<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-08787
1,000,000 SHARES
(LOGO) NICHOLS RESEARCH CORPORATION
COMMON STOCK
------------------------
Of the 1,000,000 shares of Common Stock being offered hereby, 968,700
shares are being offered by Nichols Research Corporation (the "Company"), and
31,300 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the net proceeds from the sale of Common Stock by the
Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "NRES." On August 19, 1996, the last reported sale price for the
Common Stock on the Nasdaq National Market was $29.50 per share. See "Price
Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $29.25 $1.57 $27.68 $27.68
- -------------------------------------------------------------------------------------------------
Total(3)..................... $29,250,000 $1,570,000 $26,813,616 $866,384
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $300,000 (including certain expenses payable on behalf of the Selling
Stockholders).
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 150,000 additional shares of Common Stock at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $33,637,500, $1,805,500, and
$30,965,616, respectively. See "Underwriting."
------------------------
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is anticipated that delivery of the certificates
representing the Common Stock will be made on or about August 23, 1996.
THE ROBINSON-HUMPHREY COMPANY, INC.
OPPENHEIMER & CO., INC.
FERRIS, BAKER WATTS
INCORPORATED
August 20, 1996
<PAGE> 2
Chart described in Appendix A
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus and incorporated by reference herein. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. The Company's fiscal year ends on August
31. References to fiscal years by date refer to the fiscal year ending August 31
of that calendar year; for example, "fiscal 1996" began on September 1, 1995 and
ends on August 31, 1996. This Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended.
Actual events or results could differ significantly from those discussed in the
forward-looking statements. Factors that might cause such a difference include,
without limitation, those discussed in "Risk Factors" and the matters set forth
or incorporated by reference in the Prospectus generally. All references to
contract awards in this Prospectus are with respect to the initial amounts
awarded under the contract, including options.
THE COMPANY
Nichols Research Corporation (the "Company" or "NRC") is a leading provider
of technical and information technology ("IT") services, including information
processing, systems development and systems integration. The Company provides
these services to a wide range of clients, including the Department of Defense
("DOD"), other federal agencies, state and local governments, healthcare and
insurance organizations, and other commercial enterprises. The Company's target
markets are large and growing. In 1995, U.S. Government information technology
spending was approximately $25 billion and is expected to grow at an average
annual rate of between 3% and 6% over the next few years, while the total
commercial information technology market was approximately $173 billion and is
expected to grow at an average annual rate of approximately 14% over the next
five years.
The Company's substantial expertise and capabilities in a wide range of
technologies have been built through a 20-year period of providing advanced
development, scientific and application services to U.S. military programs,
including air defense systems, strategic and theater missile defense systems,
and weapons development programs. These activities have allowed the Company to
build and maintain a foundation of advanced technical skills in large scale
computer integration, massively parallel computing, supercomputer development,
high speed data integration and networking, real-time database management,
virtual reality systems and simulations, and computer networks. The Company's
advanced technical capabilities gained while performing services for mission
critical federal projects have allowed the Company to expand its business with
U.S. military programs. In addition, the Company has used these advanced
technical capabilities to expand the market for its services to healthcare and
insurance businesses and other commercial industries. Today, the Company
addresses the technology needs of a diverse customer base by applying its
state-of-the-art technical capabilities in commercial systems integration,
simulation, software development and client-server architectures, including
SAP(R)(TM) consulting. Although the Company's traditional military technology
business has continued to grow, other growing markets for the Company's services
now represent approximately 45% of the Company's revenues.
In order to better execute its business strategy, the Company was recently
organized into the following four strategic business units focused on four broad
markets served by the Company:
NICHOLS FEDERAL provides technical services to U.S. defense agencies. For
the nine months ended May 31, 1996, Nichols Federal produced approximately 55%
of the Company's revenues.
NICHOLS INFOFED provides information services and systems integration to
federal, state and local governmental agencies. For the nine months ended May
31, 1996, Nichols InfoFed produced approximately 25% of the Company's revenues.
NICHOLS INFOTEC provides information services and systems integration to
commercial customers, other than healthcare and insurance industry customers.
For the nine months ended May 31, 1996, Nichols InfoTec produced approximately
13% of the Company's revenues.
NICHOLSELECT provides information services and systems integration to the
healthcare and insurance industries. For the nine months ended May 31, 1996,
NicholSELECT produced approximately 7% of the Company's revenues.
3
<PAGE> 4
The Company's business strategy consists of three key elements: (i)
maintain the Company's leadership in technology; (ii) apply the Company's
technology to create solutions for new clients; and (iii) make strategic
acquisitions and form alliances to expand the business of the Company and gain
industry knowledge. As part of its business strategy, the Company has
successfully completed seven strategic acquisitions and alliances since
September 1, 1994, most of which have centered on the IT and healthcare
information services markets.
The executive offices of the Company are located at 4040 South Memorial
Parkway, Huntsville, Alabama 35802, and its telephone number is (205) 883-1140.
RECENT DEVELOPMENTS
In fiscal 1996, the Company was awarded two high performance computing
modernization contracts (the "HPCM Contracts") in the aggregate amount of $313
million by the U.S. Army Information Systems Selection and Acquisition Agency.
Under these contracts, the Company will supply computer hardware and software,
provide maintenance and systems integration and provide Internet services to DOD
shared resource centers located in Dayton, Ohio and Vicksburg, Mississippi.
These shared resource centers will offer government scientists and engineers
access to state-of-the-art high performance computing and communications
capabilities. These awards establish the Company as a leader in systems
integration of high performance computers. The U.S. Government is expected to
award a total of only four such contracts under a program to modernize its
shared computer resources.
On May 31, 1996, the Company acquired Advanced Marine Enterprises, Inc.
("AME"), a naval architecture and marine technical services firm headquartered
in Arlington, Virginia. For its year ended May 31, 1996, AME had $35.5 million
in revenues. The acquisition provides the Company an opportunity to expand its
business relationship with the U.S. Navy.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered By:
The Company................................ 968,700 shares
Selling Stockholders....................... 31,300 shares
Total.............................. 1,000,000 shares
Common Stock to be Outstanding after the
Offering................................... 7,482,816 shares(1)
Use of Proceeds by the Company............... To repay up to $14.5 million of indebtedness
under its existing bank credit facility which
will provide the Company with flexibility to
finance the working capital requirements
under the Company's systems integration
contracts, for general corporate purposes and
for potential acquisitions.
Nasdaq National Market Symbol................ NRES
</TABLE>
- ---------------
(1) Does not include 891,261 shares of Common Stock issuable upon the exercise
of outstanding options and 1,016,737 shares reserved for issuance pursuant
to future grants under the Company's stock options plans at May 31, 1996.
4
<PAGE> 5
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, NINE MONTHS ENDED MAY 31,
--------------------------------------------------------------------- ---------------------------------
PRO PRO
HISTORICAL FORMA(1) HISTORICAL FORMA(1)
--------------------------------------------------------- --------- --------------------- ---------
1991 1992 1993 1994 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............. $90,932 $117,205 $159,112 $143,153 $170,331 $200,816 $116,848 $153,202 $181,073
Operating profit...... 6,445 8,587 10,374 9,459 9,830 10,799 7,035 9,588 10,370
Net income............ 4,657 5,906 7,049 6,506 7,202 7,687 5,133 6,441 6,879
Net income per common
share............... $ .90 $ .98 $ 1.13 $ 1.05 $ 1.15 $ 1.21 $ .83 $ .96 $ 1.01
Weighted average
number of common
shares and common
equivalent shares
outstanding......... 5,186,950 6,052,246 6,253,129 6,205,309 6,279,109 6,351,153 6,211,111 6,741,527 6,813,571
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
(UNAUDITED)
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................... $ 40,815 $ 67,629
Total assets.................................................................. 127,686 140,000
Short-term debt............................................................... 15,691 1,191
Long-term debt (excluding current maturities)................................. 4,493 4,493
Stockholders' equity.......................................................... 78,888 105,702
</TABLE>
- ---------------
(1) On May 31, 1996, the Company acquired all of the outstanding capital stock
of AME for approximately $17.5 million, including 72,044 shares of the
Company's Common Stock. The pro forma statement of income data assumes the
acquisition of AME as of September 1, 1994, and reflects amortization of
goodwill over 15 years and net additional interest expense, offset by
related tax effects. The pro forma data does not reflect the potential
acquisition of TXEN as described below.
(2) As adjusted to give effect to the sale of the 968,700 shares offered by the
Company and the application of the net proceeds therefrom.
The Company owns a 19.9% interest in TXEN, Inc. ("TXEN"), an information
systems and services company in the managed healthcare industry, with revenues
in its fiscal year ended June 30, 1995 of $4.7 million. The Company has an
option to purchase the remaining 80.1% of TXEN beginning in July 1997. If the
option is exercised, the purchase price will be based on TXEN's audited net
income for the fiscal year ended June 30, 1997, multiplied by a multiple that is
77.5% of NRC's average price/earnings multiple from March 1, 1997 to June 30,
1997, with a minimum multiple of 14.7 and a maximum multiple of 27.1. Because
the purchase price will be based on a discount of the Company's price/earnings
multiple, the Company believes that the acquisition of the remaining 80.1% of
TXEN is likely to be accretive to the Company's net income per common share for
the four quarters preceding the date of acquisition. If the acquisition would be
dilutive to net income per common share, the Company would consider such
dilution, together with other relevant financial and strategic considerations,
in deciding whether to exercise its option. The Company believes that the
acquisition of the remaining 80.1% of TXEN is probable. Included elsewhere in
this Prospectus are audited annual and certain unaudited interim financial
statements of TXEN and certain pro forma financial information of the Company
based on a hypothetical earnings level and purchase price calculation for TXEN.
The pro forma impact of such transaction on the Company's results for the year
ended August 31, 1995, and for the nine months ended May 31, 1996, would be
dilutive to net income per common share by $.23 and $.22, respectively.
5
<PAGE> 6
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing any of the shares of Common Stock offered hereby.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Actual events or results
could differ significantly from those discussed in the forward-looking
statements. Factors that might cause such a difference include, without
limitation, the risks detailed herein and the matters set forth or incorporated
by reference in the Prospectus generally.
CONCENTRATION OF REVENUE
Approximately 81%, 92% and 96% of the Company's total revenues in fiscal
1995, fiscal 1994 and fiscal 1993, respectively, and approximately 80% of the
Company's total revenues for the nine months ended May 31, 1996, were derived
from contracts or subcontracts funded by the U.S. Government. These U.S.
Government contracts include contracts funded by DOD military weapons systems
that account for approximately 69%, 85% and 82% of the Company's total revenues
in such years, respectively, and 55% of the Company's total revenues for the
nine months ended May 31, 1996. The Company believes that the success and
development of its business will continue to be dependent upon its ability to
participate in U.S. Government contract programs. Accordingly, the Company's
financial performance may be directly affected by changing U.S. Government
procurement practices and policies. Other factors that could materially and
adversely affect the Company's government contracting business and programs
include budgetary constraints, changes in fiscal policies or available funding,
changes in government programs or requirements, including proposals to abolish
certain government agencies or departments, curtailing of the U.S. Government's
use of technology services firms, the adoption of new laws or regulations,
technological developments and general economic conditions. These factors could
cause U.S. Government agencies to exercise their rights to terminate existing
contracts for convenience or not to exercise options to renew such contracts.
In addition, certain of the Company's contracts individually contribute a
significant percentage of the Company's revenues. For the nine months ended May
31, 1996, the Company's largest contract (by revenues) was a contract with the
U.S. Army Space and Strategic Defense Command, which generated approximately 13%
of the Company's total revenues for such period. The Company's five largest
contracts (by revenues) generated approximately 43% of the Company's total
revenues for such period. Given the recent award of the $313 million HPCM
Contracts, the Company expects revenues to continue to be concentrated in a
relatively small number of large U.S. Government contracts. Termination of such
contracts, or the Company's inability to renew or replace such contracts when
they expire, could materially and adversely affect the Company.
RISK OF REDUCTIONS OR CHANGES IN MILITARY WEAPONS EXPENDITURES
The U.S. military weapons budget has been declining in real terms since the
mid-1980s, resulting in some cases in program delays, extensions and
cancellations. Historically, a majority of the Company's revenues (55% for the
nine months ended May 31, 1996) are related to U.S. military weapons systems. A
further significant decline in U.S. military expenditures for weapons systems,
or a reduction in the weapons systems portion of the defense budget, could
materially and adversely affect the Company. The loss or significant curtailment
of the Company's U.S. military contracts would materially and adversely affect
the Company.
Approximately 33% of the Company's revenues in fiscal 1995 were from
contracts related to Ballistic Missile Defense ("BMD"), compared to 44% of
revenues in fiscal 1994 and 53% of revenues in fiscal 1993 from such contracts.
For the nine months ended May 31, 1996, 29% of the Company's revenues were from
such contracts. Strategic defense has existed for more than 26 years as a
mission of DOD through activities such as the BMD program. If a decision were
made to reduce substantially the scope of current BMD programs, management
believes that many national and theater missile defense programs would continue
to be funded by the U.S. Army and Air Force, and other DOD agencies. While the
Company has expanded into other markets, a decision to reduce significantly or
eliminate missile defense funding would have an adverse effect on the Company's
revenues and income.
6
<PAGE> 7
UNCERTAINTY ASSOCIATED WITH GOVERNMENT CONTRACTS
The Company performs its services under U.S. Government contracts that
usually require performance over a period of one to five years. Long-term
contracts may be conditioned upon continued availability of Congressional
appropriations. Variances between anticipated budgets and Congressional
appropriations may result in delay, reduction or termination of such contracts.
Contractors can experience revenue uncertainties with respect to available
contract funding during the first quarter of the government's fiscal year
beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company in the ordinary course of business occasionally performs under
contracts for which funding authorization from the U.S. Government has either
expired or not been obtained. No assurance can be given that the Company will
realize the revenue expected from performing under such contracts. Furthermore,
the Company's allowable contract costs and fees under U.S. Government contracts
are subject to audit by the Defense Contract Audit Agency ("DCAA"). Audits may
result in nonreimbursement of some contract costs and fees. To date, the Company
has experienced no material adjustments as a result of audits by the DCAA. The
DCAA has not completed audits on the Company's contracts for fiscal years 1994
and 1995.
The Company's contracts with the U.S. Government and its prime contractors
are subject to termination, in whole or in part, either upon default by the
Company or at the convenience of the government. The termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses and profit on work completed prior to termination.
Because the Company contracts to supply goods and services to the U.S.
Government, it is also subject to other risks, including contract suspensions,
protests by disappointed bidders of contract awards which can result in the
re-opening of the bidding process and changes in government policies or
regulations.
CONTRACT PROFIT EXPOSURE
The Company's services are provided primarily through three types of
contracts: fixed-price, time-and-materials and cost-reimbursement contracts.
Approximately 16% and 20% of the Company's total revenues for the fiscal year
ended August 31, 1995 and for the nine months ended May 31, 1996, respectively,
were derived from fixed-price contracts which require the Company to perform
services under a contract at a stipulated price. The Company derived
approximately 36% and 31% of its revenues during such periods from time-and-
materials contracts which reimburse the Company for the number of labor hours
expended at an established hourly rate negotiated in the contract, plus the cost
of materials incurred. The balance of the Company's revenues for the fiscal year
ended August 31, 1995 and the nine months ended May 31, 1996, respectively, were
derived from cost-reimbursement contracts under which the Company is reimbursed
for all actual costs incurred in performing the contract to the extent that such
costs are within the contract ceiling and allowable under the terms of the
contract, plus a fee or profit.
