. 333-71031

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 1

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

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES. WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION

APRIL 9, 1999

2,175,000 Shares

(NICHOLS TXEN LOGO)

Common Stock

------------------

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 78% 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. We
anticipate that the initial public offering price will be between $12.00 and
$14.00 per share.

We have applied to list the common stock on the Nasdaq National Market under the
symbol "NTXN."

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Nichols TXEN.................................... $ $
</TABLE>

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Nichols TXEN has granted the underwriters the right to purchase up to 325,000
additional shares to cover any over allotments.

BT ALEX. BROWN
CIBC OPPENHEIMER

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

THE ROBINSON-HUMPHREY COMPANY

THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 3
(Inside front cover)

Nichols TXEN

Improving the Cost Effectiveness & Quality of Health Care

with Technology-based Outsourcing Solutions for the
Administrative-side of Physician Practices and Managed Care Organizations

Information Technology Outsourcing Administrative Services Outsourcing
(photo -- software screens and (photo -- people in the administration
people working on computer systems department working on computers)
collage)

- Enterprise-Level Complete Back Office -
Software Applications Administrative
Processing Services
- Decision Support
Applications Entire Functional Area -
or Department Specific
- Back Office IT Outsourcing
Management

Nichols TXEN Technology & Nichols TXEN Technology &
the Customer's Personnel Nichols TXEN Personnel

Network Data Center
(photo -- computer center
operation collage)

Comprehensive
Marketplace
Connectivity

Physician Practice Management -integrated solutions- Managed Care Administration
Software Applications Software Applications

MDr98 - billing, insurance TXEN-MHS - premium billing,
processing, appointments, capitation, benefit plan administration
master patient index, membership & provider
advanced payor connectivity management, claim processing
Decision Manager - activity- FirstSTEPP - medical utilization
based cost analysis, care management, case management,
analysis, performance analysis authorizations
Xtend DSS - quality and
performance analysis
<PAGE> 4

MDr98(TM), Decision Manager 3.0(TM), TXEN MHS(TM), Xtend(TM), Xtend/MHS(TM),
Xtend/HEDIS(TM) and FirstSTEPP(TM) are trademarks of Nichols TXEN. Trade names
and trademarks of other companies appearing in this prospectus are the property
of their respective holders.

----------------------------

<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
It may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus carefully,
including the risk factors and financial statements.

NICHOLS TXEN

OUR BUSINESS

We provide outsourcing services to managed care organizations and physician
practice groups to meet their needs for information technology and
administrative functions. Managed care organizations manage risks, benefits and
costs under health care plans, and physician practice groups deliver health care
services. Our outsourcing services improve quality and reduce costs for our
customers by minimizing the time and personnel needed to process health care
transactions. We offer a broad range of technology and services to manage health
care 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 total revenues in 1998 were
recurring. We consider 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.

Our outsourcing solutions enable customers to concentrate on providing
quality health care. 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.
Significant benefits to our customers include:

- more efficient or streamlined administrative functions;

- variable rate operating cost structure;

- faster implementation;

- reduced capital expenditures for administrative health care technologies;

- less risk of customers' technology becoming obsolete;

- access to knowledgeable and experienced personnel;

- sophisticated enterprise-level or company-wide application software;

- easy-to-use decision support software designed to enhance operational
analysis;

- enhanced electronic communications or connectivity for transmittal and
retrieval of information within the health care market; and

- ability to focus on core businesses.

We maintain a centralized network data center to process transactions and
provide technology services for our customers. Our network data center enables
us to effectively manage and deploy our technology and to provide easier
connections between participants in the health care industry directly or via
Internet technology. We believe that because we offer both technical solutions
and administrative services through our network data center, we have a
competitive advantage over companies that offer only administrative services or
only computer and application software system packages, commonly referred to as
turnkey systems.

We are organized into two divisions. Our Managed Care Services division
provides technology and services to managed care organizations, and our Practice
Management Services division provides technology and services to physician
practice groups. As of February 28, 1999, we had 94 managed care services
customers representing over 3.0 million lives nationwide, and 290 practice
management services customers representing approximately 3,000 physicians,
primarily in the Southeast.

3
<PAGE> 6

OUR MARKET OPPORTUNITY

Health care costs in the United States have risen dramatically over the
past two decades to approximately $1.1 trillion in 1997 and are projected to
increase to $2.1 trillion in 2007. In response, membership in managed care
plans, including managed care programs that are funded by Medicare and Medicaid,
is increasing and creating many new start-up organizations and fueling rapid
growth in existing organizations. These managed care programs are increasingly
using reimbursement models different from the traditional fee-for-service model.
Often these reimbursement models involve complex contractual arrangements among
employers, payors, providers and patients which are designed not only to deliver
health care but also to control costs. As a result, the administration of the
business aspects of health care providers and payors has become much more
difficult and time consuming. In fact, market research suggests that between 30%
to 40% of every health care dollar is spent to cover administrative costs.
Managed care organizations and physician groups often lack the information
technology and operational resources to function efficiently within this more
complex and sophisticated health care environment.

Health care administration complexities are driving health care information
technology expenditures. These expenditures are expected to grow to over $23.5
billion in 2001 from $17.9 billion in 1998. According to a Healthcare
Information and Management Systems Society, or HIMSS, 1998 survey, health care
organizations are poorly equipped to support managed care. In fact, less than
10% of the companies surveyed indicated that they had the software capability to
perform each of the following functions: utilization management, risk
management, benefits management, claims management and recording and tracking
the quality of treatment results, commonly referred to as health outcomes
reporting. The HIMSS survey also indicates that an increasing number of
companies are outsourcing their health care information technology needs. The
market for healthcare information technology and administrative services
outsourcing is expected to increase from $2.3 billion in 1998 to $3.8 billion in
2001.

OUR STRATEGY

Our objective is to be the leading national provider of outsourcing
solutions for information technology and administrative services to managed care
organizations and physician practice groups within the health care industry. Our
strategy includes the following key elements:

- focus on providing outsourcing solutions for the administrative
challenges of health care;

- continue to capitalize on opportunities within the managed care and
physician markets, our niche within the health care industry;

- expand our high recurring revenue model;

- increase internal efficiencies through automation and expanded
connectivity;

- expand decision support and medical utilization management software and
services; and

- acquire complementary businesses and technologies.

4
<PAGE> 7

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 health care 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 acquisition, Nichols SELECT
changed its name to Nichols TXEN Corporation.

Our executive offices are located at 2500 Corporate Drive, Birmingham,
Alabama 35242, and our telephone number is (205)437-6000. Our Internet address
is www.nicholstxen.com. Information contained on our website is not a part of
this prospectus.

THE OFFERING

Common stock offered........................ 2,175,000 shares

Shares to be outstanding after this
offering(1)................................. 9,675,000 shares

Use of proceeds............................. For working capital, to fund
possible acquisitions, and other
general corporate purposes.

Proposed Nasdaq National Market symbol...... NTXN
- ---------------

(1) Excludes 781,500 shares of common stock issuable upon exercise of employee
and director stock options outstanding on February 28, 1999, pursuant to
the Nichols TXEN 1998 Stock Option Plan and the Non-Employee Director Stock
Option Plan. These options were granted subject to completion of the
offering at an exercise price equal to the initial public offering price.

---------------------

Unless we otherwise indicate, all information in this prospectus assumes no
exercise of the over-allotment option to purchase 325,000 additional shares of
common stock granted to the underwriters.

5
<PAGE> 8

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
-------------------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
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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 $19,050 $25,249
Gross profit....................... 2,653 3,082 3,932 4,669 20,224 8,858 11,560
Selling, general and administrative
expenses......................... 1,336 1,859 1,932 2,251 7,367 3,238 4,593
Research and development........... 634 762 710 1,155 2,771 1,130 1,493
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 2,403 (1,224)
Net income (loss).................. 228 71 320 (7,673) 3,252 1,404 (1,093)

PER SHARE DATA(1):
Earnings (loss) per share.......... $ 0.03 $ 0.01 $ 0.04 $ (1.02) $ 0.43 $ 0.19 $ (0.15)
Weighted average common shares
outstanding...................... 7,500 7,500 7,500 7,500 7,500 7,500 7,500
</TABLE>

<TABLE>
<CAPTION>
FEBRUARY 28, 1999
---------------------
AS
ACTUAL ADJUSTED(2)
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 7,471 $32,867
Total assets.............................................. 54,640 80,036
Long-term debt............................................ -- --
Total stockholders' equity................................ 47,988 73,384
</TABLE>

- ---------------

(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 $13.00
per share and the application of the net proceeds.

6
<PAGE> 9

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.

OTHER STATISTICAL DATA (COMBINED
BASIS):
Growth of revenues................. 13.8% 22.4% 29.2% 52.8% 55.7% 58.6% 32.5%
Gross profit margin................ 36.2% 43.3% 37.7% 53.0% 46.5% 46.5% 45.8%
Revenue Mix (Percent of Revenues):
Managed care..................... 27.7% 33.6% 43.3% 55.5% 66.4% 65.4% 67.5%
Practice management.............. 72.3% 66.4% 56.7% 44.5% 33.6% 34.6% 32.5%
Recurring........................ 75.1% 76.4% 78.0% 71.6% 76.6% 74.5% 76.1%
Non-recurring.................... 24.9% 23.6% 22.0% 28.4% 23.4% 25.5% 23.9%
Customer Data:
Number of managed care
customers...................... 24 33 50 70 87 83 94
Number of practice management
customers(2)................... 191 184 202 231 252 231 290
</TABLE>

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(1) Includes revenues from turnkey systems. Revenues from turnkey systems
decreased from approximately 8% of combined revenues in 1994 to less than 1%
of combined revenues in 1998.

(2) Excludes turnkey system customers. In November 1997, we decided to
discontinue sales of turnkey systems to practice management customers.

7
<PAGE> 10

RISK FACTORS

You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of common stock.

WE MAY NOT BE ABLE TO CONTINUE COMPETING SUCCESSFULLY WITH OTHER
INFORMATION

TECHNOLOGY AND ADMINISTRATIVE OUTSOURCING COMPANIES

Our business is highly competitive. If we are unable to successfully
compete with other competitors in our industry, our business, financial
condition or results of operations could be adversely affected. The market for
our technology and services is rapidly changing and requires potentially
expensive technological advances. We believe our future success will depend, in
part, upon our ability to:

- enhance our current technology and services;

- respond effectively to technological changes;

- sell additional services to our existing client base;

- introduce new technologies; and

- meet the increasingly sophisticated needs of our clients.

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. 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
78% of our outstanding common stock, or 75% 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 shareholders. 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 the 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. The agreements were
negotiated while we were a wholly owned subsidiary of Nichols Research. As a
result, the terms of these agreements may be less favorable to us than the terms
we could have obtained from unaffiliated third parties. See "Certain
Transactions -- Services Agreement," "-- Voting Agreement" and "-- Tax Sharing
Agreement."

8
<PAGE> 11

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. Some of our contracts do not contain penalty provisions
for early termination or for switching from higher revenue producing
administrative services outsourcing to information technology outsourcing. Even
for our contracts that contain financial penalties for early 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. We have recently experienced early
termination of technology outsourcing services by two significant practice
management customers, and several of our managed care customers have transferred
their outsourcing requirements from administrative services to technology
services. Any termination, significant reduction, or modification of our
business relationships with any of our significant customers or with a number of
smaller customers could have a material adverse effect on our business,
financial condition or results of operations.

WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED

There is significant competition for employees with the skills we require,
such as the ability to program computers and understand the health care
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.

ERRORS OR IMPROPER HANDLING OF CUSTOMER TRANSACTIONS COULD CAUSE US TO LOSE
CUSTOMERS OR INCUR LIABILITY

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. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability. In
addition, appropriate insurance may be unavailable in the future at commercially
reasonable rates. A successful claim in excess of our insurance coverage could
have a material adverse effect on our business, financial condition or results
of operations. Even unsuccessful claims could result in the expenditure of funds
in litigation, as well as diversion of management time and resources.

WE MAY INCUR LIABILITY AS A RESULT OF PROVIDING UTILIZATION REVIEW SERVICES

We recommend to our customers whether a claim for payment or service should
be denied or existing coverage should be continued based on the customer's plan
or contract and industry standard clinical support criteria. Our customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of medical service or payment of medical claims. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability. If the
protections are not adequate, our business may be adversely affected. See
"Business -- Government Regulation."

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

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<PAGE> 12

Accountability Act of 1996. 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 health care providers and
related entities and particularly on potential 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 health care programs for us and our
customers. See "Business -- Government Regulation."

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 are not currently a party to any agreements or
understandings for any material acquisitions and we may be unable to identify
suitable acquisition candidates in the future. In addition, we compete with
other companies to acquire other businesses. We expect this competition to
continue to increase, making it more difficult to acquire suitable companies on
favorable terms.

IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED

Even though we may acquire additional companies in the future, we may be
unable to successfully integrate the acquired businesses and realize anticipated
economies, operational and other benefits in a timely manner. If we are unable
to successfully integrate acquired businesses, any of the following may occur
which could have a negative impact on our profitability:

- substantial costs from trying to combine our operations with those of the
acquired business;

- delays in offering the acquired products or services;

- diversion of management's attention from our existing business; or

- damage to our relationships with our key customers and employees.

Integrating acquired companies generally involves combining management and
services, taking advantage of economies of scale and other economic benefits and
combining the two corporate cultures into one common culture. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours.

IF OUR ASSETS BECOME IMPAIRED, IT COULD ADVERSELY AFFECT OUR BUSINESS

During the second quarter of 1999, we recorded an intangible asset
impairment charge of $4.3 million to adjust the intangible assets of our
Practice Management Services division. After giving effect to this impairment,
we still had $32.0 million of intangible assets at February 28, 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 intangible
assets is determined based on undiscounted future operating cash flows. The
future write-off of additional unamortized intangible assets would have a
material effect on our earnings.

IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 CONCERNS, WE MAY LOSE REVENUE OR INCUR
ADDITIONAL COSTS

Many computer programs were designed and developed without considering the
upcoming change in the century, which could lead to failure of computer
applications or create erroneous

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<PAGE> 13

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 to our information technology,
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 health care programs and other
third-party payors. Such delays may also damage us. We may not be able to
identify, successfully remedy or assess all date-handling problems in our
business systems or operations or those of our customers and suppliers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."

SYSTEM FAILURES OR PERFORMANCE PROBLEMS WITH OUR NETWORK DATA CENTER COULD
DAMAGE OUR BUSINESS

Substantially all customer transactions are processed at our network data
center, which is located at a single site. We do not have a permanent mirror
processing site to which processing could be transferred in case of a
catastrophic event. As a result, any system failure or performance problems with
our network data center could damage our business. In order to operate without
interruption, we must guard against:

- telecommunications failures;

- equipment failures;

- security breaches;

- power outages, fires, tornadoes and other natural disasters at the
network data center; and

- other potential interruptions.

Our customer contracts contain performance guarantees and any interruption
could require us to reduce fees charged to customers and reduce our revenues. A
system failure could require us to spend money replacing existing equipment or
adding redundant facilities. Any failure by us to adequately and promptly
address the problems could damage our reputation, or make it more difficult for
us to attract new customers.

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.

11
<PAGE> 14

WE RELY ON PROPRIETARY TECHNOLOGY WHICH WE MAY BE UNABLE TO PROTECT FROM
INFRINGEMENT OR APPROPRIATION

Our proprietary software and other confidential information are important
to our business. We do not own any patents and we have not registered any
copyrights, trademarks, service marks, or trade names with the United States
Patent and Trademark Office. Instead, we rely on a combination of trade secrets,
common law intellectual property rights, license agreements, nondisclosure and
other contractual provisions which may not adequately protect our technology or
information. These actions do not prevent independent third-party development of
competitive products or services. We could also be subject to intellectual
property infringement claims as the number of competitors grows and the
functionality of our technology overlaps with the technology of competitors. We
could be required to enter into a license agreement or royalty arrangement with
the party asserting the claim. We may also be required to indemnify customers
for claims made against them.

CHANGES IN THE HEALTH CARE INDUSTRY COULD REDUCE DEMAND FOR OUR TECHNOLOGY AND
SERVICES

The health care industry in the United States is in a period of rapid
change and uncertainty. As a result, health care organizations may alter the way
they operate and pay for services. Our transaction processing technology and
services are designed to function within the current health care financing and
reimbursement system. During the past several years, the health care 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 health care, lower reimbursement
rates and otherwise change the operating environment for our customers. As in
the past, health care 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, health care 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.

WE MAY BE REQUIRED TO COMPLY WITH ADDITIONAL LICENSING REGULATIONS AND CONSUMER
PROTECTION LAWS

Because we provide administrative and business services to health plans, we
are required to be licensed in many states as a third-party administrator or
private review agent and to meet state requirements for continued licensure. In
addition, federal and state consumer protection laws may apply to us when we
bill patients directly for the cost of physician services provided. Failure to
comply with any of these laws or regulations could result in a loss of
licensure, or other fines and penalties. See "Business -- Government
Regulation."

12
<PAGE> 15

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 health care
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 health care providers from using our services. See
"Business -- Government Regulation."

SECURITY PROBLEMS WITH OUR NETWORK DATA CENTER COULD RESULT IN LIABILITY AND
DAMAGE TO OUR REPUTATION

We have confidential customer and patient information in our network data
center. Therefore, it is critical that our facilities and infrastructure remain
secure. Our infrastructure may be vulnerable to physical break-ins, computer
viruses, programming errors, attacks by third parties or similarly disruptive
problems. Any material security breach could result in liability and damage to
our reputation.

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 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 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 9,675,000 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 7,500,000 shares of common stock
held by Nichols Research will be "restricted securities" as defined in Rule 144.
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 the common stock.
Also, up to an additional 781,500 shares of common stock which may be issued
upon exercise of options outstanding as of February 28, 1999 under our
stock-based compensation plans will become available for future sale in the
public market.

13
<PAGE> 16

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 health care
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.

FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully for the following reasons:

- the statements discuss our future expectations;

- the statements contain projections of our future results of
operations or of our future financial condition; and

- the statements state other "forward-looking" information.

We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors,
as well as any other cautionary language in this prospectus, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, financial
condition and results of operations. In such case, the trading price of our
common stock could decline and you may lose all or part of your investment.

USE OF PROCEEDS

The net proceeds from the sale of the 2,175,000 shares of common stock
offered in this offering, after deducting the underwriting discounts and
estimated offering expenses payable by us and assuming an initial offering price
of $13.00 per share, are estimated to be $25.4 million. The net proceeds are
estimated to be $29.3 million if the underwriters' over-allotment option is
exercised in full. The net proceeds will be used for working capital and other
general corporate purposes. Some of the net proceeds may be used to fund
possible acquisitions of complementary products, technologies or businesses.

DIVIDEND POLICY

Currently we intend to retain our earnings to finance future growth, and
therefore 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.
14
<PAGE> 17

CAPITALIZATION

The following table sets forth as of February 28, 1999 (a) the
capitalization of Nichols TXEN and (b) the capitalization of Nichols TXEN as
adjusted to reflect the sale of the shares of common stock offered at an assumed
offering price of $13.00 per share, and the application of the estimated net
proceeds from the offering, all as if they occurred on February 28, 1999. This
table should be read in conjunction with the financial statements and related
notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
FEBRUARY 28, 1999
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ -- $ --
------- -------
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares
authorized; 7,500,000 issued and outstanding; 9,675,000
shares issued and outstanding, as adjusted(1).......... 75 97
Additional paid-in capital............................. 52,833 78,207
Retained earnings (deficit)............................ (4,920) (4,920)
------- -------
Total stockholders' equity........................... 47,988 73,384
------- -------
Total capitalization........................................ $47,988 $73,384
======= =======
</TABLE>

- ---------------

(1) The adjusted number of shares issued and outstanding at February 28, 1999
does not include options to purchase 781,500 shares of common stock at the
initial public offering price per share.

15
<PAGE> 18

DILUTION

The net tangible book value of Nichols TXEN as of February 28, 1999 was
approximately $16.0 million, or $2.13 per share of common stock. Net tangible
book value per share is equal to the Nichols TXEN total tangible assets less
total liabilities, divided by 7,500,000 shares of common stock outstanding.
After giving effect to the sale of 2,175,000 shares of common stock from the
offering at an assumed initial public offering price of $13.00 per share and
after deduction of the estimated underwriting discounts and commissions and
offering expenses, net tangible book value of Nichols TXEN as of February 28,
1999 would have been approximately $41.4 million or $4.27 per share of common
stock. This represents an immediate increase in net tangible book value of $2.14
per share of common stock to existing investors and an immediate dilution of
$8.73 per share to new investors purchasing shares in the offering. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Net tangible book value before the offering(1)......... $2.13
Increase per share attributable to new investors....... 2.14
-----
Net tangible book value per share after the offering........ 4.27
------
Dilution per share to new investors(2)...................... $ 8.73
======
</TABLE>

The following table summarizes, as of February 28, 1999, the differences
between the number of shares of common stock purchased from Nichols TXEN, the
aggregate cash consideration paid and the average price per share paid by
existing stockholders and new investors purchasing shares of common stock in
this offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors............... 7,500,000 77.5% $52,908,000(3) 65.2% $ 7.05
New investors.................... 2,175,000 22.5 28,275,000 34.8 13.00
--------- ----- ----------- -----
Total.................. 9,675,000 100.0% $81,183,000 100.0%
========= ===== =========== =====
</TABLE>

- ---------------

(1) The adjusted number of shares issued and outstanding at February 28, 1999
does not include options to purchase 781,500 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 $13.00 per share. Dilution to new investors will
be $8.47 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.

16
<PAGE> 19

SELECTED FINANCIAL DATA

The following table summarizes selected financial data for Nichols TXEN,
which should be read in conjunction with our financial statements and related
notes included elsewhere in this prospectus. 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 six-month periods ended February 28, 1998
and 1999 and the balance sheet data at August 31, 1994, 1995, 1996 and at
February 28, 1998 and 1999, are derived from the unaudited financial statements
of Nichols TXEN. We believe that the unaudited financial data fairly reflect the
results of operations and the financial condition of Nichols TXEN for the
respective periods.

<TABLE>
<CAPTION>
NICHOLS TXEN
-------------------------------------------------------------------
SIX MONTHS
ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
----------------------------------------------- -----------------
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 $19,050 $25,249
Cost of revenues................................ 5,704 6,300 6,438 7,769 23,256 10,192 13,689
------- ------- ------- ------- ------- ------- -------
Gross profit.................................... 2,653 3,082 3,932 4,669 20,224 8,858 11,560
Selling, general and administrative expenses.... 1,336 1,859 1,932 2,251 7,367 3,238 4,593
Research and development........................ 634 762 710 1,155 2,771 1,130 1,493
Depreciation and amortization................... 351 349 947 985 4,547 2,087 2,401
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 2,403 (1,224)
Other income (expense)(2)....................... 9 -- 94 656 (4) (2) --
Income tax expense (benefit).................... 113 41 117 107 2,283 997 (131)
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ 228 $ 71 $ 320 $(7,673) $ 3,252 $ 1,404 $(1,093)
======= ======= ======= ======= ======= ======= =======

Earnings (loss) per share(3).................... $ 0.03 $ 0.01 $ 0.04 $ (1.02) $ 0.43 $ 0.19 $ (0.15)
======= ======= ======= ======= ======= ======= =======
Weighted average common shares outstanding(3)... 7,500 7,500 7,500 7,500 7,500 7,500 7,500
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
----------------------------------------------- -----------------
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 $ 3,371 $ 7,471
Total assets.................................... 2,059 8,349 10,497 52,052 57,715 58,779 54,640
Long-term debt.................................. -- -- -- -- -- -- --
Total stockholder's equity...................... 1,497 9,382 9,702 45,829 49,081 47,233 47,988
</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 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- TXEN
Acquisition."
(2) Includes Nichols TXEN's 19.9% proportional share of income for TXEN in
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.