The Company assumes greater financial risk on fixed-price contracts than on
either time-and-materials or cost-reimbursement contracts. As the Company
increases its commercial business, it believes that an increasing percentage of
its contracts will be fixed-priced. Failure to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed-price
contract may reduce the Company's profit or cause a loss. In addition, greater
risks are involved under time-and-materials contracts than under cost-
reimbursement contracts because the Company assumes the responsibility for the
delivery of specified skills at a fixed hourly rate. Although management
believes that adequate provision for its fixed-price and time-and-materials
contracts is reflected in the Company's financial statements, no assurance can
be given that this provision is adequate or that losses on fixed-price and
time-and-materials contracts will not occur in the future.
To compete successfully for business, the Company must satisfy client
requirements at competitive rates. Although the Company continually attempts to
lower its costs, there are other information technology and technical services
companies that may provide the same or similar services at comparable or lower
rates than the Company. Additionally, certain of the Company's clients require
that their vendors reduce rates after services have commenced. There can be no
assurance that the Company will be able to compete effectively on
7
<PAGE> 8
pricing or other requirements, and as a result, the Company could lose clients
or be unable to maintain historic gross margin levels or to operate
profitability.
ACQUISITION STRATEGY
Expansion through acquisitions is an important component of the Company's
overall business strategy. However, the Company's continued ability to grow by
acquisitions is dependent upon, and may be limited by, the availability of
compatible acquisition candidates at reasonable prices and the Company's ability
to fund or finance acquisitions on acceptable terms. In addition, competition
for acquisitions may come from larger companies with significantly greater
resources. Without additional acquisitions the Company's ability to continue to
grow and expand into other markets could be materially and adversely affected.
Future acquisitions may entail the payment of consideration in excess of book
value, may result in the issuance of additional shares of the Company's Common
Stock or the incurrence of additional indebtedness by the Company, and could
have a dilutive effect on the earnings or book value per share of the Company's
Common Stock. Furthermore, there can be no assurance that the Company's
management will be able to maintain or enhance the profitability of any acquired
business.
COMPETITION
The information services industry in which the Company operates is highly
fragmented with no single company or small group of companies in a dominant
position. The Company's competitors include large, diversified firms with
substantially greater financial resources and larger technical staffs than the
Company. Some of the large competitors offer services in a number of markets
which overlap many of the same areas in which the Company offers services, while
certain companies are focused on only one or a few of these markets. The firms
which compete with the Company are consulting firms, computer services firms,
applications software companies and accounting firms, as well as the computer
service arms of computer manufacturing companies and defense and aerospace
firms.
ATTRACTION AND RETENTION OF PROFESSIONAL STAFF
The Company's success will depend in part upon its ability to attract,
retain, train and motivate highly skilled employees, particularly in the area of
information technology. There is significant competition for employees with the
information technology skills required to perform the services the Company
offers. Qualified information technology professionals are in great demand and
are likely to remain a limited resource for the foreseeable future. There can be
no assurance that the Company will be successful in attracting a sufficient
number of highly skilled employees in the future or that it will be successful
in retaining, training and motivating the employees it is able to attract, and
any inability to do so could impair the Company's ability to perform adequately
its existing contracts and to bid for or obtain new contracts.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as the number, size and scope of projects in which the
Company is engaged, the contractual terms and degree of completion of such
projects, expenditures required by the Company in connection with such projects,
any delays incurred in connection with such projects, employee utilization
rates, the adequacy of provisions for losses, the accuracy of estimates of
resources required to complete ongoing projects, and general economic
conditions. Under certain contracts, the Company is required to purchase and
resell to the customer large amounts of computer hardware and other equipment.
Revenues are accrued when this equipment is acquired for resale, and as a
result, quarterly revenues will be impacted by fluctuations related to equipment
purchases which occur on a periodic basis depending on contract terms.
8
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 968,700 shares of
Common Stock offered by the Company and the application of the net proceeds
therefrom and after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company, are anticipated to be
approximately $26.5 million ($30.7 million if the Underwriters' over-allotment
option is exercised in full).
The Company expects to use up to $14.5 million of the net proceeds of this
Offering to repay indebtedness under the Company's existing bank credit
facility, which was used to finance the acquisition of AME. At May 31, 1996,
such indebtedness bore interest at the London Interbank Offered Rate ("LIBOR")
plus 1.25% (6.7%). See Note 5 to the Company's Consolidated Financial
Statements. The Company expects to increase its presence in the systems
integration market, which may require that the Company make significant
purchases of computer hardware and other equipment for resale to its customers.
The Company's HPCM Contracts will require the purchase and resale of equipment
over the life of the contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The use of a portion of the net proceeds of this Offering to repay
indebtedness under the Company's existing bank credit facility will provide the
Company with flexibility to finance the working capital requirements under the
Company's systems integration contracts. The balance of the net proceeds will be
used for general corporate purposes and for potential acquisitions. Pending
application of such net proceeds, the Company intends to invest the proceeds in
short-term, investment grade interest-bearing securities.
The Company continually evaluates potential acquisitions and has had
discussions with a number of potential acquisition candidates; however, the
Company has no agreement with respect to any potential acquisition other than
the possible acquisition of TXEN in July 1997 pursuant to the Company's purchase
option. See "Selected Consolidated Historical and Pro Forma Financial Data." The
TXEN acquisition is not contingent upon the completion of this Offering.
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "NRES" since the Company's initial public offering in 1987. The
following table sets forth, for the periods indicated, the high and low closing
sale prices of the Company's Common Stock as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
--- ---
<S> <C> <C>
Fiscal Year Ended August 31, 1994
First Quarter....................................................... $13 3/4 $12 1/8
Second Quarter...................................................... 16 1/4 12 3/4
Third Quarter....................................................... 14 1/2 10 3/4
Fourth Quarter...................................................... 12 9 1/4
Fiscal Year Ended August 31, 1995
First Quarter....................................................... $12 1/2 $10 3/4
Second Quarter...................................................... 14 3/4 12
Third Quarter....................................................... 15 1/2 14
Fourth Quarter...................................................... 19 1/2 15 3/4
Fiscal Year Ended August 31, 1996
First Quarter....................................................... $24 1/2 $18
Second Quarter...................................................... 25 15/16 21 1/8
Third Quarter....................................................... 34 23 1/4
Fourth Quarter (through August 19, 1996)............................ 32 1/4 25
</TABLE>
On August 19, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $29.50. On August 19, 1996, there were approximately
779 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Company's Board of Directors to retain all
earnings to finance the Company's operations. The Company's existing loan
agreement presently restricts the payment of cash dividends by the Company if
the Company is in default.
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CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of May 31, 1996 (including the effect of the AME acquisition), and as
adjusted to give effect to the sale of the 968,700 shares offered by the Company
and the application of the net proceeds therefrom. See "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term debt).......... $15,691 $ 1,191
======= =======
Long-term debt:
Industrial development bonds......................................... $ 1,777 $ 1,777
Long-term notes...................................................... 2,716 2,716
------- -------
Total long-term debt......................................... 4,493 4,493
Stockholders' equity:
Common stock, par value $.01 per share; 20,000,000 shares authorized;
6,626,449 shares issued and outstanding; 7,595,149 shares issued
and outstanding, as adjusted(1)................................... 66 76
Additional paid-in capital........................................... 28,000 54,804
Retained earnings.................................................... 52,110 52,110
Less cost of 112,333 shares treasury stock........................... (1,288) (1,288)
------- -------
Total stockholders' equity................................... 78,888 105,702
------- -------
Total capitalization......................................... $83,381 $ 110,195
======= =======
</TABLE>
- ---------------
(1) Does not include 891,261 shares of Common Stock issuable upon the exercise
of outstanding options and 1,016,737 shares reserved for issuance pursuant
to future grants under the Company's stock option plans at May 31, 1996.
11
<PAGE> 12
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected financial data for the five years ended August 31,
1995 have been derived from the consolidated financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. The
financial data for the nine months ended May 31, 1996, have been derived from
the unaudited consolidated financial statements of the Company. The unaudited
financial statement data include all adjustments, consisting of normal recurring
accruals, which management considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the nine months ended May 31, 1996 are not necessarily indicative of
the results that may be expected for the entire year ending August 31, 1996. The
pro forma data have been derived from the Pro Forma Condensed Consolidated
Statements of Income (unaudited) of the Company and AME which are included
elsewhere herein and reflect the acquisition of AME as if it had occurred on
September 1, 1994. The information should be read in conjunction with the
Consolidated Financial Statements of the Company, the Pro Forma Condensed
Consolidated Financial Statements of the Company, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Financial
Statements of AME and the notes related thereto, all of which appear elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, NINE MONTHS ENDED MAY 31,
---------------------------------------------------------------------- -------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
------------------------------------------------------- ------------ ---------------------- ------------
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- -------- -------- -------- -------- ------------ -------- ----------- ------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Revenues........ $90,932 $117,205 $159,112 $143,153 $170,331 $200,816 $116,848 $ 153,202 $181,073
Costs and
expenses:
Direct and
allocable
costs........ 77,304 99,223 138,535 124,202 147,584 168,055 101,165 129,735 147,588
General and
administrative
expenses..... 7,183 9,395 10,203 9,492 12,917 21,962 8,648 13,879 23,115
------- -------- -------- -------- -------- -------- -------- -------- --------
Total
costs
and
expenses... 84,487 108,618 148,738 133,694 160,501 190,017 109,813 143,614 170,703
------- -------- -------- -------- -------- -------- -------- -------- --------
Operating
profit......... 6,445 8,587 10,374 9,459 9,830 10,799 7,035 9,588 10,370
Other income
(expense):
Interest
expense...... -- -- -- -- (114) (381) (65) (226) (419)
Other income,
principally
interest..... 592 910 835 917 1,602 1,662 1,188 749 847
------- -------- -------- -------- -------- -------- -------- -------- --------
Income before
income
taxes.......... 7,037 9,497 11,209 10,376 11,318 12,080 8,158 10,111 10,798
Income taxes.... 2,380 3,591 4,160 3,870 4,116 4,393 3,025 3,670 3,919
------- -------- -------- -------- -------- -------- -------- -------- --------
Net income...... $ 4,657 $ 5,906 $ 7,049 $ 6,506 $ 7,202 $ 7,687 $ 5,133 $ 6,441 $ 6,879
======= ======== ======== ======== ======== ======== ======== ======== ========
Net income per
common share... $ .90 $ .98 $ 1.13 $ 1.05 $ 1.15 $ 1.21 $ .83 $ .96 $ 1.01
======= ======== ======== ======== ======== ======== ======== ======== ========
Weighted average
number of
common shares
and common
equivalent
shares
outstanding.... 5,186,950 6,052,246 6,253,129 6,205,309 6,279,109 6,351,153 6,211,111 6,741,527 6,813,571
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
-------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $29,574 $35,963 $46,874 $44,092 $ 46,773 $ 40,815
Total assets........................................... 48,048 62,180 71,990 80,761 100,879 127,686
Short-term debt........................................ -- -- -- 962 1,187 15,691
Long-term debt (excluding current maturities).......... -- -- -- 4,328 5,366 4,493
Stockholders' equity................................... 36,949 43,937 52,700 57,308 67,848 78,888
</TABLE>
- ---------------
(1) On May 31, 1996, the Company acquired all of the outstanding capital stock
of AME for approximately $17.5 million, including 72,044 shares of the
Company's Common Stock. The pro forma income statement data assumes the
acquisition of AME as of September 1, 1994, and reflects amortization of
goodwill over 15 years and net additional interest expense, offset by related
tax effects. The pro forma data does not reflect the potential acquisition of
TXEN as described below.
12
<PAGE> 13
The Company owns a 19.9% interest in TXEN, an information systems and
services company in the managed healthcare industry with revenues in its fiscal
year ended June 30, 1995 of $4.7 million. This investment is currently accounted
for using the equity method and is included in noncurrent other assets on the
Company's consolidated balance sheets. The Company has an option to purchase the
remaining 80.1% of TXEN beginning in July 1997. Chris H. Horgen, Chief Executive
Officer of the Company, owns a 4.5% interest in TXEN which he acquired on
February 15, 1993, and would be beneficially impacted by the exercise of the
Company's option. If the option is exercised, the purchase price will be based
on TXEN's audited net income for the year ended June 30, 1997, multiplied by a
multiple that is 77.5% of NRC's average price/earnings multiple from March 1,
1997 to June 30, 1997, with a minimum multiple of 14.7 and a maximum multiple of
27.1. Because the purchase price will be based on a discount of the Company's
price/earnings multiple, the Company believes that the acquisition of the
remaining 80.1% of TXEN is likely to be accretive to the Company's net income
per common share for the four quarters preceding the date of acquisition. If the
acquisition would be dilutive to net income per common share, the Company would
consider such dilution, together with other relevant financial and strategic
considerations, in deciding whether to exercise its option. The Company believes
that the acquisition of the remaining 80.1% of TXEN is probable.
Included elsewhere in this Prospectus are audited financial statements for
TXEN and certain pro forma financial information of the Company which
contemplates the acquisition of TXEN. See "Pro Forma Condensed Consolidated
Financial Statements." The pro forma financial information is based on a series
of hypothetical assumptions, including the following: (i) that TXEN's audited
net income for the year ending June 30, 1997 will be $1.2 million; (ii) that the
Company's applicable price/earnings multiple will be 26; and (iii) that the
resulting purchase consideration for the remaining 80.1% of TXEN will be $19.4
million and will be paid $2.0 million in cash and $17.4 million in stock. Based
on such assumptions, and assuming the acquisition of TXEN as of September 1,
1994, the pro forma information reflects dilution to the Company's net income
per common share for the year ended August 31, 1995 and nine months ended May
31, 1996 of $.23 and $.22, respectively. Such assumptions, particularly as they
relate to TXEN's earnings and the Company's price/earnings multiple, are
hypothetical. Any significant variation of such assumptions would materially
affect the resulting calculation of pro forma results.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained in this Prospectus and in the
documents incorporated in this Prospectus by reference, the matters discussed
herein and therein contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
suggested in the forward-looking statements, including without limitation, the
risks detailed herein and in the Company's other filings with the Commission.
OVERVIEW
The Company is a leading provider of technical and IT services, including
information processing, systems development and systems integration. The Company
provides these services to a wide range of clients, including the DOD, other
federal agencies, state and local governments, healthcare and insurance
organizations, and other commercial enterprises. The Company was founded in 1976
to develop specialized optical sensing capabilities for military weapons and
ballistic defense programs. Until fiscal year 1991, virtually all of the
Company's revenues were derived under contracts with the federal government
relating to high technology weapons systems, strategic missile defense and other
related aerospace technologies. Areas of particular strength have included
tactical technology, smart sensing systems, simulations, data processing,
systems engineering and systems integration (including software development,
networking, hardware acquisition and installation, user training and system
operation and maintenance). Beginning in fiscal year 1991, in response to
increasing budget pressure on military procurements, the Company strategically
began to develop applications for its technical capabilities outside its
traditional core military business. Although the Company's core military
business has continued to grow, the Company has successfully entered the markets
for other government information technology solutions, as well as information
technology solutions in the healthcare industry and other commercial markets.
For the nine months ended May 31, 1996, the percentage of revenues from the
Company's four business units can be depicted as follows:
Chart described in Appendix B
A key part of the Company's strategy in entering new markets has been to
gain industry knowledge through strategic acquisitions and alliances. The
Company has successfully completed seven strategic acquisitions and alliances
since September 1, 1994, most of which have centered on IT and healthcare
information services markets. Since the respective dates of the acquisitions,
the Company has integrated these acquired entities in order to draw on the
Company's base of technical expertise and capabilities in designing
14
<PAGE> 15
solutions for government, commercial and healthcare clients. The strategic
acquisitions and alliances completed since September 1, 1994 can be summarized
as follows:
<TABLE>
<CAPTION>
STRATEGIC PURCHASE PRICE
ACQUISITIONS BUSINESS DESCRIPTION (IN THOUSANDS) DATE COMPLETED
<S> <C> <C> <C> <C>
Communications & - Provides information systems development $ 1,800 September 1994
Systems and services
Specialists,
Inc.