17
<PAGE> 20

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 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 reflect 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............................................ 1,072 204 897 640
Total stockholders' equity................................ 497 1,103 939 4,390
</TABLE>

18
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Nichols TXEN is a provider of outsourcing solutions for information
technology and administrative services to managed care entities and physician
groups in the health care 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 health care transactions. Nichols TXEN is organized into two
business divisions. Nichols TXEN earns 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 1998 revenues
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 Practice Management Services division provides technology and services
to:

<TABLE>
<S> <C>
- hospital-based physicians; - hospital emergency departments; and
- physician groups; - physician networks.
</TABLE>

As of February 28, 1999, Nichols TXEN had 94 managed care services
customers representing over 3.0 million lives nationwide and 290 practice
management services customers representing approximately 3,000 physicians,
primarily in the Southeast.

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 health care 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

19
<PAGE> 22

$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.

Nichols Research 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.

Practice Management Reorganization

Historically, we have offered both information technology and outsourcing
services and turnkey systems to potential practice management customers. Nichols
TXEN has made a strategic decision to discontinue turnkey computer systems sales
to practice management customers. On November 3, 1997, when Nichols TXEN
announced it would discontinue sales of turnkey systems to practice management
customers, we had 84 practice management customers with turnkey systems. Nichols
TXEN offered technical support to these customers through December 31, 1998.
Revenues related to the support of these practice management turnkey customers
for fiscal year 1998 were approximately $0.4 million or less than 1.0% of
Nichols TXEN's total revenues for 1998.

The conversion of our practice management customers from turnkey systems to
outsourcing services reduced our revenues and increased costs during the
transition period which began in November 1997 and which ended in December 1998.
Since November 1997, Nichols TXEN has not received any revenues from turnkey
system sales to practice management customers. Prior to our announcement,
turnkey system sales for practice management customers were approximately $0.5
million in each of fiscal years 1997 and 1996. Revenues associated with turnkey
sales
20
<PAGE> 23

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 practice management
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 practice management customers, we
have increased support staff and infrastructure.

The Practice Management Services division also experienced a reduction in
technology outsourcing revenues from practice management 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 practice management
clients 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 practice
management business of Computer Services Corporation. The impairment charge
reflects our assessment based on a discounted cash flow analysis that the
goodwill was unrecoverable.

SIX MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1998

Revenues. Revenues increased 32.5% to $25.2 million in the first six
months of fiscal year 1999 from $19.1 million in the corresponding period of
fiscal year 1998. The increase in revenues resulted from the addition of new
customers during fiscal year 1998, representing $2.5 million in revenues and
41.0% of the revenues increase, as well as an increase in the utilization of
Nichols TXEN's services by existing customers representing $3.6 million in
revenues or 59.0% of the revenues increase.

Cost of Revenues. Cost of revenues increased 34.3% to $13.7 million in the
first six months of fiscal year 1999 from $10.2 million in the corresponding
period of fiscal year 1998. As a percent of revenues, cost of revenues increased
to 54.2% in the first six months of fiscal year 1999 from 53.5% 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 Practice Management Services division
resulting in greater cost of revenues.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 41.8% to $4.6 million in the first six months
of fiscal year 1999 from $3.2 million in the corresponding period of fiscal year
1998. As a percent of revenues, selling, general and administrative expenses
increased to 18.2% in the first six months of fiscal year 1999 from 17.0% in the
corresponding period of fiscal year 1998. The dollar and percentage increase was
due primarily to the employment of additional staff resulting from the increase
in our new customer business as well as an increase in our existing customer
business.

Research and Development. Research and development expenses increased
32.1% to $1.5 million in the first six months of fiscal year 1999 from $1.1
million in the corresponding period of fiscal year 1998. As a percent of
revenues, research and development expenses of 5.9%

21
<PAGE> 24

were the same in each period. The dollar increase was due primarily to the
hiring of staff to develop additional software.

Depreciation and Amortization. Depreciation and amortization expenses
increased 15.0% to $2.4 million in the first six months of fiscal year 1999 from
$2.1 million in the corresponding period of fiscal year 1998. As a percent of
revenues, depreciation and amortization expenses decreased to 9.5% in the first
six months of fiscal year 1999 from 11.0% in the corresponding period of fiscal
year 1998 due to increased revenues. The dollar increase was due primarily to
additional capital expenditures required by the increase in our business.

Intangible Asset Impairment. At February 28, 1999, Nichols TXEN recorded
an intangible asset impairment charge of $4.3 million to adjust the intangible
assets of the Practice Management 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 benefit of $0.1 million was recorded in the first six
months of fiscal year 1999 compared to $1.0 million tax provision in the
corresponding period of fiscal year 1998. The tax benefit was due primarily to
the $4.3 million intangible asset impairment during the second quarter of fiscal
year 1999.

YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997

The principal reason for the change in Nichols TXEN's historical operating
data from 1998 compared to 1997 was the effect on results of operations of the
TXEN acquisition in August 1997. The 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 1997.

Revenues. Revenues increased 249.6% to $43.5 million in 1998 from $12.4
million in 1997. The primary reason for this increase in our revenues was the
inclusion of TXEN's operations for 12 months in 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 practice management customers
during fiscal year 1998, as well as an increase in utilization of our services
by existing practice management customers.

Cost of Revenues. Cost of revenues increased 199.3% to $23.3 million in
1998 compared to $7.8 million in 1997. As a percent of revenues, cost of
revenues decreased to 53.5% in 1998 from 62.5% in 1997. The dollar increase was
primarily due to the inclusion of TXEN's operations for 12 months in 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 practice management 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 1998.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 227.3% to $7.4 million in 1998 from $2.3
million in 1997. As a percent of revenues, selling, general and administrative
expenses decreased to 16.9% in 1998 from 18.1% in 1997. The dollar increase was
due to the inclusion of TXEN's operations for 12 months in 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 practice management services. The decrease as a
percentage of revenues was attributable to our ability to generate synergies
resulting from the TXEN acquisition.

Research and Development. Research and development expenses increased
139.9% to $2.8 million in 1998 from $1.2 million in 1997. As a percent of
revenues, research and development
22
<PAGE> 25

expenses decreased to 6.4% in 1998 from 9.3% in 1997. The dollar increase was
due primarily to the inclusion of TXEN's operations in 1998 which included
research and development expenses of $2.0 million. Research and development
expenses incurred by the Practice Management 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 1998 from $1.0 million in 1997. As a percent
of revenues, depreciation and amortization expenses increased to 10.5% in 1998
from 7.9% in 1997. The dollar and percentage increase was due to the inclusion
of TXEN's operations for 12 months in 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 1997.

Other Income (Expense). Other expense in 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 1998 in the statement of operations compared
to the 19.9% investment in TXEN reflected in other income in 1997.

Income Taxes. A tax provision of $2.3 million was recorded in 1998
compared to $0.1 million in 1997. The effective tax rate was 41.2% in 1998. A
tax provision was recorded for the loss before income taxes in 1997 as a result
of the difference between financial and taxable income, primarily the $8.5
million write-off of purchased in-process research and development in 1997 which
was not deductible for tax purposes.

YEAR ENDED AUGUST 31, 1997 COMPARED TO 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 1997 from $10.4
million in 1996. The primary reason for this increase in our revenues was the
increased utilization of our services by existing customers which accounted for
$1.8 million in revenues, or 90.0% of the revenues increase and $0.2 million, or
10.0% of the revenues increase 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 1997
from $6.4 million in 1996. As a percent of revenues, cost of revenues increased
to 62.5% in 1997 from 62.1% in 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 1997 from $1.9
million in 1996. As a percent of revenues, selling, general and administrative
expenses decreased to 18.1% in 1997 from 18.6% in 1996. The dollar increase was
due primarily to the employment of additional staff resulting from the increase
in our new customer business as well as an increase in our existing customer
business.

23
<PAGE> 26

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 1997 from $0.7 million in 1996. As a percent of
revenues, research and development expenses increased to 9.3% in 1997 from 6.8%
in 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 1997 from $0.9 million in 1996. As a percent
of revenues, combined depreciation and amortization expense decreased to 7.9% in
1997 from 9.1% in 1996. The dollar increase was due primarily to completion of
development projects, whose costs were amortized beginning in 1997 over a useful
life of five years. The decrease as a percentage of revenues was attributable to
a reduction in fixed capital expenditures.

Other Income. Other income increased to $0.7 million in 1997 from $0.1
million in 1996. As a percent of revenues, other income increased to 5.3% in
1997 from 0.9% in 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 1997
compared to a $0.1 million tax provision in 1996. The tax provision in 1997 was
affected by the non-deductible $8.5 million write-off of purchased in-process
research and development in 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 $7.5 million at February 28, 1999 compared
to $3.4 million at February 28, 1998. Included in working capital are cash and
cash equivalents of $0.9 million at February 28, 1999 compared to $0.3 million
at February 28, 1998. During the six months ended February 28, 1999, operating
activities provided $1.5 million in cash. Investing activities used $2.4 million
for the six months ended February 28, 1999, of which $2.2 million was used to
acquire property, plant and equipment. Accounts receivable from customers were
outstanding on average approximately 83 days during the six months ended
February 28, 1999 compared to approximately 120 days during the six months ended
February 28, 1998. The decrease in payment time for the six months ended
February 28, 1999 compared to the six months ended February 28, 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 1998, operating activities provided $6.3 million of
cash. Investing activities used $4.8 million for the year ended August 31, 1998,
of which $4.2 million was used to acquire property, plant and equipment.
Accounts receivable from customers were outstanding on average approximately 82
days during fiscal year 1998 compared to approximately 52 days during fiscal
year 1997 excluding the TXEN accounts receivable. The increase in payment time
in fiscal year 1998 compared to fiscal year 1997 was due primarily to the
addition of the managed care business where customers typically take longer to
pay their invoices. Historically, the Practice Management Services division has
experienced collections within 60 days of billing. We believe that by continuing
to apply the collection procedures used

24
<PAGE> 27

in the Practice Management Services division to the Managed Care Services
division, delays in payments on accounts receivable will be further reduced
because of active management of outstanding accounts.

We believe that the net proceeds from this offering, together with other
available funds, will be sufficient to meet our capital requirements for the
next 24 months. We may also utilize cash to acquire or invest in complementary
products, technologies or businesses. Nichols TXEN continually evaluates
acquisition 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 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 1997. The Practice Management 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 the presentation of
revenues on a combined basis presents a more meaningful and complete discussion
of our business. 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. 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.

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 Practice Management 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 Practice Management Services division. The
following table summarizes our revenues by division for the periods indicated on
a combined basis:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Managed Care....................... $ 3,194 $ 4,758 $ 7,904 $15,483 $28,861 $12,454 $17,042
Practice Management................ 8,357 9,382 10,370 12,438 14,619 6,596 8,207
------- ------- ------- ------- ------- ------- -------
Total....................... $11,551 $14,140 $18,274 $27,921 $43,480 $19,050 $25,249
======= ======= ======= ======= ======= ======= =======

PERCENTAGE OF REVENUES:
Managed Care....................... 27.7% 33.6% 43.3% 55.5% 66.4% 65.4% 67.5%
Practice Management................ 72.3 66.4 56.7 44.5 33.6 34.6 32.5
------- ------- ------- ------- ------- ------- -------
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
</TABLE>

25
<PAGE> 28

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 1997 compared to fiscal 1996 as a result
of an increase in software sales in 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>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Recurring.......................... $ 8,675 $10,801 $14,261 $19,985 $33,320 $14,196 $19,222
Non-recurring...................... 2,876 3,339 4,013 7,936 10,160 4,854 6,027
------- ------- ------- ------- ------- ------- -------
Total....................... $11,551 $14,140 $18,274 $27,921 $43,480 $19,050 $25,249
======= ======= ======= ======= ======= ======= =======

PERCENTAGE OF REVENUES:
Recurring.......................... 75.1% 76.4% 78.0% 71.6% 76.6% 74.5% 76.1%
Non-recurring...................... 24.9 23.6 22.0 28.4 23.4 25.5 23.9
------- ------- ------- ------- ------- ------- -------
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.