Conway Computer - Provides comprehensive claims $ 3,000 May 1995
Group administration and risk management for
workers' compensation
- Provides computer consulting and
software development services
- Provides support to IBM business
computer systems and system software
Computer Services - Provides a transaction-based medical $ 7,500 June 1995
Corporation practice management system
- Provides a complete billing and accounts
receivable management service
Advanced Marine - Provides naval architecture and marine $17,522 May 1996
Enterprises, technical services
Inc.
- Provides simulators and simulation
- Provides international commercial ship
simulation
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT AMOUNT
STRATEGIC ALLIANCES BUSINESS DESCRIPTION (IN THOUSANDS) DATE COMPLETED
<S> <C> <C> <C> <C>
TXEN, Inc.(1) - Provides computerized claims processing $ 1,500 December 1994
(19.9% and administration services to the
Investment) managed care healthcare industry
HealthGate Data - Provides biomedical on-line information $ 1,600 October 1995
Corporation retrieval
(20% Investment) - Provides Internet access to medical
information companies
- Provides on-line continuing education
programs
HealthShare, - Provides integrated information systems $ 750 January 1996
L.L.C. for large healthcare clients
(50% Investment)
</TABLE>
- ---------------
(1) The Company currently holds an option to purchase the remaining 80.1% of
TXEN exercisable in July 1997, and the Company believes that exercise of
such option is probable. See "Selected Consolidated Historical and Pro Forma
Financial Data."
As part of the Company's business strategy to enter new markets, the
Company intends to pursue large systems integration contracts in both the
government and commercial markets. Although such contracts are capital
intensive, requiring large equipment and software purchases to be financed by
the Company before reimbursement, the Company believes such contracts offer
attractive revenue growth and margin expansion opportunities for the Company's
range of technical expertise and capabilities. Examples of such contracts
15
<PAGE> 16
recently awarded to the Company include the $313 million HPCM Contracts. See
"-- Liquidity and Capital Resources."
A significant portion of the Company's services are performed under
cost-reimbursement contracts such that the Company receives reimbursement of its
allowable costs plus a fixed fee or profit. Unless costs are disallowed or the
Company fails to perform under the contracts, financial risks under such
contracts are low and margins are relatively narrow. An increasing portion of
the Company's services are provided under fixed-price contracts and
time-and-materials contracts. Such contracts carry higher financial risks
because the Company must deliver the contracted services at or below the fixed
price or specified hourly rate in order to earn a profit. At the same time, such
contracts offer the opportunity for higher profit margins, particularly for
companies with low cost structures. The Company believes that its low overhead
and cost structure give it an advantage in bidding on its contracts. See
"Business -- Government Contracts."
Recent contract awards have significantly increased the Company's backlog.
Contract awards for the nine months ended May 31, 1996 totaled $449.5 million.
Of this amount, $313.0 million were awards under the HPCM Contracts. As a
result, backlog has increased to $950.4 million at May 31, 1996 from $505.7
million at August 31, 1995. See "Business -- Backlog."
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the Company's
results of operations expressed as a percentage of revenues and the percentage
change of such items for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
----------------------------------
PERCENTAGE OF REVENUES
----------------------------------------- YEARS ENDED AUGUST NINE MONTHS
NINE MONTHS 31, ENDED MAY 31,
YEARS ENDED AUGUST 31, ENDED MAY 31, ------------------ -------------
----------------------- -------------- 1993 TO 1994 TO 1995 TO
1993 1994 1995 1995 1996 1994 1995 1996
----- ----- ----- ----- ----- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% (10.0)% 19.0% 31.1%
Costs and expenses:
Direct and allocable
costs................. 87.1 86.8 86.6 86.6 84.7 (10.3) 18.8 28.2
General and
administrative
expenses.............. 6.4 6.6 7.6 7.4 9.0 (7.0) 36.1 60.5
----- ----- ----- ----- -----
Total costs and
expenses............ 93.5 93.4 94.2 94.0 93.7 (10.1) 20.1 30.8
----- ----- ----- ----- -----
Operating profit........... 6.5 6.6 5.8 6.0 6.3 (8.8) 3.9 36.3
Other income (expense),
net...................... .5 .6 .8 1.0 .3 9.8 62.3 (53.4)
----- ----- ----- ----- -----
Income before taxes........ 7.0 7.2 6.6 7.0 6.6 (7.4) 9.1 23.9
Income taxes............... 2.6 2.7 2.4 2.6 2.4 (7.0) 6.4 21.3
----- ----- ----- ----- -----
Net income................. 4.4% 4.5% 4.2% 4.4% 4.2% (7.7) 10.7 25.5
===== ===== ===== ===== =====
</TABLE>
The following table summarizes the percentage of revenue by contract type
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED AUGUST 31, MAY 31,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cost-reimbursement................................ 60 % 56 % 48 % 48 % 49 %
Fixed-price....................................... 15 10 16 15 20
Time-and-materials................................ 25 34 36 37 31
--- --- --- --- ---
100 % 100 % 100 % 100 % 100 %
=== === === === ===
</TABLE>
16
<PAGE> 17
The table below presents contract award and backlog data for the periods
indicated. See "Business -- Backlog" for a discussion of the Company's backlog.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED AUGUST 31, MAY 31,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contract award amount................. $218,497 $182,747 $174,049 $135,153 $449,495
Backlog (with options)................ 501,491 520,133 505,744 520,001 950,376
Backlog (without options)............. 260,313 260,312 287,977 289,560 519,143
Backlog percentage by contract type:
Cost-reimbursement.................. 72% 73% 64% 64% 61%
Fixed-price......................... 11 12 18 15 33
Time-and-materials.................. 17 15 18 21 6
-------- -------- -------- -------- --------
100% 100% 100% 100% 100%
======== ======== ======== ======== ========
</TABLE>
COMPARISON OF HISTORICAL OPERATING RESULTS FOR THE NINE MONTHS ENDED MAY 31,
1996 WITH THE NINE MONTHS ENDED MAY 31, 1995
REVENUES. Revenues for the nine months ended May 31, 1996 increased $36.4
million (31.1%) as compared to the nine months ended May 31, 1995. Approximately
67% of the increase was primarily the result of the revenues contributed by a
significant information technology services contract with a commercial customer
and the revenues contributed by two information technology subsidiaries acquired
late in the 1995 fiscal year. The Company also realized an increase in revenues
from its existing contract base.
OPERATING PROFIT. Costs and expenses were 93.7% of revenues for the nine
months ended May 31, 1996, as compared to 94.0% for the nine months ended May
31, 1995. The reduction in direct and allocable costs as a percentage of
revenues was offset by increases in general and administrative expenses, which
reflect efforts to use contract cost reductions and increased margins to fund
planned increases in business development and marketing efforts, primarily with
commercial market opportunities.
OTHER INCOME (EXPENSE). Other income consists primarily of interest
income. Substantially all available cash is invested in interest-bearing
accounts or fixed income instruments. The 53.4% decrease in other income for the
nine months ended May 31, 1996 as compared to the nine months ended May 31, 1995
is the result of the use of cash to make strategic acquisitions and investments.
NET INCOME. Net income increased $1.3 million (25.5%) for the nine months
ended May 31, 1996 as compared to the same period in the prior year. The
increase is the result of the reasons discussed above.
COMPARISON OF HISTORICAL OPERATING RESULTS FOR FISCAL 1995 WITH FISCAL 1994
REVENUES. Revenues increased $27.2 million (19.0%) in fiscal 1995.
Approximately 32% of the increase was due to increases in funding for existing
tactical and theater missile programs and approximately 64% of the increase was
from two large contract awards for information technology services and the
revenues contributed by three acquisitions during fiscal 1995.
OPERATING PROFIT. Operating profit increased $371,000 (3.9%) in fiscal
1995. Direct and allocable costs were stable as a percentage of revenues.
General and administrative expenses increased $3.4 million (36.1%) in 1995. This
increase reflects the Company's aggressive bid and proposal activities for U.S.
government information systems and technology contracts and the significant
emphasis on marketing the Company's information technology services to
healthcare and commercial entities. As a result, the operating profit margin
decreased to 5.8% from 6.6% in 1994.
OTHER INCOME (EXPENSE). Other income increased $685,000 in fiscal 1995 due
primarily to increased rates of return on the Company's invested cash balances.
Substantially all of the Company's available cash is invested in short-term or
variable interest-bearing accounts. The Company recorded $114,000 in interest
17
<PAGE> 18
expense related to industrial development borrowings in fiscal 1995. Significant
increases in computer hardware integration contracts or additional strategic
acquisitions could reduce cash balances available for investment, thereby
resulting in a reduction of investment income and/or require the incurrence of
additional borrowings with a resulting increase in interest expense.
INCOME TAXES. Income taxes as a percentage of income before taxes was
36.4% in fiscal 1995 as compared to 37.3% in fiscal 1994. The decrease in the
effective tax rate was due to a decrease in state income taxes.
COMPARISON OF HISTORICAL OPERATING RESULTS FOR FISCAL 1994 WITH FISCAL 1993
REVENUES. Revenues decreased $16.0 million (10.0%) in fiscal 1994.
Revenues in fiscal 1993 included a significant nonrecurring computer hardware
integration contract of approximately $15.0 million. Revenues in fiscal 1994
were also impacted by decreases in funding in certain of the Company's DOD
contracts and an increasingly competitive business environment.
OPERATING PROFIT. Operating profit decreased $915,000 in fiscal 1994
(8.8%). This decrease was due to the decrease in revenues in fiscal 1994, as
direct and allocable costs and general and administrative expenses as a
percentage of revenues were approximately the same as in fiscal 1993. The
operating profit margin was 6.6% compared to 6.5% in fiscal 1993.
OTHER INCOME (EXPENSE). Other income increased $82,000 in fiscal 1994 due
primarily to an increase in cash balances available for investment.
INCOME TAXES. Income taxes as a percentage of income before taxes was
37.3% in fiscal 1994 as compared to 37.1% in fiscal 1993.
QUARTERLY FINANCIAL DATA
The following table presents unaudited quarterly financial data for the
nine months ended May 31, 1996 and the years ended August 31, 1995 and 1994.
This information has been prepared on a basis consistent with the Company's
audited financial statements and includes all adjustments, consisting of normal
recurring accruals, that management considers necessary for a fair presentation
of the data. This data is not necessarily indicative of future results of
operations. This information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------------------------
FISCAL 1994 FISCAL 1995 FISCAL 1996
---------------------------------------- ---------------------------------------- -----------------------------
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 29, MAY 31,
1993 1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- ------- -------- -------- -------- ------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues..... $ 34,079 $ 32,787 $35,561 $ 40,726 $ 36,231 $ 36,174 $44,444 $ 53,482 $ 49,030 $ 49,003 $55,169
Operating
profit..... 2,464 2,348 2,319 2,328 2,270 2,296 2,470 2,794 2,938 3,093 3,557
Net income... 1,693 1,632 1,600 1,581 1,628 1,676 1,829 2,069 2,014 2,051 2,376
Net income
per
common
share...... $ .27 $ .26 $ .26 $ .26 $ .27 $ .27 $ .29 $ .32 $ .30 $ .31 $ .35
</TABLE>
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Over the past several years, the Company's operations have provided a
positive cash flow which, along with maintaining certain available credit
facilities, has provided adequate liquidity and working capital to fully fund
the Company's operational needs and support the acquisition program. Working
capital was $46.9 million, $44.1 million and $46.8 million at August 31, 1993,
1994 and 1995, respectively, and $40.8 million at May 31, 1996. Operating
activities provided cash of $6.0 million, $7.5 million and $6.8 million for the
years ended August 31, 1993, 1994 and 1995, respectively, and used cash of
$562,000 for the nine months ended May 31, 1996. The Company realized proceeds
from the sale of Common Stock and reissuance of treasury stock of $1.7 million,
$1.9 million and $2.3 million for the years ended August 31, 1993, 1994 and
1995, respectively, and $2.2 million for the nine months ended May 31, 1996.
The Company has a bank line of credit of $73.5 million which expires in
March 1997, unless renewed. The credit agreement provides for interest at LIBOR
plus 1.25% and a commitment fee on the unused portion of the line of credit.
Outstanding borrowings are secured primarily by accounts receivable. In fiscal
1995, there were no borrowings under this line of credit. On May 31, 1996, the
Company borrowed $14.5 million under the line of credit. These proceeds,
together with 72,044 shares of Common Stock, were used to acquire all of the
outstanding capital stock of AME. In fiscal 1995, the Company borrowed $2.2
million under an Alabama State Industrial Development Bond program offering
certain incentives which effectively reduced the cost of borrowing. The proceeds
are being utilized to expand acquisitions of property and equipment for
information technology programs. In fiscal 1994, the Company borrowed $5.8
million under a term loan agreement. The proceeds were used to purchase computer
hardware for lease to a customer over a period of six years under a systems
integration contract.
Purchases of property and equipment (including those financed under the
term loan agreement) were $1.7 million, $7.3 million and $2.2 million for the
years ended August 31, 1993, 1994 and 1995, respectively, and $3.1 million for
the nine months ended May 31, 1996. There are no material capital expenditure
commitments at May 31, 1996.
The Company is regularly evaluating potential acquisition candidates. In
fiscal 1995, the Company acquired a 100% interest in three separate information
system development and technology companies. These companies provide services
primarily to healthcare and other commercial clients. The aggregate cash
consideration for these transactions was approximately $11.4 million. In fiscal
1995, the Company also acquired a 19.9% interest in TXEN for approximately $1.5
million and has an option to purchase the remaining 80.1% in July 1997.
The Company was recently awarded the HPCM Contracts for information system
development and computer system integration activities, which will require the
Company to acquire substantial amounts of computer hardware for resale or lease
to customers. The Company continues to actively pursue other contracts that
could require similar equipment acquisitions. The timing of payments to
suppliers and payments from customers could cause cash flows from operations to
fluctuate from period to period.
The Company believes that its existing capital resources, together with
available borrowing capacity, will be sufficient to fund operating needs,
finance acquisitions of property and equipment for information technology
programs and computer systems integration activities, and make strategic
acquisitions, if appropriate.
EFFECTS OF INFLATION
Substantially all contracts awarded to the Company have been based on
proposals which reflect estimated cost increases due to inflation. Historically,
inflation has not had a significant impact on the Company.
19
<PAGE> 20
BUSINESS
GENERAL
The Company is a leading provider of technical and information technology
("IT") services, including information processing, systems development and
systems integration. The Company provides these services to a wide range of
clients, including the Department of Defense ("DOD"), other federal agencies,
state and local governments, healthcare and insurance organizations, and other
commercial enterprises. The Company's substantial expertise and capabilities in
a wide range of technologies have been built through a 20-year period of
providing advanced development, scientific and application services to U.S.
military programs, including air defense systems, strategic and theater missile
defense systems, and weapons development programs. These activities have allowed
the Company to build and maintain a foundation of advanced skills in large scale
computer integration, massively parallel computing, supercomputer development,
high speed data integration and networking, real-time database management,
virtual reality systems and simulations, and computer networks. The Company's
advanced technical capabilities gained while performing services for mission
critical federal projects provide the Company with a technological competence
which the Company is transferring to the commercial sector. The Company today
addresses the technology needs of a diverse customer base by applying its
state-of-the-art technical capabilities in commercial system integration,
simulation, software development and client-server architectures, including
SAP(R) consulting. As a result, the Company has expanded the market for its
services by offering innovative technical solutions to customers' needs.