Practice Management. Nichols TXEN has identified all of the active
applications specific to the Practice Management 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

26
<PAGE> 29

2000 problems, implement appropriate modifications and validate the final
changes. As of December 31, 1998, we had completed 1,020 hours of programming
changes. We estimate that there remains 200 hours of programming work and 500
hours of testing before the Practice Management systems are Year 2000 compliant.
We believe that these modifications will be completed by the end of April 1999.
We believe that our decision support application, Decision Manager 3.0, is Year
2000 compliant.

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 remediate 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, Nichols TXEN
has minimized its 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 anticipate that the
Year 2000 conversions will not be completed in a timely fashion, we will work to
enhance our contingency plan. If our Year 2000 conversions are not completed
prior to 2000 or 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. We estimate that
the total cost for Year 2000 compliance will be $263,500, which represents 4,391
hours of analysis, modification and testing. As of April 5th, 1999, we had
completed 4,090 hours of Year 2000 compliance work at a cost of $245,400.

27
<PAGE> 30

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 our 1999 fiscal year. Management does not believe
that Nichols TXEN has material other comprehensive income which would require
such separate disclosure.

During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained 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 and are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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.

28
<PAGE> 31

BUSINESS

NICHOLS TXEN

We provide outsourcing of information technology and administrative
services to managed care organizations and physician practice groups within the
health care industry. Our outsourcing services improve quality and reduce costs
by minimizing the time and personnel needed to process health care transactions
by offering customers a broad range of medical billing and claims processing
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 which allow customers the
flexibility to perform administrative functions with their staff utilizing our
technology or to outsource to us some or all of their administrative and
technology processing functions. Each customer contracts with us for the level
of outsourcing service needed. Our outsourcing solutions provide customers with
significant benefits, including:

- streamlined administrative functions;

- variable rate operating cost structure;

- faster implementation;

- reduced capital expenditures for administrative health care technologies;

- less technology risk;

- access to knowledgeable and experienced personnel;

- sophisticated enterprise-level application software and decision support
tools; and

- enhanced marketplace connectivity.

As a result, our services enable customers to concentrate on providing
quality health care by focusing on core competencies. We maintain a centralized
network data center to process transactions and provide technology services for
our customers. We believe that our ability to offer both technical solutions and
administrative services through a network data center differentiates us from
competitors that offer only turnkey software solutions or only administrative
services.

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 Practice Management Services division provides technology services to:

<TABLE>
<S> <C>
- - hospital-based physicians; - physician groups; and
- - hospital emergency departments; - physician networks.
</TABLE>

As of February 28, 1999, we had 94 managed care services customers representing
over 3.0 million lives nationwide and 290 practice management services customers
representing approximately 3,000 physicians, primarily in the Southeast.

INDUSTRY BACKGROUND

Health care costs in the United States have risen dramatically over the
past two decades to 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

29
<PAGE> 32

to reduce costs have caused significant changes in the health care industry.
Although reimbursement for health care 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 health care from payors to
health care providers. 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. Membership in these
point-of-service plans increased 36.9%, from 8.5 million lives in 1997 to 11.7
million lives in 1998. Physician groups and managed care organizations often
lack the technical and operational resources to function within this more
complex and sophisticated health care environment. These groups and
organizations need access to a greater spectrum of information related to cost
and quality of health care. Due to the increased complexity, it is estimated
that 30% to 40% of every health care dollar spent covers administrative costs.
In addition to focusing on the costs of health care services, managed care
organizations are focusing on how the services are utilized and managed.

Membership in commercial HMOs is expected to rise from approximately 66
million members in 1997 to approximately 105 million members in 2001. The Health
Care Financing Administration, or 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, Medicaid HMOs increased from 270 plans in 1997 to 284 plans in
1998, while membership grew 39.5% during that same period. 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
health care organizations. For example, industry studies indicate approximately
30% to 40% of claim forms are either incomplete or inaccurate. Furthermore,
providers need information to evaluate the profitability of their contracts with
managed care organizations and to assess the overall performance of their
practices.

Expanding costs and administrative complexities are driving healthcare
organizations to increase their expenditures in information technology. These
expenditures are expected to grow from $17.9 billion in 1998 to $25.3 billion in
2001. HMOs alone are projected to spend $5 billion on information technology in
1999. A 1998 HIMSS survey indicates that health care organizations are poorly
equipped to support managed care. Less than 10% of the companies surveyed
indicated they had the software capability to perform: utilization management;
risk management; benefits management; claims management; and health outcomes
reporting.

The HIMSS survey also indicates an increasing demand for health care
information technology outsourcing solutions, with approximately 59% of health
care organizations surveyed outsourcing some portion of their information
technology services. The market for health care information technology and
administrative services outsourcing is expected to increase from $2.3 billion in
1998 to $3.8 billion in 2001. Physician groups, in particular, have increased
their utilization of administrative services outsourcing. Within the last five
years, more than 300 physician management services organizations have been
formed to address the technology and administrative needs of physician groups.

Automating the administrative tasks of health care reduces the cost of
administering a single outpatient case by as much as 32%. By automating the
movement of administrative information, it is estimated that health care
administrative management expenses may be reduced by 20%. For

30
<PAGE> 33

example, cost savings of $1.73 per claim may be realized by automating claims
submission. Private networks, such as our network data center, and public
networks, such as the Internet, enable rapid communication of data among
participants in the health care industry. We believe that HCFA's recent approval
of secure transmissions over the Internet will increase the utilization of
electronic health care transactions. In addition, network data centers improve
software systems operations and provide better decision support information
because the integration and access is centralized and easier to manage.

STRATEGY

Nichols TXEN's objective is to be the leading national provider of
outsourcing solutions for information technology and administrative services to
managed care entities and to physician organizations within the health care
industry. Our strategy includes the following key elements:

Focus on providing outsourcing solutions for the administrative challenges
of health care. Nichols TXEN believes contractual complexity and an increase in
the volume of health care transactions caused by managed care will continue to
force health care companies to outsource solutions for information technology,
especially administrative services. We plan to focus additional resources on
providing administrative services to meet the increased demand for complete
administrative solutions versus information technology outsourcing or turnkey
alternatives. 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 control our own technology and can directly and more quickly
address the new, changing information demands of the health care industry.

Continue to capitalize on niche opportunities. We have successfully
focused our efforts in the managed care and physician practice management
markets of the health care industry. Often, these organizations are expanding
into new lines of business and lack the capability to adequately process new and
increased information demands. To be successful, these organizations must
acquire new information technology to manage contractual complexity and improve
communication connectivity. Our ability to scale our outsourcing solutions
enables us to provide outsourcing solutions to start-up organizations, as well
as established companies within targeted markets.

Expand high recurring revenue model. Nichols TXEN maintains a significant
recurring revenue stream resulting from 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 our existing customers
including operations consulting, software enhancements, add-on software and
outsourcing services, such as information analysis and medical management.

Increase internal efficiencies through automation and expanded
connectivity. Nichols TXEN believes that improvements in automatic claim
filing, automatic claim adjudication and automatic generation of payments will
increase operating efficiencies and improve customer services. Improvements in
technology and services can be made efficiently because we control the
supporting software, technology, centralized network data center and
communications connectivity. 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 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 practice management clients providing for

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<PAGE> 34

increased efficiency, quality and customer satisfaction. Increasing efficiency
through automation and expanded connectivity enables us to realize economies of
scale as additional customers are added.

Expand decision support and medical utilization management software and
services. We plan to add new decision support and medical utilization
management software and services that complement our transaction application
software suites. The diffusion of managed care risk has created a demand for
actuarial services requiring new levels of information to evaluate health care
costs and outcomes effectiveness. Employer-sponsored groups, such as the
National Coalition for Quality Assurance, or NCQA, are pressuring health plans
for comparative information using standard industry measures, such as the Health
Plan Employer Data and Information Set. In addition, the managed care industry
has recently focused on the management and control of a patient's use of
hospital services. We plan to broaden our technology and services to improve the
evaluation of patient medical necessity, treatment planning, referral and
authorization processing, care coordination and assessment of quality outcomes.
These services are also known as utilization review, case management, disease
management and outcomes assessment.

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
network data center operating model.

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 solutions help clients to:

- increase operational efficiencies and reduce administrative expenses;

- 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 health care.

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 7,000 organizations that may benefit from our outsourcing
services. The chart on the following page illustrates our Managed Care Services.

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<PAGE> 35
Managed Care Services

<TABLE>
<CAPTION>
- ------------------------------------------------------------ ----------------------------------------------------------
MCT Services - Managed Care MCA Services - Managed Care
Technology Outsourcing Administration Outsourcing
- ------------------------------------------------------------ ----------------------------------------------------------

<S> <C>
Customers outsource their software and system functions to Customers outsource all their information technology needs
Nichols TXEN but use their own administrative staff. and some or all administrative functions. Through Nichols
Through our centralized network data-center, customers access TXEN's back office service centers, customers utilize our
high-end software systems for managed care administration, personnel and technology to perform claims processing,
decision support, medical management and electronic data eligibility verification, member/provider data management,
interchange. capitation processing, premium billing, check processing,
mail room and other related administrative services.
- ------------------------------------------------------------ ----------------------------------------------------------

Nichols TXEN Technology Nichols TXEN Technology
& Customer Personnel & Nichols TXEN Personnel
</TABLE>

<TABLE>
<CAPTION>
-------------------------------- ---------------------------------- -------------------------
Marketplace Connectivity Nichols TXEN - Network Data Center Supporting Technology
-------------------------------- ---------------------------------- -------------------------

<S> <C> <C>
Electronic Data Interchange National Wide Area Network Highly Automated Mailroom
Integrated 3rd Party Applications IBM AS/400s High Speed Scanners
Direct, On-line Connections NT Servers Image Server
Connected LANs High Speed Laser Printers
--------------------------------- ---------------------------------- -------------------------
</TABLE>

Intra-Network Integration with Nichols TXEN
Practice Management Services Applications

<TABLE>
<CAPTION>
- ------------------------------------ --------------------------------------------- -----------------------------------------
First STEPP TXEN-MHS Xtend-DSS
Medical Management Software Managed Care Administration Software Decision Support Software
- ------------------------------------ --------------------------------------------- -----------------------------------------

<S> <C> <C>
Distributed Client/Server medical Enterprise-level managed care administration Executive information and decision support
utilization management software software system for managing and controlling software application suite for analyzing
system for managing tasks and premium billing, capitation, benefit plans transaction data and evaluating
workflow associated with approval of and membership data, eligibility, provider performance and quality. Xtend uses
surgical procedures, hospital contracts, referrals, authorizations, claims, replicated data captured from the
admissions, case management, productivity reporting, accounts receivable, TXEN-MHS and FirstSTEPP applications.
utilization review and specialist accounts payable and general ledger.
referrals. First STEPP is fully
integrated with TXEN-MHS.
- ------------------------------------ --------------------------------------------- -----------------------------------------
</TABLE>

Nichols TXEN High-End
Software
Technology Foundation

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<PAGE> 36

Managed Care Technology Services

Managed care technology, or MCT, customers outsource their software and
system functions to us but use their own administrative staff. Customers access
our internally-developed, high-end software systems for managed care
administration, decision support and medical management. In addition, we offer
integrated third party supporting software and connectivity through our network
data center. The customers' local area networks are connected to our high-speed
wide area network. MCT customers use the following software products 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 support, implementation, consulting and software
development services. As of February 28, 1999, we provided MCT services to 59
customers, of which 13 were turnkey customers.

Managed Care Administrative Services

Managed care administrative, 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 back office service
centers, customers utilize our personnel and technology to perform:

<TABLE>
<S> <C> <C>
- - claims processing; - check processing;
- - eligibility management; - mailroom operations; and
- - capitation risk management;
- - premium billing; - other related administrative services.
</TABLE>

For our MCA customers, we use TXEN MHS, FirstSTEPP and Xtend to perform the
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 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 February 28, 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

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<PAGE> 37

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 activities. 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>

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.

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<PAGE> 38

PRACTICE MANAGEMENT SERVICES DIVISION

The Practice Management Services division's goal is to reduce the time and
personnel needed to perform practice management administrative tasks through an
optimized combination of technology, process automation and well-trained
personnel. 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 timely data through electronic
connectivity.
</TABLE>

The Practice Management Services division targets hospital-based and other
physician groups, hospital emergency departments and physician networks. As of
February 28, 1999, Nichols TXEN had 290 practice management customers
representing approximately 3,000 physicians in eight states: Alabama,
Mississippi, Georgia, Tennessee, Florida, North Carolina, Missouri and Texas. We
have initiated marketing efforts in South Carolina, Kentucky, Virginia,
Maryland, Louisiana and Arkansas. We estimate that there are approximately 8,000
potential customers within this 14-state region. The chart on the following page
illustrates our Practice Management Services.

36
<PAGE> 39

Practice Management Services

- ------------------------------------------------------------- -------------------------------------------------------------
PMT Services - Practice Management PMA Services - Practice Management
Technology Outsourcing Administrative Outsourcing
- ------------------------------------------------------------- -------------------------------------------------------------
<S> <C>

PMT Customers outsource their software and system PMA customers outsource all of their information
functions but use their own administrative staff. Through our technology systems and some or all administrative functions.
centralized network data center, customers access high-end Through Nichols TXEN's back office service centers, customers
software systems for complete practice management utilize our personnel and technology to perform billing, data
administration and decision support. Customers connect entry, chart development, coding, claims submission,
directly to payors, hospitals and other providers. statement processing, insurance follow-up, payment posting,
first level collections and performance analysis.
- ------------------------------------------------------------- -------------------------------------------------------------

</TABLE>

Nichols TXEN Technology Nichols TXEN Technology
& Customer Personnel & Nichols TXEN Personnel

- -------------------------------- ---------------------------------- ----------------------------
Marketplace Connectivity Nichols TXEN - Network Data Center Supporting Technology
- -------------------------------- ---------------------------------- ----------------------------

Electronic Data Interchange Wide Area Network Highly Automated Mailroom
Integrated 3rd Party Applications IBM Mainframe High Speed Scanners
Direct, On-line Connections NT Servers Image Server
Connected LANs High Speed Laser Printers
- -------------------------------- ---------------------------------- ----------------------------

</TABLE>

Intra-Network Integration with Nichols TXEN
Managed Care Services Applications

<TABLE>
<CAPTION>
- -------------------------------------------------------- ------------------------------------------------------
MDr98 Decision Manger 3.0
Physician Practice Management Software Decision Support Software
- -------------------------------------------------------- ------------------------------------------------------

<S> <C>

MDr98 is a network-based practice management Decision Manager is a decision support application
software solution for large physician networks, hospital- designed for Microsoft Access, which enables detailed
based physicians, emergency departments and MSOs. analysis of a physician group's operations. Features of
MDr98 capabilities include: billing management, Decision Manager include activity-based cost analysis,
insurance processing and tracking, appointment procedure analysis and diagnosis, reimbursement
scheduling, windows or text based screens, payments analysis and referral summary, easy data selection and
and statement management, electronic claim filing and sorting, and flexible customized report writer.
remittance, secondary filing, decision management,
master patient index, medical records interfaces and
claims submission management.
- -------------------------------------------------------- ------------------------------------------------------

</TABLE>

Nichols TXEN High-End
Software
Technology Foundation

37
<PAGE> 40

Practice Management Technology Services

Practice management technology, or PMT, customers outsource their software
and system functions to Nichols TXEN, but use their own administrative staff.
Customers access our internally developed, high-end software systems for
practice management administration, decision support and financial management.
In addition, we offer integrated third party supporting software, and
marketplace connectivity through our network data center. Customers connect via
local area networks or directly to our network data center. We differentiate our
physician practice management solutions by enabling customers to connect through
the network data center directly to payors, hospitals and other providers. PMT
customers use MDr98, which enables physician practices to manage and control:

<TABLE>
<S> <C>
- - appointment scheduling;
- - medical billing;
- - electronic remittance;
- - payment processing;
- - electronic claims submission; and
- - insurance follow-up.
</TABLE>

PMT customers may use Decision Manager 3.0, which enables physician practices to
analyze billing and practice information to detect trends regarding payments,
utilization, costs and demographics. In addition, we offer PMT customers access
to our automated mailroom and customized statement processing capabilities. We
also provide software support, implementation, consulting and software
development services. As of February 28, 1999, we provided PMT services to 222
customers.

Practice Management Administrative Services

Practice management, or PMA, customers outsource all of their information
technology systems and some or all administrative functions to the Practice
Management Services division. Through our back office service centers, customers
utilize our personnel and technology to perform:

<TABLE>
<S> <C>
- - billing;
- - chart development;
- - claims submission;
- - insurance follow-up;
- - first level collections;
- - data entry;
- - coding;
- - statement processing;
- - payment posting; and
- - operational analysis.
</TABLE>

For PMA 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 diseases, commonly known as ICD-9 Codes, guidelines, 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 February 28, 1999, we provided PMA services to 68 customers.

Practice Management Services Supporting Software

MDr98 Physician Practice Management System. MDr98 is the core software
supporting our PMT and PMA services. Over the past 30 years, Nichols TXEN has
modified and enhanced our core software for physician practice transaction
processing. We believe MDr98 is the only software product that offers physician
organizations the complete functionality and market place

38
<PAGE> 41

connectivity necessary to succeed in today's complex health care environment.
Our MDr98 is a complete 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 network-based
practice management solution 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, on-line claims submission and
electronic remittance. MDr98 capabilities include the following functions:

<TABLE>
<S> <C>
- - billing management;
- - appointment scheduling;
- - payments and statement management;
- - secondary filing;
- - master patient index;
- - claims submission management;
- - insurance processing and tracking;
- - windows and text based screens;
- - electronic claim filing and remittance;
- - decision management; and
- - medical records interfaces.
</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.

OPERATIONS

Network Data Center

We believe that our method of delivering and accessing health care
information technology utilizing a network data center is superior to a turnkey
system. 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. The network data center is
located in Birmingham, Alabama. Customers may connect to the network directly or
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 health care 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,
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<PAGE> 42

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. This 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 is to deploy our technology over a wide-area
network, we expect that integration with the Internet should be easier, more
cost effective and more comprehensive. Customers using our network data center
have immediate access to new software products developed by Nichols TXEN,
upgrades of existing products and third-party software connected to the network.
In addition, enhancements made to address issues for one customer may be shared
by all users of our network. The center also facilitates customer support
because customer representatives can access software and customer data while
answering customer inquiries.

Nichols TXEN has an extensive disaster recovery plan for our network data
center. 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. At February 28, 1999, Nichols
TXEN employed 15 sales representatives with geographic and market segment
assignments to market our services and technology to new customers, and we
employed 6 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. At February 28, 1999, we employed 7 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 15,000 potential customers in 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.
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<PAGE> 43

Research and Development

Typically, 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 use our own 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 1996, $1.6 million in 1997 and $3.3 million in 1998 of which 3% in 1996, 4%
in 1997 and 19% in 1998, respectively, were customer-sponsored research and
development related to the modification and development of software products. As
of February 28, 1999, the research and development staff consisted of 70
employees.

Nichols TXEN uses graphical user interface tools to make set-up,
information review and workflow on software systems faster, easier and more
intuitive. Planned enhancements designed to achieve this goal include a customer
service module, benefit plan building assistant, Java-based user interface for
TXEN MHS and MDr98, and more extensive care management tracking for FirstSTEPP.
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. Currently, we offer two
primary decision support products, Xtend for managed care and Decision Manager
3.0 for practice management. We also plan to adopt an ORACLE database, create a
medical management module for Xtend and add key indicator views in Decision
Manager 3.0 and MDr98 for reporting.

COMPETITION

The business of providing information technology and administrative
services outsourcing 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 client base, introduce new technologies and meet the
increasingly sophisticated needs of our clients. In general, we compete based on
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. Most of our sales are derived from competitive procurement processes that
require specific, highly detailed presentations from all qualified vendors. We
compete with firms that sell turnkey computer systems, with firms that offer
only information technology outsourcing services and with companies that focus
entirely on administrative services outsourcing as well. Examples of our
competition include Medaphis, Inc., McKesson HBOC, Inc. and QuadraMed, Inc. A
turnkey system is characterized by a stand-alone package of hardware and
software designed to perform specific functions. We plan to significantly limit
our sale of turnkey computer systems to customers who desire to process their
transactions internally. Accordingly, Nichols TXEN may be at a competitive
disadvantage to other vendors offering such systems. 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

41
<PAGE> 44

health care industry, may establish joint marketing arrangements or other
relationships to compete more effectively against us and new competitors may
emerge.

INTELLECTUAL PROPERTY

Our success is dependent, in part, on our ability to protect our
proprietary software and confidential information from unauthorized use and
disclosure. We do not own any patents and have not registered any copyrights,
trademarks, service marks or trade names with the United States Patent and
Trademark Office. We rely on a combination of trade secrets, common law
intellectual property rights, license agreements, nondisclosure and other
contractual provisions and technical measures to establish and protect our
proprietary rights in our intellectual property and confidential information.
There can be no assurance that the legal protections afforded to us or the steps
taken by us will be adequate to prevent misappropriation of our technology and
confidential information. In addition, these protections do not prevent
independent third-party development of competitive products or services. We
believe that our proprietary rights do not infringe upon the proprietary rights
of third parties. There can be no assurance, however, that third parties will
not assert infringement claims against us in the future or that any such
assertion will not require us to enter into a license agreement or royalty
arrangement with the party asserting the claim.

FACILITIES

We currently occupy approximately 109,000 square feet in two 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 PMA operations.

EMPLOYEES

Nichols TXEN had 622 employees as of February 28, 1999, of which 358 were
in the Managed Care Services division, 210 were in the Practice Management
Services division, and 54 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> <C>
- - software; - managed care and practice management markets;
- - management; - claims examination; and
- - project management; - human resources.
</TABLE>

We augment our regular recruiting efforts of university visits, job fairs, and
employee referral programs with a special recruiting and training program for
college graduates from a variety of disciplines with high grade point averages.
These college graduates are placed in an intense sixteen-week training program.
The training program educates these new employees on the managed care market and
also provides concentrated training on business division products and service.
During fiscal year 1998, we conducted fall, spring and summer classes training
48 new employees. At the end of the training program, these new employees were
assigned positions with Nichols TXEN.

To recruit and train additional personnel, Nichols TXEN participates in a
six-week pre-employment screening program developed and funded primarily by the
State of Alabama.

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<PAGE> 45

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 health care 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.

Anti-Kickback Statute

Under Medicare, Medicaid and other government funded health care programs,
federal and state governments enforce a federal statute that prohibits the
offer, payment, solicitation or receipt of any remuneration, directly or
indirectly, overtly or covertly, in cash or in kind to induce or in exchange for
(1) referring patients covered by the programs, or (2) leasing, purchasing,
ordering or arranging for or recommending the lease, purchase or order of any
item, good, facility or service covered by the programs. Prohibited remuneration
includes any kickbacks, bribes, or rebates. The statute is commonly referred to
as the Anti-Kickback Statute.