Although the Company's traditional military technology business has continued to
grow, other growing markets for the Company's services now represent
approximately 45% of revenues.
INDUSTRY OVERVIEW
Information Technology Industry -- Federal Government
The U.S. Government is the largest single buyer of IT. Federal Sources,
Inc. ("Federal Sources"), an independent market research firm specializing in
the federal market, estimates that U.S. Government IT spending was $25.6 billion
in the Government's fiscal year 1995 (which ended September 30, 1995) and will
be $26.3 billion in fiscal year 1996, up 2.7%. Federal Sources estimates that IT
spending by civilian agencies will increase from $15.4 billion in fiscal year
1995 to $16.5 billion in fiscal year 1996, up 7.1%. IT spending by the DOD is
expected to increase in the next few years, although it is expected to decrease
3.9% from $10.2 billion in fiscal year 1995 to $9.8 billion in fiscal year 1996.
Federal Sources estimates that total U.S. Government IT spending will increase
at an average annual rate of between 3% and 6% over the next few years.
Information Technology Industry -- Commercial Sector
INPUT, an independent market research firm, estimates that the total
commercial IT services market in the United States was $173 billion in 1995, up
13% from 1994. This market is expected to grow at a 14% average annual rate over
the next five years. The market growth is expected to be driven by a growing
world economy, increased competition and shorter technology cycles which are
forcing more companies to "outsource" their IT services. Over the last few
years, the increase in business process reengineering projects has also resulted
in companies focusing on their core businesses and outsourcing more non-core
functions.
The components of the market in which the Company
participates -- professional services (including consulting, custom software
development, and training), systems integration, outsourcing and system software
products -- are all showing growth. INPUT estimates that the professional
services segment was $26 billion in 1995, up 13% over 1994; the systems
integration segment was $12 billion, up 11% over 1994; the outsourcing segment
was $18.7 billion, up 19% over 1994; and the systems software products segment
was $26 billion, up 10% over 1994. IT spending in the markets that the Company
is targeting, such as healthcare, insurance, facility management, and state and
local governments, are expected to grow 10% to 20% annually over the next few
years.
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BUSINESS STRATEGY
The Company's business strategy consists of three key elements: (i)
maintain the Company's leadership in technology; (ii) apply the Company's
technology to create solutions for new clients; and (iii) make strategic
acquisitions and form alliances to expand the business of the Company and gain
industry knowledge.
MAINTAIN TECHNOLOGY LEADERSHIP. The Company's substantial expertise and
capabilities in a wide range of technologies have been built through a 20-year
period of providing advanced development, scientific, and application services
to U.S. military programs, including air defense systems, strategic and theater
missile defense systems, and weapons development programs. The Company believes
that, because of its expertise and capabilities with such a wide range of
technologies, it has an advantage over its competitors in providing information
technology and other technical business services based on these technologies.
The Company will seek to maintain this advantage by keeping pace with new
developments in technology and by continuing to compete for contracts which will
require that the Company provide high-quality, sophisticated technical solutions
to clients based on the use of advanced technologies.
APPLY TECHNOLOGY TO CREATE SOLUTIONS FOR NEW CLIENTS. The Company believes
that the creative use of its technology expertise and capabilities to provide
innovative, focused technical solutions for its clients has been largely
responsible for the Company's success. The Company intends to use its base of
technical expertise and capabilities in network design, systems integration,
software development, simulation technology, and Internet services to create
solutions for new clients in government, healthcare, insurance and other
commercial markets.
MAKE STRATEGIC ACQUISITIONS AND FORM ALLIANCES. The Company's acquisition
program is a key component of its overall business strategy. The Company will
make strategic acquisitions and form alliances that will allow the Company (i)
to develop technical services which it does not currently provide, (ii) to
target markets that it does not currently serve and gain industry knowledge in
such markets, and (iii) to develop strategic relationships with clients.
ACQUISITIONS AND ALLIANCES
Since September 1, 1994, the Company has successfully completed seven
strategic acquisitions and alliances to expand its business into other markets
and gain industry knowledge. The key acquisitions and alliances completed during
this period are:
COMMUNICATIONS & SYSTEMS SPECIALISTS, INC. ("CSSI"). In September 1994,
the Company acquired CSSi, which provides information systems development and
services primarily in client-server systems development for federal government
agencies. This acquisition enhanced the Company's ability to provide information
development services.
TXEN, INC. ("TXEN"). In December 1994, the Company acquired 19.9% of the
capital stock of TXEN. The Company has an option to purchase the remaining 80.1%
of TXEN in July 1997. TXEN provides information technology products and services
to the managed healthcare industry, including computerized claims processing and
administration services. The Company provides system engineering and development
services to TXEN and has entered into a strategic alliance with TXEN pursuant to
which services are jointly marketed. As a result of the investment and strategic
alliance with TXEN, the Company has enhanced its knowledge of the healthcare
industry. At such time as the Company exercises its option to purchase the
remaining 80.1% of TXEN, the Company will acquire a business base in a rapidly
expanding segment of the healthcare information services industry.
CONWAY COMPUTER GROUP ("CCG"). In May 1995, the Company acquired CCG,
which provides information technology products and services to a variety of
commercial customers. As a result of the CCG acquisition, the Company expanded
its business to include computerized workers' compensation claims,
administration and risk management services. CCG also provides IT services to a
variety of commercial customers, including software development and consulting
services. CCG provides support services to customers with IBM business computer
systems.
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COMPUTER SERVICES CORPORATION ("CSC"). In June 1995, the Company acquired
CSC, which provides transaction and practice management system services, a
computer based medical management system, and a complete billing and accounts
receivable management service to physicians and other medical providers. This
acquisition expands the Company's commitment to IT services in the healthcare
industry by providing the Company with a core business base in computerized
transaction processing and related IT services.
HEALTHGATE DATA CORPORATION ("HEALTHGATE"). In October 1995, the Company
acquired a 20% interest in HealthGate, which is an Internet-based provider of
medical information, including on-line information retrieval, access to medical
information companies and on-line continuing education programs. The Company has
entered into a strategic alliance with HealthGate under which the Company
performs systems development work for HealthGate. As a result of this investment
and strategic alliance, the Company receives Internet advertising exposure for
its services.
HEALTHSHARE, L.L.C. ("HEALTHSHARE"). In January 1996, the Company and a
subsidiary of MediFinancial Solutions, Inc. formed HealthShare as an equal joint
venture to provide large-scale integrated information systems to support
healthcare clients.
ADVANCED MARINE ENTERPRISES, INC. ("AME"). In May 1996, the Company
acquired AME, a leading naval architecture and marine technical services firm.
AME also develops simulation and virtual reality technology for naval and marine
applications and provides support in ship acquisition management, production
support, human systems integration and ship survivability and protection. AME
also sells ship simulators and virtual reality trainers to the international
commercial ship building industry. Approximately 80% of AME's business is with
the U.S. Navy. The acquisition substantially expanded the Company's presence in
the Washington, D.C. area and provides an opportunity for the Company to expand
its business relationship with the U.S. Navy.
NICHOLS FEDERAL
Nichols Federal provides technical services to U.S. defense agencies. For
the nine months ended May 31, 1996, Nichols Federal produced approximately 55%
of the Company's revenues.
Nichols Federal provides systems engineering, systems analysis, simulation
development, and systems integration for the defense and intelligence technical
services market. The Company's capabilities include optics, guidance and
control, software engineering, virtual reality simulations, and command,
control, communication, computers and information ("C(4)I"). These technical
services are rendered primarily for the U.S. Army, Navy, and Air Force. Many of
the Company's contracts are not project specific, but require that the Company
provide technical services to a variety of weapons development and other
projects.
The Company has provided technical services related to missile defense
since 1983 when the Strategic Defense Initiative Organization ("SDIO") was
formed. In 1993, SDIO changed its name to the Ballistic Missile Defense
Organization ("BMDO"). BMDO's mission continues to be Ballistic Missile Defense
("BMD") with emphasis on Theater Missile Defense ("TMD") and National Missile
Defense ("NMD"). The Company's contract revenues from BMD programs were
approximately $84.3 million in fiscal 1993, $64.4 million in fiscal 1994, $56.4
million in fiscal 1995, and $43.8 million in the nine months ended May 31, 1996.
Approximately 33% of the Company's revenues in fiscal 1995 were from contracts
related to BMD, compared to 44% of revenues in fiscal 1994 and 53% of revenues
in fiscal 1993. For the nine months ended May 31, 1996, 29% of the Company's
revenues were from such contracts. Strategic defense has existed for more than
26 years as a mission of DOD through activities such as the BMD program. If a
decision were made to reduce substantially the scope of current BMD programs or
to eliminate the BMDO, management believes that many national and theater
missile defense programs, including some research and development areas that
existed prior to the creation of SDIO/BMDO, would continue to be funded by the
U.S. Army and Air Force, and other DOD agencies.
Sensor Systems and Technologies
The cornerstone of the Company's traditional defense business is the
development, integration, and support of strategic and tactical sensor systems
for defense applications. The Company's sensor system
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services include all program aspects from developing sensor requirements to
hardware development and testing. Through its experienced personnel, the Company
has established techniques and disciplines for design and analysis of systems
and subsystems, and has developed automated tools which are necessary in the
development of sophisticated electronic systems.
Under contracts in the aggregate amount of $73 million with the U.S. Army,
the Company performs sensor and sensor data analysis, operates a data analysis
center, and participates in hardware development and testing. Under contracts in
the aggregate amount of $6.8 million with the U.S. Air Force, the Company
performs seeker modeling, supports hardware-in-the-loop testing, and conducts
independent reviews of missile systems prior to flight tests. Under contracts in
the aggregate amount of $400,000 with the U.S. Navy, the Company performs
minefield detection development.
Missile and Air Defense
For BMD and TMD programs, the Company's services include system
architecture definition; system analysis; system and element definition and
performance estimates; system engineering; test and evaluation; model and
simulation development; radar and infrared sensor and seeker definition and
technology assessments; risk assessments; and program and system acquisition
documentation. Under a $91 million contract with the U.S. Army Space and
Strategic Defense Command, the Company is providing systems engineering and
technical support through studies, concept definition, independent analyses,
simulations, technological assessments, and related tasks in support of
ballistic and theater missile defense systems, experiments and technology
demonstrations. Under a $97 million contract with the BMDO, the Company provides
system engineering support for sensor systems. Under a $10 million contract with
the U.S. Navy, the Company operates and maintains the Innovative Science and
Technology Experimentation Facility at Kennedy Space Center, Florida, which is
engaged in scientific and technology experiments associated with BMD programs.
Space Surveillance and Avionics
The Company's space surveillance and avionics programs involve satellite
and other space applications. The Company performs contracts involving the
establishment of the architecture of future space surveillance and avionics
systems for the U.S. Air Force, the U.S. Navy and intelligence customers. These
contracts are based on the Company's experience in optical sensor and
geolocation technologies and its ability to develop sophisticated computer
simulations to evaluate the performance of candidate architectures. Under an $83
million contract with the U.S. Air Force Space and Missile Systems Center, the
Company provides engineering, analysis, and design for satellite and missile
development programs. Under several contracts with the U.S. Air Force, the
Company supports new materials research, provides software quality assurance for
testing and evaluation, supports research for infrared and cryogenic
technologies, provides sensor data reduction analysis, supports aircraft threat
warning analysis, and develops software for satellite tracking systems.
Army Tactical Systems and Technology
The Company provides development services for Army tactical systems and
technologies, which support Army project offices and research and development
centers. The Company develops high-fidelity simulations for weapon systems,
which are used for cost-effective missile concept definition, design, and
analysis. The Company also conducts lethality and vulnerability studies of
various weapon systems. Under contracts in the aggregate amount of $155 million,
the Company provides functional engineering support to the U.S. Army Missile
Command's Research Development and Engineering Center for guidance and control.
The Company used the knowledge and capabilities that it gained from
creating computer simulations, performing computer/network integrations and
developing high resolution scene generation capabilities to establish an
extensive business base in Distributive Interactive Simulation ("DIS") and
Virtual Prototype Simulation ("VPS"). DIS is a system that permits an
interactive exchange of information to facilitate multiple simulations across a
computer network. VPS is a virtual reality computer simulation that replicates
the sights, sounds, and functionality of a given system, simulating both the
operation of the weapon system and
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the environment surrounding the operator of the system. VPS may be used to
evaluate equipment designs, instruct users in the operation of weapon systems,
analyze the effectiveness of the system against different threats, or test
system effectiveness under various conditions. In fiscal 1996, the Company was
awarded a $48 million contract by the U.S. Army Missile Command ("MICOM") for
continued support to the System Simulation and Development Directorate. The
Company has developed virtual prototype simulators for several MICOM systems,
including Bradley Stinger Fighting Vehicle ("BSFV"), Line-Of-Sight-Anti-Tank
("LOSAT") missile, Javelin, Tube-Launched-Optically-Guided Weapon ("TOW"), Rapid
Force Projection Initiative, Avenger, and Advanced Chaparral.
Special Programs
The Company provides technical services related to scientific and technical
intelligence analysis, threat simulator development, survivability analysis, and
sensor development for collection of data for various U.S. intelligence
programs. The Company has used its 15-year record of providing systems
engineering support to U.S. intelligence programs to expand its customer base in
the intelligence area. The Company now assists intelligence customers in
resolving new and existing information technologies issues related to missile
proliferation, technology transfers, and foreign digital communication systems.
Services provided by the Company include hardware systems evaluation and
integration, hardware-in-the-loop testing and evaluation, and system signature
analysis and prediction for ground missile and air defense systems. Results of
this work aid U.S. weapon system developers in producing more effective products
that give U.S. operational forces greater combat leverage.
The Company also provides technical services for systems engineering;
in-flight survivability analysis; intelligence systems assessments; threat
simulator engineering; foreign material exploitation; infrared seeker
characterization; instrumentation development; detailed measurements of systems
and sensors; sensor data analysis; hardware-in-the-loop development and testing;
test planning; and configuration management.
Under an $87 million contract with the Defense Intelligence Agency's
Missile and Space Intelligence Center, the Company provides scientific and
technical assistance to aid the evaluation of foreign ground missile systems,
subsystems, and technologies. Under a $4.3 million contract with the U.S. Army's
Threat Simulation Management Office, the Company provides technical and systems
engineering support in the design and development of threat simulators and
supports performance assessment tests of developed threat simulators.
Marine Engineering
In May 1996, the Company acquired AME, a leading naval architecture and
marine technical services firm. As a subsidiary of the Company, AME develops
simulations, simulators, and virtual reality programs for naval and marine
applications. In addition to traditional naval architecture and marine
engineering services, AME provides support in ship acquisition management,
production support, human systems integration, and ship survivability and
protection. In 1995, AME was awarded a five-year $169 million contract by the
U.S. Naval Sea Systems Command for ship design and technical support.
Approximately 80% of AME's business is with the U.S. Navy. The acquisition of
AME substantially expands the Company's presence in the Washington, D.C. area
and provides the Company an opportunity to expand its business relationship with
the U.S. Navy.
NICHOLS INFOFED
Nichols InfoFed provides information services and systems integration to
federal, state and local governmental agencies. For the nine months ended May
31, 1996, Nichols InfoFed produced approximately 25% of the Company's revenues.
The services offered by Nichols InfoFed include information technology
services, computer systems integration, staff augmentation, consulting services,
computer facility management and operations, Internet
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services, and customized software system development for customers in the
federal and state information technology services market.
Computer Systems Integration
By building on its existing technical expertise and capabilities, the
Company has been awarded contracts in computer systems integration, including
large-scale projects. The Company's services include high performance computing,
enterprise networking, and office automation, including high-end supercomputer
architectures and applications; Internet services; high-speed, networking
technologies; advanced visualization systems; and on-line, high-integrity data
storage and archival systems. The Company is a systems integrator for many
manufacturers and suppliers of supercomputers, workstations, personal computers,
and networking equipment. The Company also offers a wide range of training
services utilizing innovative techniques and tools, such as computer-based
training aids to promote high productivity and efficient use of installed
systems. These training services include personal computer applications as well
as advanced supercomputing applications.
In fiscal 1996, the Company was awarded two HPCM Contracts in the aggregate
amount of $313 million from the U.S. Army Information Systems Selection and
Acquisition Agency for support at the U.S. Army Corps of Engineers' Waterways
Experiment Station in Vicksburg, Mississippi, and the U.S. Air Force
Aeronautical Systems Center at Wright Patterson Air Force Base in Dayton, Ohio.
These contracts, which are expected to extend until 2004, are to supply computer
hardware and software, provide maintenance and systems integration and provide
Intranet and Internet services. These high performance shared resource centers
will offer government scientists and engineers access to state-of-the-art high
performance computing and communications capabilities. These awards establish
the Company as a leader in high performance computer systems integration.
Other major contracts of this business unit include a $40.5 million
contract with the State of Alabama to provide complete systems integration and
facilities management services for the statewide Alabama Research and Education
Network and the Alabama Supercomputer Center. The Company is providing Internet
access to state government, industry, college and secondary school clients
within the State of Alabama. Under a $24.9 million contract with the Defense
Intelligence Agency's Missile and Space Intelligence Center, the Company
provides acquisition, installation, Intranet and Internet services, and
technical and management services for a high performance scientific computer
center.
Information Systems Development
The Company provides services related to the design, development, and
support of turnkey information systems, distributed client-server software
systems, network security, object-oriented software solutions, and software
applications. The Company also provides information system development services
in the areas of network security, framework solutions, enterprise solutions, and
professional staff augmentation. The Company also develops distributed
client-server software systems for data and communications processing, and
provides turnkey, computer-based information systems.
The Company's information technology services cover a broad spectrum of
multi-vendor platforms and operating environments, including client-server and
scientific computing. In support of these services, the Company has entered into
arrangements with selected vendors such as Sun Microsystems, Digital Equipment
Corporation, Novell Corporation, and Silicon Graphics. In addition to being a
systems integrator for Sun Integration Services, Sybase, and other companies,
the Company is a reseller of products for Novell, Compaq Computer, Dell
Computer, Apple Computer, and Hewlett-Packard.
Under contracts in the aggregate amount of $9.2 million with a U.S.
Government agency, the Company is providing services for the development and
processing of information and for the development of a large client-server
system to perform high capacity digital communication functions. Under a
$600,000 contract with the U.S. Department of Treasury, the Company is
developing an information infrastructure for improved business processes.
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Information Systems Support
The Company provides operating and support services for existing
information systems and assists in the development of enhancements that allow
these existing systems to meet evolving technical challenges. The Company
provides a wide range of services such as workflow management to enhance
operations data, training to improve the client's abilities to use existing IT
capabilities, support of video teleconferences, document imaging to reduce
paperwork, support of desktop computers, network design and development, and
software support for new and legacy computer systems.
The Company supports federal and state government clients in the use of
their information systems to ensure maximum potential and to keep such systems
up-to-date with evolving hardware and software technology. The Company is
currently performing a $35 million contract with the Centers for Disease Control
and Prevention and the Agency for Toxic Substances and Disease Registry to
upgrade, maintain, and manage their microcomputer local and wide area networks
for a primary facility in Atlanta, Georgia, as well as offices in all 50 states
and a number of locations around the world.
Under a $3 million subcontract to support the National Aeronautics and
Space Administration ("NASA") Marshall Space Flight Center, the Company is
providing the software and services to design, manage, verify, implement, and
maintain NASA's Advanced X-Ray Astro-Physics Facility Offline System.
Other customers for which the Company provides information services include
the State of Alabama Department of Human Resources and the Office of National
Drug Control Policy.
Advanced Information Technology Applications
The Company applies its expertise and capabilities in advanced information
technology to serve military and other customers. These services include
large-scale simulations development, custom software systems, prototype hardware
systems, and technical services. The Company designs, develops, and supports
large-scale simulations and high-fidelity models in a variety of computer
languages and hardware platforms. The Company is experienced in developing
user-friendly technologies and developing advanced virtual reality simulations.
The Company has significant software engineering resources and an established
software process improvement program with experience in all phases of the
software development cycle. The Company's work in the areas of data compression,
machine vision, neural networks, and fuzzy logic has allowed the Company to
become a leader in the areas of image processing and technology integration
programs. The Company provides these advanced information technology services
under contracts with NASA's Global Hydrology Center, the U.S. Army, Air Force,
and BMDO.
NICHOLS INFOTEC
Nichols InfoTec provides information services and systems integration
services to commercial customers, other than healthcare and insurance industry
customers. For the nine months ended May 31, 1996, Nichols InfoTec produced
approximately 13% of the Company's revenues.
The Company was awarded a $20 million systems integration contract by
Federal Express to provide interactive training workstations for its field
offices nationwide as well as training for Federal Express personnel in the use
of company developed software. For this effort, the Company was selected by
Federal Express as its "Information and Telecommunication Supplier of the Year
for 1995."
Consulting Services
The Company provides IT consulting services such as networking and systems
integration, custom business application software development, contract
programming and staff supplementation. The Company provides these IT consulting
services for clients with personal computer local area networks and wide area
networks and computer systems manufactured by vendors such as IBM,
Hewlett-Packard, Sun Microsystems, and Digital Equipment Corporation.
Programming and design capabilities range from traditional software languages to
modern graphical user interface client-server development tools.
Telecommunications and
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transportation are the predominant industries served by the Company's consulting
business. The Company's clients include MTEL (Skytel), MobileComm, Oreck and
KLLM Transport Services.
Professional Services
Professional services provided by the Company include client-server
consulting, systems administration, programming, systems engineering, network
consulting, software process improvement consulting and training. The Company's
experience covers a broad spectrum of vendor platforms and operating
environments. The Company's professional services are marketed primarily to
Fortune 1000 companies. The Company's clients include SmithKline Beecham,
American Communication Services, Sun Microsystems, E.I. DuPont De Nemours & Co.,
and Watkins Johnson Co.
SAP(R)(TM) Project Support
In 1995, the Company's subsidiary, CCG, and DSM Copolymer, Inc. formed a
joint venture company, Holland Technology Group L.L.C. ("HOLTEK"). HOLTEK
supplies specialized consulting services for the installation and integration of
enterprise-wide, client-server software products developed by SAP(R)(TM) AG of
Germany. This software is used to manage accounting, human resources,
manufacturing, sales, and distribution functions. According to SAP publications,
this software has been purchased by more than 5,000 customers worldwide. The
Company is currently in the process of becoming a SAP Implementation Partner
with SAP America. Clients include DSM Copolymer, MedPartners, and Mobil Oil.
Systems Development and Evaluation
The Company markets and sells its military sensor technologies for
commercial applications. For ITI MOVATS, a Westinghouse subsidiary, the Company
has developed a universal data system to collect performance data in nuclear
power plants. The system combines sensor technology with advanced software
technology to increase the efficiency of the operators and minimize exposure to
radioactive environments.
For the Federal Aviation Administration, the Company is developing a sensor
system to detect the presence of ice on aircraft wings. This system, which is
likely to have commercial application, should improve safety, reduce aircraft
ground time and environmental clean-up costs associated with unnecessary
de-icing of aircraft.
The Company has developed and is manufacturing a fiber optics calibration
system known as FOCUS. FOCUS calibrates test equipment used to identify the
location of breaks in fiber optic cables without the expense of excavation. The
Company was awarded two contracts to provide FOCUS to U.S. Government customers.
The Company, through its AME subsidiary, sells ship simulators and virtual
reality naval trainers to the international commercial ship building industry.
To date, AME has sold five simulators to customers in this industry.
Commercial Information Technology
The Company designs and integrates emergency response systems ("E-911
Systems"), police/fire computer-aided dispatch systems, automatic location
systems, criminal records systems, and other systems for city and county
customers. The Company has been subcontracted to provide project management,
systems integration, site installation, and acceptance test development and
execution for an E-911 System for Virginia Beach, Virginia. The Company has also
provided systems integration services for Federal Express and Prison Health
Services.
The Company provides software development services for a variety of
clients. These clients include Federal Express, Sun Microsystems, and Digital
Equipment Corporation. In addition, the Company sells a Software Process
Improvement Product ("SPIP"), which is used to assist companies in achieving
Level 2 of the Software Engineering Institute's Capability Maturity Model.
Customers for the SPIP product include Logicon and Concurrent Technologies.
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The Company provides it services to support existing information systems
such as workflow management, training to improve the client's existing IT
capabilities, support of video teleconferences, document imaging, hardware and
software support for desktop computers, facilities operation and management,
network design and development, and software support for new and existing
computer systems. The Company provides these services to commercial clients to
ensure maximum utilization of their information systems and to keep their
systems up-to-date with evolving technology. Clients include Federal Express,
Equifax, The Huntsville Times, and MCI.
NICHOLSELECT
NicholSELECT provides information services and systems integration to the
healthcare and insurance industries. For the nine months ended May 31, 1996,
NicholSELECT produced approximately 7% of the Company's revenues.
The Company identified the healthcare and insurance markets as attractive
industries for application of its information technology, information services,
and system integration expertise and capabilities. Management believed, however,
that the Company needed industry knowledge to be successful. Beginning in 1994,
the Company began a series of strategic acquisitions and alliances to acquire
industry knowledge and business in the healthcare and insurance markets. The
Company has experienced significant growth in providing information technology
and system integration services to managed healthcare and specialty provider
organizations.
Practice Management Information Services
Through its wholly-owned subsidiary, Computer Services Corporation, the
Company provides practice management services and systems to physicians. The
Company provides both transaction-based services and turnkey systems for
physicians' billing, appointment scheduling, and collections. The Company's
information systems and services currently serve over 1,500 physicians in the
State of Alabama, representing approximately one-third of the total market in
the state. Clients include the University of Alabama at Birmingham, Norwood
Clinic, Clinic for Women, Eliza Coffee Memorial Hospital, Huntsville Hospital
East, HealthSouth Medical Associates, Southern Medical Group, Bessemer Coronary
Clinic, and Mobile Infirmary.
Healthcare Systems Integration
The Company provides systems integration and computer network services for
the healthcare industry, including clinical patient records. These services
include requirements definition, network design, hardware and software
integration, network communications, installation, network management, and
support. The Company has developed strategic relationships with other providers,
such as Prison Healthcare Services, MedicaLogic, OACIS, Promina, and CapMed, to
deliver these services to state departments of corrections and hospital
networks, and other healthcare organizations.
Managed Care Services
In 1994, the Company acquired 19.9% of the capital stock of TXEN. The
Company has an option to purchase the remaining capital stock in July 1997. TXEN
provides managed care information systems and services to healthcare
administrators nationwide. TXEN offers its clients four different service
options: (1) full service, (2) back office service, (3) outsourcing, and (4)
turnkey facilities management. TXEN has approximately 50 clients located across
the United States representing approximately two million member lives. Clients
range in size from start-up organizations to health plans with over 250,000
members. Clients include health maintenance organizations ("HMO"s), such as the
Phoenix Healthcare Corporation, Integrity Health Plan, and Harris Methodist
Health Plan; preferred provider organizations ("PPO"s), such as The Emerald
Health Network, Beech Street, and QualCare; physician hospital organizations
("PHO"s), such as Texas Children's Health Plan, Yale Preferred Health, and
Family Plus Health Plan; third-party administrators, such as Equifax Healthcare
Administrators, Fox-Everett, and Seabury and Smith; and insurance
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companies, such as IBA Health and Life Assurance Co. The Company provides
technology and software re-engineering services for TXEN.
Property and Casualty Information Services
Through its wholly-owned subsidiary, Conway Computer Group, the Company
provides information technology consulting services, customized software
development, and packaged solutions for the property and casualty insurance
industry. The Company develops and supports two major packaged software products
which are used for property/casualty and workers' compensation insurance
systems. One of the products provides rating, underwriting, policy
administration, and premium accounting for insurance companies. The other
product provides full claims administration and risk management, as well as
electronic data transfer and managed care options, which may be used in
conjunction with the other products in an insurance company environment.
Customers using the software include the State of Alaska, The Kroger Company,
Texas Association of School Boards, Employers' Security Insurance Co., and
American Federated General Agency.
Large Integrated Delivery Systems
In January 1996, the Company and a subsidiary of MediFinancial Solutions,
Inc. formed HealthShare, L.L.C. ("HealthShare"). The Company and such subsidiary
each own 50% of HealthShare. HealthShare will provide its clients with
integrated information systems and support services to reduce the cost of
administering the delivery of healthcare while increasing their ability to
monitor and manage the quality and efficiency of healthcare services delivered
to their constituents. HealthShare intends to offer an Extensible, Patient-
Oriented, and Multi-Component Healthcare ("EPOCH") integrated delivery system
for large healthcare organizations such as government or university medical
schools. EPOCH, when fully operational, is intended to leverage advanced
information technologies to integrate electronically all components of
healthcare delivery from the physician's office to the managed care organization
and insurance provider. HealthShare clients have included New Jersey Medical
School and Columbia/HCA Healthcare Corporation.
HealthGate
In 1995, the Company purchased 20% of HealthGate Data Corporation
("HealthGate"). HealthGate offers an Internet bio-medical and health information
system which provides access to databases, journals, textbooks, continuing
education programs, and other related information sources. Under a strategic
alliance with HealthGate, the Company performs system development services for
HealthGate and sells products and other services to HealthGate. HealthGate has
enrolled approximately 2,500 clients since commencing operations in December
1995.
COMPETITION
The Company competes against technical services companies in the defense
and aerospace industries, including BDM International, General Research
Corporation, Logicon, Booz Allen and Hamilton, and CACI International. The
information services industry in which the Company operates is highly fragmented
with no single company or small group of companies in a dominant position. The
Company's competitors include large, diversified firms with substantially
greater financial resources and larger technical staffs than the Company. Some
of the larger competitors offer services in a number of markets which overlap
many of the same areas in which the Company offers services, while certain
companies are focused on only one or a few of these markets. The firms which
compete with the Company are consulting firms, computer services firms,
applications software companies and accounting firms, as well as the computer
service arms of computer manufacturing companies and defense and aerospace
firms. The primary factors of competition in the business in which the Company
is engaged include technical, management and marketing competence, price, and
past performance. The federal government market is highly competitive with no
single dominating company. Procurement reforms over the last year have increased
the importance of a contractor's past performance in deciding new bid awards.
Past performance can represent over half the criteria weighting on new awards.
The Company emphasizes client satisfaction, as evidenced by the Company's
ability to maintain clients for many
29
<PAGE> 30
years and winning all of its major contract re-competes during the last five
years. The Company believes that its low overhead and cost structure give it an
advantage in bidding on contracts.
MARKETING
For Nichols Federal and Nichols InfoFed, the Company's marketing activities
are directed by the business unit presidents. The business unit presidents
coordinate the marketing activities of program development managers assigned to
the business units. The program development staff, as well as other Company
managers, engineers and scientists, attend new business briefings sponsored by
government agencies, review publications and learn of new business opportunities
through customer contacts. Potential new procurements are analyzed and evaluated
within the unit of the Company that would be principally responsible for
performance of the contract. The decision to submit a bid or proposal is made by
the responsible unit president through a formal bid review process.
For Nichols InfoTec and NicholSELECT, the Company's marketing services are
directed by such unit's vice president of commercial sales. The marketing and
sales staff receive a salary plus incentive compensation based on sales. After
identifying prospective sales opportunities, the sales and marketing staff
coordinates with the technical staff responsible for performing the services to
develop each customer proposal which, if accepted, results in a contract award.