A person or entity that violates the Anti-Kickback Statute may be
penalized. These penalties include criminal fines of up to $25,000 per violation
and imprisonment. In addition, civil penalties can be imposed up to $50,000 per
violation, plus three times the actual damages. Further, the Secretary of the
Department of Health and Human Services has the authority to exclude or bar
individuals or entities who violate the Anti-Kickback Statute from participating
in

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<PAGE> 46

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 health care fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996, or HIPAA. HIPAA broadened the scope of fraud and abuse laws, such as
the Anti-Kickback Statute, to include all health care services, whether or not
they are reimbursed under a federal program. Federal health care offenses
include health care fraud and making false statements relative to health care
matters. Any person or entity that knowingly and willfully defrauds or attempts
to defraud a health care benefit program or obtains by means of false or
fraudulent pretenses, representations or promises, any of the money or property
of any health care benefit program in connection with the delivery of health
care 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 health care services by a health
care 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

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<PAGE> 47

obligation to pay the federal government. "Person" includes an individual,
company or corporation. Various state laws impose liability for similar acts.
Claims under the Federal False Claims Act may be brought by the federal
government or private "whistleblowers." If we are found liable for a violation
of the Federal False Claims Act, or any similar state law, it may result in
substantial civil and criminal penalties. In addition, Nichols TXEN could be
prohibited from processing Medicaid or Medicare claims for payment.

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
health care providers and suppliers or other contractors which have a potential
to increase utilization of government health care 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 health care 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, we may
become subject to 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.

LEGAL PROCEEDINGS

We are involved in various lawsuits and claims arising in the normal course
of business. In our opinion, although the outcomes of these suits and claims are
uncertain, in the aggregate they should not have a material adverse effect on
our business, financial condition or results of operations.

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<PAGE> 48

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.................... 36 Vice President and General Manager, Managed Care
W. Luckey Crocker.................... 44 Vice President and General Manager, Practice Management
Chris H. Horgen(1)................... 52 Director
James D. Kever(2)(3)................. 46 Director
James I. Harrison, Jr.(2)(3)......... 66 Director
Patsy L. Hattox...................... 50 Secretary
Allen E. Dillard..................... 39 Treasurer
</TABLE>

- ---------------

(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.

All directors of Nichols TXEN hold office until the next annual meeting of
the stockholders and the election and qualification of their successors.
Officers serve at the discretion of the Board of Directors.

Thomas L. Patterson has been Chairman of the Board of Nichols TXEN since
the acquisition of TXEN, Inc. in August 1997. Since May 1998, Mr. Patterson has
been employed part-time in the capacity of Chairman of the Board. From 1989 to
August 1997, Mr. Patterson served as Chief Executive Officer and President of
TXEN, Inc., one of our predecessors, which he co-founded. In 1980, Mr. Patterson
founded SEAKO, Inc., an information technology company for practice management
and managed care systems. From 1980 to 1989, Mr. Patterson served as President
of SEAKO, Inc. He also serves on the Board of Directors of Nichols Research.

Paul D. Reaves has served as our Chief Executive Officer since May 1998.
Mr. Reaves was a co-founder of TXEN, Inc. and he served as Executive Vice
President of TXEN, Inc. from 1989 to 1997. From 1981 to 1989, Mr. Reaves was
employed by SEAKO, Inc. in programming, implementation, customer support and
sales and marketing. Mr. Reaves served as Vice President of SEAKO, Inc. from
1985 to 1989.

H. Grey Wood has served as our President since January 1998 and as our
Chief Operating Officer since August 1997. Mr. Wood served as Vice President and
General Manager of TXEN, Inc. from 1995 to 1997. From 1993 to 1995, he was
Director and General Manager of the physician Practice Management Group of CSC
Healthcare Systems, Inc., a vendor of turnkey practice management and managed
care software.

John D. McKay has served as our Chief Financial Officer since 1997. From
1988 to 1996, he served as Controller of one of our predecessors, Computer
Services Corporation. From 1982 to 1988, Mr. McKay held various staff and
management positions with Ernst & Young LLP, focusing on health care 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

46
<PAGE> 49

1990 to 1997, Mr. Pitman 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
Practice Management 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. Mr.
Horgen 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 shareholders actions required to be approved by
shareholders, 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.

47
<PAGE> 50

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.

DIRECTOR COMPENSATION

Prior to completion of this offering, non-employee directors received no
compensation for service on the Board of Directors. Following completion of this
offering, directors not employed by Nichols TXEN or Nichols Research will
receive a fee of $2,500 for each board meeting attended and $500 for each
committee meeting attended which is held independently of a board meeting.

After completion of this offering, the non-employee directors will be
eligible to receive options pursuant to Nichols TXEN's Non-Employee Director
Stock Option Plan. The Director Stock Option Plan will become effective upon
consummation of this offering. Under the Director Stock Option Plan, each
director who is not an officer or employee of Nichols TXEN, Nichols Research or
an officer or employee of a majority-owned subsidiary or joint venture of
Nichols TXEN, will be granted an option to purchase 5,000 shares of common stock
at the initial public offering price. Each subsequently appointed or elected
non-employee director will be granted an option to purchase 1,000 shares of
common stock at an exercise price equal to the fair market value on the date of
the grant. In addition, each non-employee director will be granted an option at
each annual meeting of shareholders 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.

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<PAGE> 51

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, ALL OTHER
1998(1) COMPENSATION(2)
--------------------- ---------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- --------- --------
<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,
Practice Management
</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 the Company under the Nichols
Research Retirement Plan for the fiscal year ended August 31, 1998.

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 February 28,
1999, options exercisable for 781,500 shares of common stock at an exercise
price equal to the initial public offering price were granted subject to the
completion of this offering.

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<PAGE> 52

The 1998 Stock Option Plan permits a committee composed of either the
entire Board of Directors or two or more disinterested non-employee directors of
Nichols TXEN to issue incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, and non-statutory stock options that
do not conform to the requirements of that code section. The committee has
discretionary authority to determine the individuals to whom options will be
granted from among those individuals who are eligible, as well as the number of
options to be granted to each individual. The exercise price of each incentive
stock option shall not be less than 100% of the fair market value of the common
stock at the time of the grant, except in the case of a grant to an employee who
owns 10% or more of the outstanding stock of Nichols TXEN, the exercise price
shall be not less than 110% of such fair market value. The exercise price of
each non-statutory option will be determined by the committee at the time of the
grant of the non-statutory stock option, which price may not be less than the
fair market value of the shares at the time the option is granted, except that
with respect to not more than 10% of the shares of common stock authorized under
the 1998 Stock Option Plan, a committee composed solely of disinterested
non-employee directors may establish an exercise price below fair market value.
In addition, options may not be repriced to specify a price less than the
initial exercise price, except that with respect to not more than 10% of the
shares of common stock authorized under the 1998 Stock Option Plan, a committee
composed solely of disinterested non-employee directors may approve a repricing
of options specifying a lower price.

No non-statutory option is exercisable either in whole or in part prior to
the earlier of the date specified in the non-statutory option or six months from
the date the non-statutory option is granted. Each non-statutory option will
expire on the earlier of the date specified in the non-statutory option or ten
years from the date the non-statutory option is granted. No incentive option is
exercisable, either in whole or in part, prior to two years from the date it is
granted and in no event is an incentive option exercisable after the expiration
of five years from the date it is granted. Each incentive option is exercisable
in three installments. Up to one-third of the total shares granted may be
purchased after 24 months from the date of the grant, up to an additional
one-third may be purchased after 36 months and up to the final one-third may be
purchased after 48 months. Incentive option recipients may accumulate
installments not yet exercised, which may be exercised, in whole or in part, in
any subsequent period but not later than five years from the date the incentive
option is granted.

The Board of Directors may amend the 1998 Stock Option Plan without
stockholder approval, except with respect to:

- a change in the number of shares for which options may be granted under
the 1998 Stock Option Plan either in the aggregate or as to any
individual employee;

- 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, the Board of Directors and Nichols Research, as the
sole shareholder, adopted and approved the Nichols TXEN Corporation Employees'
Stock Purchase Plan. A total of 500,000 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

50
<PAGE> 53

any of its subsidiaries. Persons serving on the Stock Purchase Plan's committee
may receive option grants under the Stock Purchase Plan.

All regular, full-time employees of Nichols TXEN and such subsidiaries as
are designated by the Board 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 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 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.

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<PAGE> 54

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.

52
<PAGE> 55

CERTAIN TRANSACTIONS

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

53
<PAGE> 56

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.

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>

54
<PAGE> 57

PRINCIPAL STOCKHOLDERS

Prior to this offering, Nichols Research owned 7,500,000 shares, or 100% of
Nichols TXEN. Nichols TXEN will sell 2,175,000 shares in connection with this
offering, and thereafter Nichols Research will own 7,500,000 shares, or
approximately 78% of Nichols TXEN, 75% 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 February 28, 1999, options covering 781,500 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......................................... 22,500
John D. McKay............................................. 22,500
Chris H. Horgen........................................... 40,000
Allen E. Dillard.......................................... 5,000
Patsy L. Hattox........................................... 5,000
Other officers and employees of Nichols TXEN................ 364,500
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.

55
<PAGE> 58

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 February 28, 1999, Nichols TXEN
had issued and outstanding 7,500,000 shares of common stock. After this
offering, Nichols TXEN will have 9,675,000 shares of common stock outstanding.

COMMON STOCK

Holders of shares of common stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of Nichols
TXEN's stockholders. Nichols TXEN's amended and restated certificate of
incorporation does not provide for cumulative voting, and accordingly, the
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election. The
holders of shares of common stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by Nichols TXEN
out of funds legally available therefor. In the event of a dissolution,
liquidation, or winding up of Nichols TXEN, holders of shares of common stock
are entitled to share ratably in all assets remaining after payment of all
liabilities and liquidation preferences, if any. Holders of shares of common
stock have no preemptive, subscription, redemption, or conversion rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued by Nichols TXEN in connection with this offering will be, duly
authorized, validly issued, fully paid and nonassessable. The transfer agent and
registrar for the common stock is ChaseMellon Shareholder Services.

CERTAIN PROVISIONS OF DELAWARE LAW

Nichols TXEN is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation, such as Nichols TXEN shall become upon completion of this
offering, 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 shareholders, 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.

56
<PAGE> 59

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.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering there has been no market 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
9,675,000 shares of common stock. Of the 9,675,000 shares outstanding upon
completion of this offering, the 2,175,000 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 7,500,000
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 BT Alex.
Brown Incorporated. BT Alex. Brown Incorporated, 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, 7,500,000 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 reserved under the Non-Employee Director Stock
Option Plan; and

- the 500,000 shares reserved for issuance under the Employees' Stock
Purchase Plan.

57
<PAGE> 60

UNDERWRITING

Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below through their representatives, BT Alex.
Brown Incorporated, CIBC Oppenheimer Corp., Friedman, Billings, Ramsey & Co.,
Inc. and The Robinson-Humphrey Company, LLC, have severally agreed to purchase
from Nichols TXEN, the following respective numbers of shares of common stock at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated.................................
CIBC Oppenheimer Corp.......................................
Friedman, Billings, Ramsey & Co., Inc.......................
The Robinson-Humphrey Company, LLC..........................
--------
Total.................................................. 2,175,000
========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters are subject to conditions precedent and that the underwriters will
purchase all shares of the common stock offered hereby if any of such shares are
purchased.

Nichols TXEN has been advised by the representatives of the underwriters
that the underwriters propose to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may allow,
a concession not in excess of $ per share to other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the representatives.

Nichols TXEN has granted to the underwriters an option, exercisable not
later than 30 days after the date of this prospectus, to purchase up to 325,000
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of common stock to be purchased by
it shown in the above table bears to 2,175,000, and Nichols TXEN will be
obligated, pursuant to the option, to sell such shares to the underwriters. The
underwriters may exercise such option only to cover over allotments made in
connection with the sale of common stock offered hereby. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 2,175,000 shares are being offered.

The following table shows the underwriting fees to be paid to the
underwriters by Nichols TXEN in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.

<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>

58
<PAGE> 61

The underwriters will offer the shares, including the shares from the
over-allotment option if it is exercised, on a firm commitment basis. BT Alex.
Brown Incorporated expects to deliver the shares of common stock to purchasers
on , 1999.

Nichols TXEN has agreed to indemnify the underwriters and their contracting
persons against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.

Nichols TXEN, Nichols Research, the officers and directors of Nichols TXEN
and the executive officers and directors of Nichols Research, holding in the
aggregate approximately 7,500,000 shares of common stock and options to purchase
586,500 shares of common stock, have agreed not to offer, sell or otherwise
dispose of any shares of common stock for a period of 180 days after the date of
this prospectus without the prior written consent of BT Alex. Brown
Incorporated. When determining whether to release shares from the lock-up
agreements, BT Alex. Brown Incorporated may consider, among other factors,
market conditions at the time, the number of shares for which the release is
requested and the shareholder's reasons for requesting the release.

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the common stock for their own account. Additionally, to cover
such over allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.

The representatives of the underwriters have advised Nichols TXEN that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiations among Nichols TXEN and the representatives of the
underwriters. Among the factors to be considered in such negotiations will be:

- prevailing market conditions;

- the results of operations of Nichols TXEN in recent periods;

- the market capitalizations and stages of development of other companies
that Nichols TXEN and the representatives of the underwriters believe to
be comparable to the Company;

- estimates of the business potential of Nichols TXEN; and

- the present state of Nichols TXEN's development and other factors deemed
relevant.

59
<PAGE> 62

LEGAL MATTERS

The validity of the issuance of the shares of the common stock offered
hereby will be passed upon for Nichols TXEN by Lanier Ford Shaver & Payne, P.C.,
Huntsville, Alabama. John R. Wynn is a member of the law firm Lanier Ford Shaver
& Payne, P.C. and is a director of Nichols Research. As of the date of this
prospectus, six attorneys of Lanier Ford Shaver & Payne, P.C., including Mr.
Wynn, beneficially owned an aggregate of 31,321 shares of Nichols Research
common stock. Certain 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.

60
<PAGE> 63

ADDITIONAL INFORMATION

Nichols TXEN has filed with the Securities and Exchange Commission a
registration statement on Form S-1, together with all amendments, schedules and
exhibits thereto, under the Securities Act with respect to the shares of common
stock offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement, parts of which are omitted in accordance with the rules
and regulations of the SEC. For further information with respect to Nichols TXEN
and the common stock offered hereby, reference is made to the registration
statement. Statements made in this prospectus as to the contents of any
contract, agreement, or other document are not necessarily complete and in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. The registration statement and the exhibits
and schedules thereto may be inspected without charge at the public reference
facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the SEC: Seven
World Trade Center, Room 1400, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates.
Information pertaining to the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. In addition, Nichols TXEN is
required to file electronic versions of these documents with the SEC through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The SEC maintains a World Wide Web Site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC.

Nichols TXEN intends to make available to its stockholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.

61
<PAGE> 64

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 February
28, 1998 (unaudited) and February 28, 1999 (unaudited).... F-3
Statements of Operations for the three years ended August
31, 1996, 1997 and 1998 and the six months ended February
28, 1998 (unaudited) and February 28, 1999 (unaudited).... F-4
Statements of Changes in Stockholder's Equity for the three
years ended August 31, 1996, 1997 and 1998 and the six
month period ended February 28, 1999 (unaudited).......... F-5
Statements of Cash Flows for the three years ended August
31, 1996, 1997 and 1998 and the six months ended February
28, 1998 (unaudited) and February 28, 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 two
years ended June 30, 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> 65

REPORT OF INDEPENDENT AUDITORS

To the Stockholder of
Nichols TXEN Corporation

We have audited the accompanying balance sheets of Nichols TXEN Corporation
as of August 31, 1997 and 1998, and the related statements of operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended August 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of Nichols TXEN Corporation as
of August 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended August 31, 1998 in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Birmingham, Alabama
January 7, 1999

F-2
<PAGE> 66

NICHOLS TXEN CORPORATION
BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
----------------- -----------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 237 $ 1,804 $ 273 $ 860
Accounts receivable, less allowance for doubtful
accounts of $150 and $500 at August 31, 1997 and
1998, respectively................................ 6,946 9,919 12,665 11,628
Deferred income taxes................................ 156 436 289 453
Other................................................ 575 1,455 1,098 1,182
------- ------- ------- -------
Total current assets................................... 7,914 13,614 14,325 14,123

Property and equipment, net............................ 4,783 6,527 5,623 7,783

Deferred income taxes.................................. -- -- -- 705

Intangible assets, net................................. 39,355 37,574 38,831 32,029
------- ------- ------- -------
Total assets........................................... $52,052 $57,715 $58,779 $54,640
======= ======= ======= =======

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................... $ 1,105 $ 751 $ 1,159 $ 327
Accrued compensation and benefits.................... 459 1,444 1,054 1,316
Income taxes payable................................. 419 2,126 901 837
Payable to Nichols Research and affiliates........... 1,003 2,635 4,031 3,486
Deferred revenue..................................... 2,371 379 3,732 160
Other................................................ 334 499 77 526
------- ------- ------- -------
Total current liabilities.............................. 5,691 7,834 10,954 6,652

Deferred income taxes.................................. 532 800 592 --

Commitments

Stockholder's equity:
Common stock......................................... 75 75 75 75
Additional paid-in capital........................... 52,833 52,833 52,833 52,833
Retained earnings (deficit).......................... (7,079) (3,827) (5,675) (4,920)
------- ------- ------- -------
Total stockholder's equity............................. 45,829 49,081 47,233 47,988
------- ------- ------- -------
Total liabilities and stockholder's equity............. $52,052 $57,715 $58,779 $54,640
======= ======= ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 67

NICHOLS TXEN CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................ $10,370 $12,438 $43,480 $19,050 $25,249
Cost of revenues.................... 6,438 7,769 23,256 10,192 13,689
------- ------- ------- ------- -------
Gross profit........................ 3,932 4,669 20,224 8,858 11,560
Selling, general and administrative
expenses.......................... 1,932 2,251 7,367 3,238 4,593
Research and development............ 710 1,155 2,771 1,130 1,493
Depreciation and amortization....... 947 985 4,547 2,087 2,401
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 2,403 (1,224)
Other income (expense):
Interest expense.................. -- -- (4) (2) --
Equity in earnings of TXEN,
Inc............................ 94 656 -- -- --
------- ------- ------- ------- -------
Income (loss) before income taxes... 437 (7,566) 5,535 2,401 (1,224)
Income tax expense (benefit)........ 117 107 2,283 997 (131)
------- ------- ------- ------- -------
Net income (loss)................... $ 320 $(7,673) $ 3,252 $ 1,404 $(1,093)
======= ======= ======= ======= =======
Earnings (loss) per common share.... $ 0.04 $ (1.02) $ 0.43 $ 0.19 $ (0.15)
======= ======= ======= ======= =======
Weighted average common shares
outstanding....................... 7,500 7,500 7,500 7,500 7,500
======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE> 68

NICHOLS TXEN CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<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............. 7,500,000 $75 $ 9,033 $ 274 $ 9,382
Net income............................. -- -- 320 320
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1996............. 7,500,000 75 9,033 594 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............. 7,500,000 75 52,833 (7,079) 45,829
Net income............................. -- -- 3,252 3,252
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1998............. 7,500,000 75 52,833 (3,827) 49,081
Stock dividend affected in the form of
a 7,500 to 1 stock split............. 7,500,000 75 -- -- --
Net loss (unaudited)................... -- -- (1,093) (1,093)
--------- --- ------- ------- -------
BALANCE AT FEBRUARY 28, 1999
(UNAUDITED).......................... 7,500,000 $75 $52,833 $(4,920) $47,988
========= === ======= ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 69

NICHOLS TXEN CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
--------------------------- -----------------
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 $ 1,404 $(1,093)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 947 985 4,547 2,087 2,401
Provision for doubtful accounts............ -- -- 350 25 72
Equity in earnings of TXEN, Inc............ (94) (656) -- -- --
Deferred income taxes...................... 54 (4) (12) (73) (1,522)
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) (5,744) (1,781)
Other assets............................. (228) (73) (880) (523) 273
Accounts payable......................... 2 5 (354) 54 (424)
Accrued compensation and benefits........ 59 44 985 595 (128)
Payable to Nichols Research and
affiliates............................ 438 309 1,632 3,510 (438)
Other current liabilities................ 115 79 120 1,104 (192)
------ -------- ------- ------- -------

Net cash provided by operating activities.... 1,082 932 6,317 2,439 1,465

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......... (684) (909) (4,185) (2,176) (2,168)
Payments for acquisitions, net of cash
acquired................................... -- (17,439) -- -- --
Additions to deferred software development
cost....................................... (280) (490) (565) (227) (241)
------ -------- ------- ------- -------
Net cash used by investing activities........ (964) (18,838) (4,750) (2,403) (2,409)

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 36 (944)
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 $ 273 $ 860
====== ======== ======= ======= =======

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> 70

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. All share and per
share amounts have been retroactively restated to reflect the 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 781,500 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> 71
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.

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.

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

F-8
<PAGE> 72
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 February 28, 1998 and
February 28, 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
six months ended February 28, 1999 are not necessarily indicative of the results
that may be expected for the year ended August 31, 1999.

F-9
<PAGE> 73
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

2. RELATED PARTY TRANSACTIONS

Nichols TXEN utilized central cash management systems of Nichols Research
to finance its operations. Cash requirements are satisfied either by
intercompany transactions between Nichols Research and Nichols TXEN or by cash
from operations. Such intercompany transactions are included in the payable to
Nichols Research 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.

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.

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>

F-10
<PAGE> 74
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

3. INCOME TAXES (CONTINUED)
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.

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>

F-11
<PAGE> 75
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

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.

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>

F-12
<PAGE> 76
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

7. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS (CONTINUED)
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 4 years.

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.

F-13
<PAGE> 77
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

8. BUSINESS COMBINATIONS (CONTINUED)

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> <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 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 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 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.

F-14
<PAGE> 78
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

9. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)

The services agreement automatically renews for successive one year terms,
unless canceled by either Nichols Research or Nichols TXEN upon 90 days prior
notice following the initial one year term.

VOTING AGREEMENT

Nichols Research has entered into a Voting Agreement with Nichols TXEN
dated November 6, 1998 which will become effective upon completion of an initial
public offering. Pursuant to the Voting Agreement, Nichols Research has agreed
to vote all of its shares of Nichols TXEN common stock at any meeting at which
directors are elected in favor of the election of independent directors so that
after such election, if such persons are elected, there will be at least two
independent directors of Nichols TXEN. The Voting Agreement will terminate upon
the earlier of five years from the date of the Voting Agreement or the date upon
which Nichols Research owns beneficially 50% or less of the common stock of
Nichols TXEN.