GOVERNMENT CONTRACTS
A substantial portion of the Company's revenues are derived from contracts
and subcontracts with the DOD and other federal government agencies. A majority
of the Company's contracts are competitively bid and awarded on the basis of
technical merit, personnel qualifications, experience, and price. The Company
also receives some contract awards involving special technical capabilities on a
negotiated, noncompetitive basis due to the Company's unique technical
capabilities in special areas. Future revenues and income of the Company could
be materially affected by changes in procurement policies, a reduction in
expenditures for the services provided by the Company, and other risks generally
associated with federal government contracts.
The Company performs its services under federal government contracts that
usually require performance over a period of one to five years. Long-term
contracts may be conditioned upon continued availability of Congressional
appropriations. Variances between anticipated budget and Congressional
appropriations may result in delay, reduction or termination of such contracts.
Contractors often experience revenue uncertainties with respect to available
contract funding during the first quarter of the government's fiscal year
beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company's federal government contracts are performed under
cost-reimbursement contracts, time-and-materials contracts and fixed-price
contracts. Cost-reimbursement contracts provide for reimbursement of costs (to
the extent allowable under Federal Acquisition Regulations) and for payment of a
fee. The fee may be either fixed by the contract (cost-plus-fixed fee) or
variable, based upon cost, quality, delivery, and the customer's subjective
evaluation of the work (cost-plus-award fee). Under time-and-materials
contracts, the Company receives a fixed amount by labor category for services
performed and is reimbursed (without fee) for the cost of materials purchased to
perform the contract. Under a fixed-price contract, the Company agrees to
perform certain work for a fixed price and, accordingly, realizes the benefit or
detriment to the extent that the actual cost of performing the work differs from
the contract price. Contract revenues for the year ended August 31, 1995 were
approximately 48% from cost-reimbursement contracts, approximately 36% from
time-and-materials contracts and 16% from fixed-price contracts.
The Company's allowable federal government contract costs and fees are
subject to audit by the Defense Contract Audit Agency ("DCAA"). Audits may
result in non-reimbursement of some contract costs and fees. To date, the
Company has experienced no material adjustments as a result of audits by the
DCAA. The DCAA has not completed audits of the Company's federal contracts for
fiscal years 1994 and 1995.
The Company's federal government contracts may be terminated, in whole or
in part, at the convenience of the government. If a termination for convenience
occurs, the government generally is obligated to pay the
30
<PAGE> 31
cost incurred by the Company under the contract plus a pro rata fee based upon
the work completed. When the Company participates as a subcontractor, the
Company is at risk if the prime contractor does not perform its contract.
Similarly, when the Company as a prime contractor employs subcontractors, the
Company is at risk if a subcontractor does not perform its subcontract.
Some of the Company's federal government contracts contain options which
are exercisable at the discretion of the customer. An option may extend the
period of performance for one or more years for additional consideration on
terms and conditions similar to those contained in the original contract. An
option may also increase the level of effort and assign new tasks to the
Company. In the Company's experience, options are usually exercised.
The Company's eligibility to perform under its federal government contracts
requires the Company to maintain adequate security measures. The Company has
implemented security procedures necessary to satisfy the requirements of its
federal government contracts.
BACKLOG
The Company had a backlog of approximately $950.4 million, including
options of $431.2 million, at May 31, 1996. The Company had a backlog of $505.7
million, including options of $217.8 million, at August 31, 1995, compared to a
backlog of $520.1 million, including options of $259.8 million, at August 31,
1994. Backlog represents the amount of revenues expected to be realized from
awarded contracts. Therefore, the amount in backlog is typically less than the
face amount of the contract. The amount includes estimates based on the
Company's experience with similar awards and customers and estimates of revenues
that would be recognized from the performance of options, under existing
contracts, that may be exercised by the customer. These estimates are reviewed
periodically and are adjusted based on the latest available information.
Historically, these adjustments have not been significant. Because contracts in
backlog are typically multi-year contracts, an increase in backlog may not
translate into proportional revenue growth in any future period. Management
believes that approximately 6% to 8% of the Company's backlog at May 31, 1996,
will result in revenues for the three months ending August 31, 1996.
The backlog amounts as presented are comprised of funded and unfunded
components. Funded backlog represents the sum of contract amounts for which
funds have been specifically obligated by customers to contracts. Unfunded
backlog represents future contract or option amounts that customers may obligate
over the specified contract performance periods. The Company's customers
allocate funds for expenditures on long-term contracts on a periodic basis. The
Company is committed to provide services under its contracts to the extent funds
are provided. The funded component of the Company's backlog at May 31, 1996 was
approximately $144.4 million. The funded components of the Company's backlog at
August 31, 1995 and 1994, were $56.0 million and $48.6 million, respectively.
The ability of the Company to realize revenues from contracts in backlog is
dependent upon adequate funding for such contracts. Although funding of its
contracts is not within the Company's control, actual contract fundings have
been approximately equal to the aggregate amounts of the contracts.
INTELLECTUAL PROPERTY RIGHTS
The Company's success has resulted, in part, from its methodologies and
other proprietary intellectual property rights. The Company relies upon a
combination of trade secret, nondisclosure and other contractual arrangements
and technical measures to protect its proprietary rights. The Company generally
enters into confidentially and nonsolicitation agreements with its clients and
potential clients and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
The Company's business does not depend on patents, copyrights, and
trademarks. Management believes that the Company's success depends on the
innovative skills and technical competence of its personnel rather than on the
ownership of patents, copyrights or trademarks. Technology developed by the
Company under its federal contracts is owned by the U.S. Government.
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<PAGE> 32
EMPLOYEES
At May 31, 1996, the Company had 1,655 full-time employees. Of the
Company's professional employees, 95% hold undergraduate degrees and 38% hold
advanced degrees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.
FACILITIES
The Company currently leases approximately 195,000 square feet of office
space in Huntsville, Alabama, and approximately 194,000 square feet of office
space in 26 other locations throughout the United States. The Company's leases
expire at varying periods from 1996 to 2005, and currently call for minimum
annual lease payments of approximately $2.7 million. Certain of the lessors
under such leases are affiliated with the Company. See Note 6 to Notes to the
Company's Consolidated Financial Statements.
LEGAL PROCEEDINGS
On May 31, 1996, the Company purchased all of the capital stock of AME
pursuant to an agreement which provides indemnification of the Company by the
sellers against all damages arising out of litigation pending against AME. One
of the pending cases was PRC, Inc. v. AME, et al., instituted on January 2, 1996
in the Circuit Court of Arlington County, Virginia, Chancery No. 96.1, wherein
PRC, Inc. alleged that, among other matters, AME and certain of its employees
conspired to illegally acquire the PRC Engineering Department, including its
employees, customers, property and proprietary information.
The trial of this non-jury action commenced May 28, 1996 and concluded on
June 19, 1996. At that time the judge orally announced his tentative findings
and conclusions of law awarding PRC, Inc. monetary damages totaling
approximately $4.1 million, exclusive of attorneys' fees and expenses estimated
to be in the range of $650,000 to $700,000. While the court's pronouncement is
presently inconclusive and subject to change, it is an indication of the amount
of the final judgement expected to be entered. In addition to the sellers'
contractual indemnity, an escrow account funded by the sellers in the amount of
approximately $5.6 million exists to secure the sellers' indemnity which the
Company believes will be adequate to cover the potential liability associated
with this litigation.
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<PAGE> 33
MANAGEMENT
The following sets forth certain information concerning the directors and
executive officers of the Company as of May 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------- --- ------------------------------------------------
<S> <C> <C>
Chris H. Horgen.................... 49 Chief Executive Officer and Chairman
Michael J. Mruz.................... 50 President, Chief Operating Officer and Director
Roy J. Nichols..................... 58 Senior Vice President and Vice Chairman
Patsy L. Hattox.................... 47 Corporate Vice President, Chief Administrative
Officer, Secretary and Director
Allen E. Dillard................... 36 Vice President, Chief Financial Officer and
Treasurer
Earl Madden........................ 64 Vice President and Chief Procurement Officer
James C. Moule..................... 60 President, Nichols Federal
Michael W. Solley.................. 38 President, Nichols InfoFed
Thomas L. Patterson................ 53 President, NicholSELECT
Roger P. Heinisch.................. 58 Director
John R. Wynn....................... 51 Director
William E. Odom.................... 64 Director
James R. Thompson, Jr.............. 60 Director
Phil E. DePoy...................... 60 Director
Robert W. Hager.................... 68 Director
</TABLE>
Chris H. Horgen is a co-founder of the Company, and has been Chairman of
the Board since 1991 and Chief Executive Officer since 1983. Mr. Horgen was
Co-Chairman of the Board from 1984 to 1991 and Executive Vice President from
1976 to 1983. From 1975 to 1976, Mr. Horgen was Branch Chief of Optical Analysis
at McDonnell Douglas Astronautics Company, an aerospace and defense contractor.
From 1972 to 1975, he was a Project Manager for Optical Programs for the U.S.
Army, and from 1969 to 1972, he was an officer in the U.S. Air Force. He holds a
bachelors degree and a masters degree in Aerospace Engineering from Iowa State
University and a masters degree in System Management from the University of
Southern California. Mr. Horgen also serves as a director of SouthTrust Bank of
Alabama, N.A.
Michael J. Mruz became President of the Company in August 1994, and its
Chief Operating Officer and a Director in September 1994. From 1989 to 1994, Mr.
Mruz served as Executive Vice President, Chief Financial and Administrative
Officer, and a member of the Board of Directors of BDM International, Inc.
("BDM"), a defense contractor. While at BDM, Mr. Mruz held the positions of
Corporate Vice President from 1988 to 1989, Vice President/General Manager of
BDM's Huntsville Technology Center from 1983 to 1988, Vice President, Systems
Design and Analysis from 1979 to 1983, and various management and technical
positions from 1974 to 1979. Mr. Mruz served in the U.S. Air Force from 1968
through 1974 in research and development assignments involving communications
systems. Mr. Mruz holds a bachelors degree in Mathematics from Villanova
University, and a masters degree in Systems Analysis from the Air Force
Institute of Technology.
Roy J. Nichols is a co-founder of the Company, and has been Vice Chairman
of the Board and Senior Vice President since 1991. Mr. Nichols was the President
of the Company from 1976 to 1991. He is currently working on a part-time basis
for the Company. Mr. Nichols was Co-Chairman of the Board from 1984 to 1991.
From 1969 to 1976, Mr. Nichols was Chief Engineer at McDonnell Douglas
Astronautics Company and from 1958 to 1968, he was Program Manager for the
University of Michigan's Willow Run Laboratories. Mr. Nichols holds bachelors
and masters degrees in Aeronautical and Astronautical Engineering from the
University of Michigan. Mr. Nichols also serves as a director of Adtran, Inc.
Patsy L. Hattox has served as a Director and Corporate Secretary since
1980, as Vice President of Administration and Investor Relations since 1988, and
as Chief Administrative Officer since 1991. From 1985
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<PAGE> 34
to 1988, she held the position of Division Director for Administration. Ms.
Hattox holds a bachelors degree in Business Administration from Athens State
College.
Allen E. Dillard became Chief Financial Officer and Corporate Treasurer in
1994 and a Vice President in 1995. He joined the Company in 1992 as Staff
Manager of Finance and Accounting. From 1983 to 1992, Mr. Dillard was employed
with Ernst & Young LLP, where he served as Senior Manager from 1992, as Manager
from 1988 to 1992, and as Staff Accountant from 1983 to 1988. Mr. Dillard is a
certified public accountant and holds a bachelors degree in Accounting from the
University of Alabama at Birmingham.
Earl Madden became Chief Procurement Officer in 1994 and a Vice President
in 1995. He joined the Company in 1983 as Manager of Contract Administration and
Purchasing after twenty-four years experience with the U.S. government in the
contracts and logistics field. From 1986 to 1989, Mr. Madden served as
Directorate Director of Contract Administration and Purchasing, and from 1989 to
1994 he served as the Division Director of Contract Administration and
Purchasing. Mr. Madden has a masters degree in Contract Management from Florida
Institute of Technology.
James C. Moule became President of Nichols Federal in 1995. Since Mr. Moule
joined the Company in 1988 through 1995, he served as Vice President of the
Southwest Region. From 1987 to 1988, he was employed by McDonnell Douglas
Astronautics Company as a Program Director. Prior to joining McDonnell Douglas,
Mr. Moule was employed by the Northrop Corporation where he served as Program
Manager from 1981 to 1982; Vice President, Engineering from 1982 to 1984; and
Director of Advanced Programs from 1985 to 1987. Mr. Moule holds a bachelors
degree in Physics from the University of California in Los Angeles.
Michael W. Solley joined the Company in 1983 and has been President of
Nichols InfoFed since July 1996. From 1985 to July 1996, Mr. Solley was the Vice
President for the computer systems integration unit and from 1980 to 1983, he
managed several large computer systems integration contracts. Mr. Solley holds a
bachelors degree in Electrical Engineering from the University of Alabama in
Huntsville.
Thomas L. Patterson joined the Company in July 1996 as President of
NicholSELECT. Mr. Patterson has also been President of TXEN, Inc., an
information technology company for managed care organizations, since he founded
it in 1989. From 1980 to 1989, he was President of SEAKO, Inc., an information
technology company for practice management and managed care systems. Mr.
Patterson holds a bachelors degree in Mechanical Engineering and a masters
degree in Engineering Mechanics from the University of Alabama.
Roger P. Heinisch has been a Director of the Company since 1984. He has
been Vice President Engineering with Alliant Techsystems, Inc., a defense
contractor, since 1991. He was employed by Honeywell, Inc., a defense
contractor, from 1968 to 1990. While at Honeywell, Dr. Heinisch held the
positions of Vice President of Manufacturing and Materials Operations of the
Defense Systems Group from 1989 to 1990, Vice President and Deputy, Science and
Technology from 1988 to 1989, Vice President of Flight Systems Operations from
1985 to 1988, and Vice President for Honeywell's System and Research Center from
1982 to 1985. Dr. Heinisch holds bachelors and masters degrees in Nuclear
Engineering from Marquette University and a doctorate degree in Engineering from
Purdue University. Dr. Heinisch also serves as a director of Non-Volatile
Electronics, Inc.
John R. Wynn has been a Director of the Company since 1985. He is a
practicing attorney in Huntsville, Alabama and has been a member of the law firm
of Lanier Ford Shaver & Payne, P.C. and its predecessors since 1970. The firm
has served as general counsel to the Company since 1983.
Lt. Gen. (Ret.) William E. Odom has been a Director of the Company since
1991. He has been Director of National Security Studies for Hudson Institute, a
nonprofit organization which analyzes, evaluates, and formulates foreign,
military, and domestic policy, since 1988. He also serves as an adjunct
professor at Yale University. In 1988, General Odom retired from the Army after
34 years of service. At the time of his retirement, General Odom was Director of
the National Security Agency and Chief, Central Security Service, at Fort George
Meade, Maryland. As Director of the National Security Agency from 1985 to 1988,
General Odom was responsible for the agency's work in signal intelligence and
communications security and was the principal signal intelligence advisor to the
Secretary of Defense, the Director of Central Intelligence, and the Joint Chiefs
of Staff. General Odom received a bachelors degree in Engineering from the
United States
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<PAGE> 35
Military Academy. He also holds a masters degree and a doctorate degree in
Political Science from Columbia University.
James R. Thompson, Jr., has been a Director of the Company since 1992. He
has been Executive Vice President of Orbital Sciences Corporation, a space
technology company, since 1991. From 1989 to 1991, he served as Deputy
Administrator for NASA. From 1986 to 1989, he served as the Director of NASA's
Marshall Space Flight Center. From 1983 to 1986, he was the Deputy Director for
Technical Operations for Princeton Applied Physics Laboratory. Mr. Thompson
holds a bachelors degree in Aeronautical Engineering from Georgia Institute of
Technology and a masters degree in Mechanical Engineering from the University of
Florida. Mr. Thompson also serves as a director of Orbital Sciences Corporation
and Spacehab, Inc.
Phil E. DePoy has been a Director of the Company since 1994. He has served
as President of the National Opinion Research Center ("NORC"), a non-profit
corporation engaged in survey research for the public interest and affiliated
with the University of Chicago, since 1992. From 1985 to 1992, Dr. DePoy served
as Distinguished Senior Fellow and President and Chief Executive Officer of the
Center for Naval Analyses ("CNA") located in Alexandria, Virginia. CNA's
research efforts include operations analysis, systems analysis, and systems
engineering efforts for the Navy and other government agencies. He served in a
variety of capacities at CNA from 1959 through 1991, beginning as an analyst and
field representative. He became CNA's President and CEO in 1985. Dr. DePoy
received his bachelors degree in Chemical Engineering from Purdue University,
his masters degree in Nuclear Engineering from Massachusetts Institute of
Technology, and his doctorate degree in Chemical Engineering from Stanford
University.
Robert W. Hager has been a Director of the Company since 1994. He retired
from The Boeing Company in March 1993, where he had been Vice President-General
Manager of the Missiles and Space Division since 1991. He was responsible for
all missile and space programs within Boeing. In May 1989, Mr. Hager became Vice
President-General Manager of Boeing's Huntsville Division. From 1984 to 1989, he
served as Vice President, Space Station Freedom. He was Vice President of
Engineering for Boeing Aerospace before his Space Station position. Mr. Hager
received his masters degree in Civil Engineering from the University of
Washington. He is a Trustee of the University of Washington's Space Research
Association.
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<PAGE> 36
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock of the Company as of May 31, 1996, and
as adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
hereby by (i) each person known by the Company to own beneficially more than 5%
of such stock; (ii) each director of the Company; (iii) all directors and
executive officers of the Company as a group; and (iv) Chris H. Horgen, the
Company's Chief Executive Officer, and Michael J. Mruz, John D. Jones, James C.
Moule and Jerry T. Bosley, the four most highly compensated executive officers
of the Company during fiscal 1995 (collectively, the "Named Executive
Officers"). Unless otherwise indicated, each stockholder named has sole voting
and dispositive power with respect to his shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
--------------------- NUMBER OF ---------------------
NUMBER OF SHARES BEING NUMBER OF
NAMES SHARES PERCENT OFFERED SHARES PERCENT
- --------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Brinson Partners, Inc.(2).............. 602,303 9.2% -0- 602,303 8.0%
David L. Babson and Co., Inc.(3)....... 517,500 7.9 -0- 517,500 6.9
Account Management, Inc.(4)............ 420,500 6.5 -0- 420,500 5.6
Directors:
Chris H. Horgen(5)..................... 293,334 4.5 -0- 293,334 3.9
Michael J. Mruz(6)..................... 95,500 1.5 -0- 95,500 1.3
Roy J. Nichols(7)...................... 333,432 5.1 30,000(15) 303,432 4.0
Patsy L. Hattox(8)..................... 42,547 * -0- 42,547 *
Phil E. DePoy(9)....................... 2,500 * -0- 2,500 *
Robert W. Hager(10).................... 3,000 * -0- 3,000 *
Roger P. Heinisch(11).................. 14,334 * -0- 14,334 *
William E. Odom(12).................... 6,002 * -0- 6,002 *
James R. Thompson, Jr.(13)............. 4,000 * -0- 4,000 *
John R. Wynn(14)....................... 11,601 * -0- 11,601 *
Named Executive Officers who are not
Directors:
John D. Jones(16)...................... 37,147 * -0- 37,147 *
James C. Moule(17)..................... 33,367 * -0- 33,367 *
Jerry T. Bosley(18).................... 11,888 * -0- 11,888 *
Other Selling Stockholders:
John C. Henderson...................... 1,661 * 500 1,161 *
Mark S. Dendinger...................... 4,984 * 300 4,684 *
Bennie H. Palmer, Jr................... 1,661 * 500 1,161 *
All directors and executive officers as
a group (15 persons)(19)............. 917,512 14.0 30,000(15) 887,512 11.8
</TABLE>
- ---------------
* Less than 1%
(1) Shares issuable under options exercisable within 60 days are considered
outstanding for the purpose of calculating the percentage of Common Stock
owned by each executive officer, director, and 5% stockholder who has
options exercisable within 60 days, but such shares are not considered
outstanding with respect to any other executive officer, director, or 5%
stockholder.
(2) The principal mailing address for Brinson Partners, Inc., is 209 South
LaSalle Street, Suite 20, Chicago, IL 60604-1295.
(3) The principal mailing address for David L. Babson & Co., Inc., is One
Memorial Drive, Cambridge, MA 02142-1300.
(4) The principal mailing address for Account Management, Inc., is 2 Newberry
Street, Boston, MA 02116.
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<PAGE> 37
(5) Includes 1,033 shares held by an adult child who is a member of Mr.
Horgen's household, and 66,000 shares held directly by Mr. Horgen's spouse.
(6) Includes 17,500 shares which are subject to immediately exercisable options
held by Mr. Mruz and 8,000 shares held in a revocable trust, of which both
Mr. Mruz and his spouse are trustees.
(7) Represents 244,542 shares held in a revocable trust for Mr. Nichols and his
spouse, of which both are trustees, and 88,890 shares held in the Roy J.
Nichols and Susan B. Nichols Charitable Remainder Unitrust, of which Mr.
Nichols is the sole trustee. Mr. Nichols currently resides at 2430 Covemont
Drive, Huntsville, AL 35801.
(8) Includes 3,175 shares which are subject to immediately exercisable options
held by Ms. Hattox.
(9) Includes 2,000 shares which are subject to immediately exercisable options
held by Dr. DePoy.
(10) Represents 2,000 shares which are subject to immediately exercisable
options held by Mr. Hager, and 1,000 shares which are held in joint tenancy
with Mr. Hager's spouse.
(11) Includes 5,002 shares which are subject to immediately exercisable options
held by Dr. Heinisch.
(12) Includes 5,002 shares which are subject to immediately exercisable options
held by General Odom.
(13) Represents 4,000 shares which are subject to immediately exercisable
options held by Mr. Thompson.
(14) Includes 4,000 shares which are subject to immediately exercisable options
held by Mr. Wynn, and 266 shares held by Mr. Wynn's spouse for the benefit
of minor children.
(15) These shares are being sold solely by the Roy J. Nichols and Susan B.
Nichols Charitable Remainder Unitrust. Roy J. Nichols, as the sole trustee
of this trust, is the beneficial owner of these shares. See footnote (7)
above.
(16) Includes 3,009 shares which are subject to immediately exercisable options
held by Dr. Jones.
(17) Includes 3,010 shares which are subject to immediately exercisable options
held by Mr. Moule.
(18) Includes 6,007 shares which are subject to immediately exercisable options
held by Mr. Bosley.
(19) Includes 46,096 shares which are subject to stock options exercisable
within 60 days, 66,200 shares owned by the spouses of two officers, 252,542
shares held in trusts by two officers and their spouses, 88,890 shares held
in trust by an officer who is sole trustee, 1,000 shares held in joint
tenancy with a spouse, 1,033 shares held by an adult child who is a member
of an officer's household, 266 shares held by the spouse of a director for
the benefit of minor children and 400 shares held by an officer as
custodian for a minor child.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.01 per share. As of May 31, 1996 there were
6,514,116 shares of Common Stock outstanding. The Common Stock is currently held
by approximately 2,500 stockholders.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are not entitled to cumulative voting
rights in the election of directors. The holders of Common Stock are entitled to
receive, pro rata, dividends out of funds legally available for distribution
when and if declared by the Board of Directors and to share ratably in the
assets of the Company legally available for distribution to its stockholders in
the event of liquidation, dissolution, or winding-up of the Company. The holders
of Common Stock have no preemptive, subscription, redemption, or conversion
rights. The Common Stock currently outstanding is, and the Common Stock issued
in this Offering will be, fully paid and nonassessable. There are no
restrictions under the Company's Certificate of Incorporation or By-laws on the
transferability of the Common Stock.
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, New York, New York.
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<PAGE> 38
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Underwriters named below, for whom The Robinson-Humphrey Company,
Inc., Oppenheimer & Co., Inc., and Ferris, Baker Watts, Incorporated, are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to the Underwriters, the respective number of
shares of Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
The Robinson-Humphrey Company, Inc. ...................................... 400,000
Oppenheimer & Co., Inc. .................................................. 400,000
Ferris, Baker Watts, Incorporated......................................... 200,000
---------
Total........................................................... 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the 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 $0.90 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share in sales to certain other dealers.
After this offering, the public offering price and other selling terms may be
changed.
The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 150,000 shares of Common Stock at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus to
cover over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them as shown in the table above
bears to the 1,000,000 shares of Common Stock offered hereby. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the 1,000,000 shares of Common Stock offered hereby.
The Company, each of the Company's directors and executive officers, the
Selling Stockholders and certain other stockholders of the Company have agreed
that they will not sell, offer to sell, grant an option for the sale of, or
otherwise dispose of, any shares of Common Stock or securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 180
days from the date of this Prospectus without the prior written consent of the
Representatives; provided however, that the Company may issue shares of Common
Stock in connection with the exercise of currently outstanding stock options.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
In connection with this Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with
38
<PAGE> 39
Rule 10b-6A under the Securities Exchange Act of 1934 during the two business
day period before commencement of offers or sales of the Common Stock. The
passive market making transactions must comply with applicable volume and price
limits and be identified as such. In general, a passive market maker may display
its bid at a price not in excess of the highest independent bid for the
security; however, if all independent bids are lowered below the passive market
maker's bid, such bid must then be lowered when certain purchase limits are
exceeded.
The Robinson-Humphrey Company, Inc., has from time to time performed, and
expects to continue to perform, various investment banking services for the
Company on a fee-for-services bases.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company and the Selling Stockholders by Lanier Ford Shaver &
Payne, P.C., Huntsville, Alabama. John R. Wynn, a member of the law firm of
Lanier Ford Shaver & Payne, P.C., is a director of the Company. As of July 24,
1996, five attorneys of Lanier Ford Shaver & Payne, P.C., including Mr. Wynn,
beneficially owned an aggregate of 18,048 shares of Common Stock. Certain legal
matters relating to this Offering will be passed upon for the Underwriters by
King & Spalding, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Nichols Research Corporation and
the financial statements of Advanced Marine Enterprises, Inc. and TXEN, Inc.
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Copies may also be obtained through the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
Additional information regarding the Company and the Common Stock offered
hereby is contained in the Registration Statement on Form S-3 and the exhibits
relating thereto filed with the Commission under the Securities Act of 1933, as
amended, with respect to the Common Stock being offered by this Prospectus. For
further information pertaining to the Company and the Common Stock, reference is
made to the Registration Statement and the exhibits thereto, which may be
inspected without charge at, and copies thereof may be obtained at prescribed
rates from, the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit to which reference is hereby made.
39
<PAGE> 40
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"),
are hereby incorporated by reference in this Prospectus: The Company's (i)
Annual Report on Form 10-K for the year ended August 31, 1995; (ii) Quarterly
Report on Form 10-Q for the quarter ended November 30, 1995; (iii) Quarterly
Report on Form 10-Q for the quarter ended February 29, 1996; (iv) Quarterly
Report on Form 10-Q for the quarter ended May 31, 1996; (v) Current Report on
Form 8-K dated May 31, 1996, as amended July 24, 1996; and (vi) Registration
Statement on Form 8-A filed on January 9, 1987, as amended August 14, 1989.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
herein. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed superseded or modified for
purposes of this Prospectus to the extent that a statement contained herein (or
in any other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits to such documents which are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to Patsy
L. Hattox, Secretary, 4040 South Memorial Parkway, Huntsville, Alabama 35802.
Telephone requests may be directed to Ms. Hattox at (205) 883-1140.
40
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
NICHOLS RESEARCH CORPORATION
Report of Independent Auditors...................................................... F-2
Consolidated Balance Sheets as of August 31, 1993, 1994 and 1995, and May 31, 1996
(unaudited)...................................................................... F-3
Consolidated Statements of Income for the years ended August 31, 1993, 1994 and
1995, and for the nine months ended May 31, 1995 and 1996 (unaudited)............ F-4
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1993,
1994 and 1995, and for the nine months ended May 31, 1996 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1993, 1994 and
1995, and for the nine months ended May 31, 1995 and 1996 (unaudited)............ F-6
Notes to Consolidated Financial Statements.......................................... F-7
ADVANCED MARINE ENTERPRISES, INC.
Report of Independent Auditors...................................................... F-16
Balance Sheet as of May 31, 1996.................................................... F-17
Statement of Income for the year ended May 31, 1996................................. F-18
Statement of Stockholders' Equity for the year ended May 31, 1996................... F-19
Statement of Cash Flows for the year ended May 31, 1996............................. F-20
Notes to Financial Statements....................................................... F-21
TXEN, INC.
Report of Independent Auditors...................................................... F-24
Balance Sheets as of June 30, 1995, and May 31, 1996 (unaudited).................... F-25
Statements of Income for the year ended June 30, 1995, and the eleven months ended
May 31, 1995 and 1996 (unaudited)................................................ F-26
Statements of Stockholders' Equity for the year ended June 30, 1995, and the eleven
months ended May 31, 1996 (unaudited)............................................ F-27
Statements of Cash Flows for the year ended June 30, 1995, and the eleven months
ended May 31, 1995 and 1996 (unaudited).......................................... F-28
Notes to Financial Statements....................................................... F-29
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED).................... F-33
NICHOLS RESEARCH CORPORATION AND ADVANCED MARINE ENTERPRISES, INC.