TAX SHARING AGREEMENT

Nichols Research and Nichols TXEN have entered into a Tax Sharing Agreement
which generally provides for the manner in which the parties will bear taxes for
the period beginning on September 1, 1998, and ending upon the sale by Nichols
TXEN of the common stock pursuant to this offering and income tax deficiencies
or refunds resulting from future audit adjustments. Nichols TXEN will be
required to pay to Nichols Research an amount equal to the excess of the income
tax liability which Nichols TXEN would have for the short period over the amount
which Nichols TXEN has previously paid (or been charged with by Nichols
Research) with respect to such taxes. If additional taxes must be paid by
Nichols TXEN or Nichols Research as a result of an adjustment made by a tax
regulatory authority, and as a result of that adjustment, the other party would
obtain an offsetting tax benefit, the party obtaining the tax benefit pays an
amount equal to the additional tax to the party whose income tax liability was
increased. Likewise, if income taxes are reduced as a result of an adjustment
made by a tax regulatory authority, and as a result of that adjustment, the
other party would suffer an offsetting tax detriment, the party whose taxes were
reduced must pay such amount to the other party. The Tax Sharing Agreement also
contains provisions dealing with contesting adjustments made by tax regulatory
authorities, determining who will bear the expense of any such challenge and
cooperation between the parties.

10. INTANGIBLE ASSET IMPAIRMENT (UNAUDITED)

At February 18, 1999, the Company 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 the Company's intangible assets.

During the second quarter of 1999, management of the Company believed there
were events and changes in circumstances that warranted a re-assessment as to
whether the carrying amount of the goodwill related to the 1995 purchase of the
practice management business of CSC was still recoverable. These events include:
(1) loss of two significant customers, (2) discontinuance of turnkey sales and
(3) a reduction in technology outsourcing revenues. Therefore, in accordance
with applicable accounting rules, management prepared an undiscounted cash flow
analysis over the estimated recovery period to determine if these intangible
assets were still

F-15
<PAGE> 79
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998

recoverable. Management prepared the analysis with assumptions that reflected
its current outlook on the business. In all instances, management believed the
assumptions inherent in the analysis were reasonable and supportable. The
following key assumptions were used in management's undiscounted cash flow
analysis: (1) revenue was forecasted to decline through fiscal 2000 and then
remain flat; (2) EBITDA margin was forecasted to continue to decrease in 1999,
increase slightly over the following four years and then stabilize at a moderate
margin over the remaining life of the assets; and (3) capital spending would be
maintained in the range of 3% of revenue. Since the undiscounted cash flow model
showed an impairment of the Company's long-lived assets, the Company used a
discounted cash flow model to measure the fair value of these long-lived assets,
which was consistent with the Company's policy. The fair value calculation
determined the fair value of the long-lived assets was less than book value. The
Company wrote off the value of its longest lived asset first, which resulted in
the write-off of all of the goodwill associated with the CSC acquisition.

F-16
<PAGE> 80

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.

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

August 1, 1997

F-17
<PAGE> 81

TXEN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<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> 82

TXEN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<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> 83

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> 84

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> 85

TXEN, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

TXEN, Inc. (the Company) facilitates the administration of health benefits by
providing health care organizations hardware and software solutions through
either outsourcing or turnkey agreements primarily in the United States. The
Company also provides data processing services through management service
organization (MSO) agreements.

Cash and Cash Equivalents

The Company 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 the Company 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 the Company'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 the Company 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 the Company's customer base. The Company believes that any risk
associated with trade accounts receivable is adequately provided for in the
allowance for doubtful accounts. The Company 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. The
Company 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> 86
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development

Research and development is conducted by the Company under both customer
sponsored and Company sponsored programs. Total research and development costs
incurred by the Company 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 the Company 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

The Company 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 the Company'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

F-23
<PAGE> 87
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

The Company has two revolving credit lines with a bank which are payable on
demand totaling $1,000,000 which are collateralized by certain assets of the
Company 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, the Company 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.

The Company 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 the Company that was then sold to various employees
of the Company in exchange for notes receivable. Interest accrues at 8.0% and
matures on October 1, 1997.

The Company paid $146,975 and $115,268 in interest during the fiscal years ended
June 30, 1996, and 1997, respectively.

4. LEASES

The Company 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. The Company 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> 88
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' EQUITY

On December 16, 1994, the Company entered into a Stock Purchase Option Agreement
with a third-party. Under the terms of the agreement, the Company sold one share
of convertible preferred stock to the third-party for $1,500,000. The Company
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 the Company. The option is exercisable for a
period of thirty days after release of the Company'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 the Company. The Company 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

The Company paid $0 and $1,161,001 in income taxes during the fiscal years ended
June 30, 1996 and 1997, respectively.

Significant components of the Company'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> 89
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

The Company has a note payable to a stockholder of the Company 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 the Company
is restricted from doing so by any agreements with third-parties in force at
that time.

The Company has notes and accrued interest receivable from stockholders of the
Company of $448,783 and $418,833 at June 30, 1996 and 1997, respectively, which
bear interest at 8.0%.

The Company 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. The Company had $188,037 of revenue from an affiliated company during the
fiscal year ended June 30, 1997.

8. SAVINGS AND RETIREMENT PLAN

The Company has a savings and retirement plan administered by Nichols Research
for all eligible employees pursuant to Section 401(k) of the Internal Revenue
Code. The Company will match employee contributions to the savings and
retirement plan at a level determined annually by the Company's Board of
Directors. The Company'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 the Company and owned
approximately 60% of the Class A common stock at June 30, 1997. Under a stock
purchase agreement, the Company 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 the Company for a period of 30 days after release of the
Company'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> 90
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. CONTINGENCY

The Company entered into an agreement with a customer whereby the Company 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, the Company 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 5-year terms. Incentive stock
options vest and become exercisable at the end of 2 years of continued
employment while non-qualified stock options are exercisable upon grant. Pro
forma information regarding net income is required by SFAS 123, and has been
determined as if the Company 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 the Company's common stock because the Company is privately
held; and no dividend yields.

If the Company 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> 91
(Inside back cover)

(Photo - busy office environment)

The Nichols TXEN
High Technology-Driven
Outsourcing Services
Value Proposition

(Photo - Health care claim) - streamlined administrative functions

- variable rate operating cost structure

- faster implementation

(Photo - CD Rom and - reduced capital expenditures for administrative
circuit board) health care technologies

- less technology risk

- access to knowledgeable and experienced personnel

(Photo - person looking - sophisticated enterprise-level application
at computer) software and decision support tools

- enhanced marketplace connectivity

(Photo - Doctors in surgery) - ability to focus on core
businesses

Directions for the Future in health care information technology

<PAGE> 92

- ----------------------------------------------------------
- ----------------------------------------------------------

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 8
Forward-Looking Statements................ 14
Use of Proceeds........................... 14
Dividend Policy........................... 14
Capitalization............................ 15
Dilution.................................. 16
Selected Financial Data................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 19
Business.................................. 29
Management................................ 46
Certain Transactions...................... 53
Principal Stockholders.................... 55
Description of Capital Stock.............. 56
Shares Eligible for Future Sale........... 57
Underwriting.............................. 58
Legal Matters............................. 60
Experts................................... 60
Additional Information.................... 61
Index to Financial Statements............. F-1
</TABLE>

---------------------

DEALER PROSPECTUS DELIVERY OBLIGATION:

UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, 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.

- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------

2,175,000 Shares

(NICHOLS TXEN LOGO)

Common Stock

-------------------

PROSPECTUS

-------------------

BT ALEX. BROWN

CIBC OPPENHEIMER

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

THE ROBINSON-HUMPHREY COMPANY

, 1999

- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 93

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......... $ 9,730
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,000
Nasdaq National Market listing fee.......................... 75,000
Accountants' fees and expenses.............................. 200,000
Legal fees and expenses..................................... 250,000
Blue Sky fees and expenses.................................. 16,000
Transfer Agent's fees and expenses.......................... 30,000
Printing and engraving expenses............................. 165,000
Miscellaneous............................................... 150,270
--------
Total Expenses.................................... $900,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits indemnification
by the Company of any director, officer, employee or agent of the Company or
person who is serving or was serving at the Company'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 the Company, and, with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful. The
Company 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 the Company to procure a judgment in its favor by reason of the fact that
such person was a director, officer, employee or agent of the Company or is or
was serving at the request of the Company 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 the Company, 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 the Company 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 the Company 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. The Company 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.

II-1
<PAGE> 94

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 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.

II-2
<PAGE> 95

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.
10.1+ -- Nichols TXEN Corporation 1998 Stock Option Plan**
10.2+ -- Nichols TXEN Corporation Employees' Stock Purchase Plan**
10.3+ -- Nichols TXEN Corporation Non-Employee Director Stock Option
Plan**
10.4+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Thomas L. Patterson**
10.5+ -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Paul D. Reaves**
10.6+ -- Employment Agreement dated August 29, 1997, as amended,
between Registrant and H. Grey Wood**
10.7+ -- Corporate Services Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.8+ -- Tax Sharing Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.9+ -- Form of Indemnification Agreement between Registrant and its
directors
10.10+ -- Software Licensing Agreement between CSC Healthcare Systems,
Inc. and TXEN, Inc. dated June 1, 1993
10.11+ -- Voting Agreement dated November 6, 1998, between Registrant
and Nichols Research Corporation
10.12+ -- Commercial Lease dated September 1, 1996, between Computer
Services Corporation and Birmingham S.S.P., Inc.
10.13+ -- Commercial Lease dated October 31, 1985, between Computer
Services Corporation and Wimberly & Thomas Building
Restoration Partnership
10.14+ -- Lease between Nichols SELECT Corporation and Birmingham
S.S.P., Inc.
10.15+ -- Office Space Lease dated May 6, 1998, between the Registrant
and Raytheon Engineers & Constructors, Inc.
10.16+ -- Office Lease dated April 13, 1998, between the Registrant
and Metropolitan Life Insurance Company
10.17+ -- Sublease dated May 5, 1997, between TXEN, Inc. and ABB
Environmental Systems, Inc.
10.18* -- Lease dated May 8, 1998, between the Registrant and Daniel
Meadow Brook South, LLC
11.1+ -- Computation of Earnings Per Share
23.1 -- Consent of Ernst & Young LLP, independent auditors, with
respect to Nichols TXEN Corporation
23.2 -- Consent of Ernst & Young LLP, independent auditors, with
respect to TXEN, Inc.
</TABLE>

II-3
<PAGE> 96

<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.

(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> 97

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 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 April, 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. 1 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 April 9, 1999
- ------------------------------------------------ and Director (Principal
Paul D. Reaves Executive Officer)

* Chairman of the Board April 9, 1999
- ------------------------------------------------
Thomas L. Patterson

* President, Chief Operating April 9, 1999
- ------------------------------------------------ Officer and Director
H. Grey Wood

* Director April 9, 1999
- ------------------------------------------------
Chris H. Horgen

* Director April 9, 1999
- ------------------------------------------------
James D. Kever

* Director April 9, 1999
- ------------------------------------------------
James I. Harrison, Jr.

John D. McKay Chief Financial Officer April 9, 1999
- ------------------------------------------------ (Principal Financial and
John D. McKay Accounting Officer)

*By: John D. McKay
- ------------------------------------------------
John D. McKay
Attorney-in-fact
</TABLE>

II-5
<PAGE> 98

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 the Company's 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> 99

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 six months ended
February 28, 1999
Allowance for doubtful
accounts (unaudited)....... $500 $ 72 $ -- $(137) $435
---- ---- ---- ----- ----
Total valuation and
qualifying
accounts............ $500 $ 72 $ -- $(137) $435
==== ==== ==== ===== ====
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> 100

EXHIBIT INDEX

- ---------------

* To be filed by amendment.
** Management contract or compensatory plan or arrangement.

+ Previously filed.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 7, 1999, in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-71031) and related Prospectus of Nichols TXEN
Corporation for the registration of 2,175,000 shares of its common stock.

/s/ Ernst & Young LLP

Birmingham, Alabama
April 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. 1 to the Registration
Statement (Form S-1 No. 333-71031) and related Prospectus of Nichols TXEN
Corporation for the registration of 2,175,000 shares of its common stock.

/s/ Ernst & Young LLP

Birmingham, Alabama
April 9, 1999