Pro Forma Condensed Consolidated Statement of Income for the year ended August 31,
1995 (unaudited)................................................................. F-34
Pro Forma Condensed Consolidated Statement of Income for the nine months ended May
31, 1996 (unaudited)............................................................. F-35
Notes to Pro Forma Condensed Consolidated Statements of Income (unaudited).......... F-36
NICHOLS RESEARCH CORPORATION AND TXEN, INC. .......................................... F-37
</TABLE>
F-1
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Nichols Research Corporation
We have audited the accompanying consolidated balance sheets of Nichols
Research Corporation as of August 31, 1993, 1994 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nichols
Research Corporation at August 31, 1993, 1994 and 1995, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
October 12, 1995
F-2
<PAGE> 43
NICHOLS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------- MAY 31,
1993 1994 1995 1996
------- ------- -------- -----------
(IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments (Note 1)...................... $22,616 $19,355 $ 17,196 $ 13,064
Accounts receivable (Note 2)...................................... 40,785 39,620 53,103 67,094
Deferred income taxes (Note 1 and 4).............................. 1,460 1,283 1,351 1,351
Other............................................................. 825 2,010 1,593 2,416
------- ------- -------- -----------
Total current assets....................................... 65,686 62,268 73,243 83,925
Long-term investments (Note 1 and 3)................................ 1,000 7,894 4,530 4,495
Property and equipment (Note 1):
Computers and related equipment................................... 8,397 9,742 11,973 15,866
Furniture, equipment and improvements............................. 3,838 3,919 5,149 6,282
Equipment-contracts............................................... -- 5,771 5,771 5,771
------- ------- -------- -----------
12,235 19,432 22,893 27,919
Less accumulated depreciation..................................... 7,153 8,924 11,434 13,768
------- ------- -------- -----------
Net property and equipment........................................ 5,082 10,508 11,459 14,151
Goodwill (net of accumulated amortization of $171) (Note 1 and 9)... -- -- 8,803 20,774
Other assets (Note 10).............................................. 222 91 2,844 4,341
------- ------- -------- -----------
Total assets............................................... $71,990 $80,761 $100,879 $ 127,686
======== ======== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $12,590 $12,483 $ 16,886 $ 14,005
Accrued compensation and benefits (Note 7)........................ 5,978 4,731 6,897 9,667
Income taxes payable (Note 4)..................................... 240 -- 969 104
Note payable...................................................... -- -- -- 14,500
Current maturities of long-term debt (Note 5)..................... -- 962 1,187 1,191
Other............................................................. 4 -- 531 3,643
------- ------- -------- -----------
Total current liabilities.................................. 18,812 18,176 26,470 43,110
Deferred income taxes (Note 4)...................................... 478 949 1,195 1,195
Long-term debt (Note 5):
Industrial development bonds...................................... -- -- 2,000 1,777
Long-term notes................................................... -- 4,328 3,366 2,716
------- ------- -------- -----------
Total long-term debt....................................... -- 4,328 5,366 4,493
Commitments (Note 6)
Stockholders' equity (Note 8):
Common stock, par value $.01 per share
Authorized - 20,000,000 shares
Issued - 6,030,997, 6,262,137, 6,439,277, and 6,626,449 shares,
respectively.................................................. 60 63 64 66
Additional paid-in capital........................................ 20,679 22,528 24,258 28,000
Retained earnings................................................. 31,961 38,467 45,669 52,110
Less cost of 322,500, 184,377 and 112,333 shares treasury stock,
respectively.................................................. -- (3,750) (2,143) (1,288)
------- ------- -------- -----------
Total stockholders' equity................................. 52,700 57,308 67,848 78,888
------- ------- -------- -----------
Total liabilities and stockholders' equity................. $71,990 $80,761 $100,879 $ 127,686
======== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 44
NICHOLS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 1)...................... $159,112 $143,153 $170,331 $116,848 $153,202
Costs and expenses:
Direct and allocable costs........... 138,535 124,202 147,584 101,165 129,735
General and administrative
expenses.......................... 10,203 9,492 12,917 8,648 13,879
-------- -------- -------- -------- --------
Total costs and expenses..... 148,738 133,694 160,501 109,813 143,614
-------- -------- -------- -------- --------
Operating profit....................... 10,374 9,459 9,830 7,035 9,588
Other income (expense):
Interest expense (Note 5)............ -- -- (114) (65) (226)
Other income, principally interest... 835 917 1,602 1,188 749
-------- -------- -------- -------- --------
Income before income taxes............. 11,209 10,376 11,318 8,158 10,111
Income taxes (Note 4).................. 4,160 3,870 4,116 3,025 3,670
-------- -------- -------- -------- --------
Net income............................. $ 7,049 $ 6,506 $ 7,202 $ 5,133 $ 6,441
======== ======== ======== ======== ========
Net income per common share (Note 1)... $ 1.13 $ 1.05 $ 1.15 $ .83 $ .96
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares
outstanding.......................... 6,253,129 6,205,309 6,279,109 6,211,111 6,741,527
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 45
NICHOLS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
---------- ------ ---------- -------- -------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1992................... 5,806,954 $ 58 $ 18,967 $24,912 -- $43,937
Sale of common stock....................... 224,043 2 1,712 -- -- 1,714
Net income................................. -- -- -- 7,049 -- 7,049
---------- ------ ---------- -------- -------- -------------
BALANCE, AUGUST 31, 1993................... 6,030,997 60 20,679 31,961 -- 52,700
Sale of common stock....................... 231,140 3 1,849 -- -- 1,852
Purchase of 322,500 shares of treasury
stock.................................... -- -- -- -- (3,750) (3,750)
Net income................................. -- -- -- 6,506 -- 6,506
---------- ------ ---------- -------- -------- -------------
BALANCE, AUGUST 31, 1994................... 6,262,137 63 22,528 38,467 (3,750) 57,308
Sale of common stock....................... 177,090 1 1,517 -- -- 1,518
Reissue of 138,123 shares of treasury
stock.................................... -- -- 213 -- 1,607 1,820
Net income................................. -- -- -- 7,202 -- 7,202
---------- ------ ---------- -------- -------- -------------
BALANCE, AUGUST 31, 1995................... 6,439,227 64 24,258 45,669 (2,143) 67,848
Employee stock options (unaudited)......... 155,963 1 1,529 -- -- 1,530
Employee stock purchases (unaudited)....... 31,259 1 690 -- -- 691
Reissue of 72,044 shares of treasury stock
(unaudited).............................. -- -- 1,523 -- 855 2,378
Net income (unaudited)..................... -- -- -- 6,441 -- 6,441
---------- ------ ---------- -------- -------- -------------
BALANCE, MAY 31, 1996 (UNAUDITED).......... 6,626,449 $ 66 $ 28,000 $52,110 $ (1,288) $78,888
======== ====== ======= ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 46
NICHOLS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED AUGUST 31, MAY 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 7,049 $ 6,506 $ 7,202 $ 5,133 $ 6,441
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization............................ 1,314 1,858 2,907 2,017 3,070
Gain on sale of furniture, fixtures and equipment........ (10) (14) -- -- --
Loss on the sale of investments.......................... -- -- 34 34 --
Deferred income taxes.................................... (30) 647 178 -- --
Changes in assets and liabilities (net of effects of
acquisitions):
Accounts receivable.................................... (3,206) 1,165 (10,919) (2,535) (6,959)
Other assets........................................... (55) (1,053) 846 823 (677)
Accounts payable....................................... 1,132 (107) 3,497 (2,373) (4,917)
Compensation and benefits.............................. (95) (1,248) 1,921 2,300 1,658
Income taxes payable................................... 84 (240) 840 703 (865)
Other current liabilities.............................. (191) (4) 326 241 1,687
------- -------- -------- ------- --------
Total adjustments...................................... (1,057) 1,004 (370) 1,210 (7,003)
------- -------- -------- ------- --------
Net cash provided (used) by operating
activities...................................... 5,992 7,510 6,832 6,343 (562)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (1,704) (7,301) (2,213) (1,328) (3,113)
Purchase of long-term investments.......................... -- (7,894) -- -- --
Payment for non-compete agreement.......................... -- -- (900) (900) --
Payments for acquisitions, net of cash acquired............ -- -- (10,547) (2,869) (14,763)
Payments for investment in affiliates...................... -- -- (1,535) (1,535) (1,546)
Proceeds from sale of long-term investments................ 2,500 1,000 3,284 3,284 --
Proceeds from the sale of property and equipment........... 43 32 -- -- --
------- -------- -------- ------- --------
Net cash provided (used) by investing
activities...................................... 839 (14,163) (11,911) (3,348) (19,422)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock......................... 1,714 1,852 1,518 1,039 2,221
Proceeds from long-term notes.............................. -- 5,771 -- -- --
Proceeds from note payable................................. -- -- -- -- 14,500
Proceeds from industrial development bonds................. -- -- 2,225 2,225 --
Proceeds from sale of treasury stock....................... -- -- 734 734 --
Payments of long-term debt................................. -- (481) (1,557) (1,003) (869)
Purchase of treasury stock................................. -- (3,750) -- -- --
------- -------- -------- ------- --------
Net cash provided by financing activities......... 1,714 3,392 2,920 2,995 15,852
------- -------- -------- ------- --------
Net increase (decrease) in cash and temporary cash
investments.............................................. 8,545 (3,261) (2,159) 5,990 (4,132)
Cash and temporary cash investments at beginning of
period................................................... 14,071 22,616 19,355 19,355 17,196
------- -------- -------- ------- --------
Cash and temporary cash investments at end of period....... $22,616 $ 19,355 $ 17,196 $25,345 $ 13,064
======= ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Deferred compensation resulting from the exercise of
restricted stock options and issuance of treasury
stock.................................................... $ -- $ -- $ 81 $ 81 $ --
Issuance of treasury stock as consideration in
acquisition.............................................. -- -- 1,005 1,005 2,378
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 47
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1993, 1994, 1995
AND MAY 31, 1996
(ALL INFORMATION AS OF MAY 31, 1996 AND FOR THE NINE MONTHS
ENDED MAY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Nichols Research Corporation (NRC) provides information systems and
technology services to agencies of the Department of Defense, non-defense
federal agencies, state governments and commercial entities.
The consolidated financial statements include the accounts of Nichols
Research Corporation and its wholly-owned subsidiaries (the Company).
Wholly-owned subsidiaries as of August 31, 1995, and May 31, 1996, are
Communications & Systems Specialists, Inc. (CSSi), NRC Technical Services
Corporation (NRCTSC), Conway Computer Group, Inc. (CCG), and Computer Services
Corporation (CSC). All significant intercompany balances and transactions have
been eliminated in consolidation.
The interim consolidated financial statements as of May 31, 1996, and for
the nine months ended May 31, 1995 and 1996, have not been examined by
independent auditors, but in the opinion of the Company, all adjustments,
consisting of the normal recurring accruals necessary for a fair presentation of
the results of the period, have been made.
Revenue recognition
The major portion of the Company's revenues result from services performed
under U.S. government contracts, either directly or through subcontracts.
Revenue on cost-plus-fee (including award fee) contracts is recognized based on
reimbursable costs incurred plus estimated fees earned thereon. Revenue on
fixed-price contracts is recognized using the percentage of completion method
based on costs incurred in relation to total estimated costs. Revenue on
time-and-materials contracts is recognized to the extent of fixed billable rates
for hours delivered plus reimbursable costs. Provisions for losses on contracts
are recognized in the period in which the loss is first determinable. Unbilled
accounts receivable are stated at estimated realizable value.
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 disposed of. The Company
will adopt Statement No. 121 in the first quarter of fiscal year 1997 and, based
on current circumstances, does not believe the effect of adoption will be
material.
Income taxes
Deferred income taxes are provided for temporary differences between
financial and taxable income, primarily related to accrued liabilities and use
of accelerated depreciation methods for income tax purposes.
F-7
<PAGE> 48
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net income per common share
Net income per common share is based upon the weighted average number of
common shares and the dilutive common equivalent shares, related to stock
options outstanding during the period, less treasury shares assumed to have been
purchased with the option proceeds. Dilution in net income per common share on a
fully diluted basis is less than 3% in all periods.
Cash and temporary cash investments
The Company considers as cash equivalents those securities that are
available upon demand or have maturities of three months or less at the time of
purchase. At August 31, 1995 and May 31, 1996, temporary cash investments
consisted of various money market accounts, primarily with an Alabama bank.
Stock options
The Company grants stock for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and intends to continue to do so;
accordingly, the Company recognizes no compensation expense for stock option
grants.
Long-term investments
Investments are classified at the time of purchase and are evaluated as of
each balance sheet date. Debt securities, which include municipal obligations
and preferred stock, are classified as held-to-maturity and stated at amortized
cost. Equity securities, which consist of mutual funds, are classified as
available-for-sale and are stated at average cost which approximates fair value.
Interest, dividends and amortization of premiums are included in investment
income.
Goodwill
Goodwill is amortized using the straight-line method over periods ranging
from ten to twelve years. The carrying amount of goodwill is evaluated if facts
and circumstances suggest that it may not be recoverable over the remaining
amortization period. The carrying amount is reduced by the amount estimated not
to be recoverable.
Reclassification
Certain prior period amounts have been reclassified to conform with the
current year's presentation.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Billed................................................ $17,058 $15,955 $25,201
Unbilled.............................................. 23,727 23,665 27,902
------- ------- -------
$40,785 $39,620 $53,103
======= ======= =======
</TABLE>
Accounts receivable include $32,700,000, $32,900,000 and $36,717,000 due
from the U.S. Government at August 31, 1993, 1994 and 1995, respectively.
F-8
<PAGE> 49
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unbilled accounts receivable include retainages of $2,124,000, $2,745,000
and $3,373,000 at August 31, 1993, 1994 and 1995, respectively. Unbilled amounts
are classified as current assets since substantially all amounts will be
realized within one year.
Costs related to certain contracts are subject to adjustment from
negotiations and audit between the Company and its customers, including
representatives of the U.S. Government. Revenues for such contracts and the
related unbilled receivables have been recorded in amounts that are expected to
be realized.
NOTE 3 -- LONG-TERM INVESTMENTS
The following is a summary of long-term investments as of:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AUGUST 31, 1994
Available-for-sale:
Mutual funds............................ $3,318 $ -- $ -- $ 3,318
Held-to-maturity:
Municipal obligations................... 3,572 -- (123) 3,449
Preferred stocks........................ 1,004 -- (86) 918
------ ------ ----- ------
4,576 -- (209) 4,367
------ ------ ----- ------
$7,894 $ -- $ (209) $ 7,685
====== ====== ===== ======
AUGUST 31, 1995
Held-to-maturity:
Municipal obligations................... $3,526 $ -- $ (40) $ 3,486
Preferred stocks........................ 1,004 -- (26) 978
------ ------ ----- ------
$4,530 $ -- $ (66) $ 4,464
====== ====== ===== ======
</TABLE>
Contractual maturities of debt securities held-to-maturity occur ratably
over the next four years. Proceeds from the sale of investments classified as
available-for-sale were $3,284,000 for the year ended August 31, 1995. Gross
realized losses as a result of these sales were $34,000 and are included as
other income.
F-9
<PAGE> 50
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INCOME TAXES
Effective September 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The cumulative effect of this change was not significant and prior years'
financial statements were not restated.
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------------------------
1993 1994 1995
DEFERRED METHOD LIABILITY METHOD LIABILITY METHOD
--------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................... $ 3,505 $2,688 $3,439
State................................. 685 535 499
------ ------ ------
4,190 3,223 3,938
Deferred:
Federal............................... 42 540 156
State................................. (72) 107 22
------ ------ ------
(30) 647 178
------ ------ ------
$4,160 $3,870 $4,116
====== ====== ======
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Accrued liabilities not currently deductible................... $1,283 $ 1,351
Non-current deferred tax liabilities:
Basis difference for property and equipment.................... (949) (1,195)
------ -------
$ 334 $ 156
====== =======
</TABLE>
The provision for deferred income taxes for the year ended August 31, 1993
resulted from the following:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
1993
--------------
(IN THOUSANDS)
<S> <C>
Accrued liabilities not currently deductible........................... $ (103)
Use of cash basis accounting for state income tax purposes............. (79)
Use of accelerated depreciation for income tax purposes................ 117
Deferred compensation not currently deductible......................... 35
-----
$ (30)
=====
</TABLE>
F-10
<PAGE> 51
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense as a percentage of income before income taxes varies
from the federal statutory rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit..................... 3.6 4.1 3.0
Other.......................................................... (0.5) (0.8) (0.6)
---- ---- ----
37.1% 37.3% 36.4%
==== ==== ====
</TABLE>
The Company made income tax payments of approximately $4,106,000,
$4,259,000 and $2,283,000 in 1993, 1994 and 1995, respectively.
NOTE 5 -- LINE OF CREDIT AND LONG-TERM DEBT
In August 1995, the Company renegotiated its line of credit which now
provides for borrowing up to $73,500,000. Borrowings are secured primarily by
accounts receivable. A commitment fee of .125% of the unused portion is payable
quarterly under this agreement. The agreement expires March 1997 and is
renewable annually. Borrowings under this agreement bear interest at the London
Interbank Offered Rate (LIBOR) plus 1.25%. There were no outstanding borrowings
on this facility at August 31, 1995 and $14,500,000 (unaudited) at May 31, 1996.
In 1993 and 1994, the Company had a $22,000,000 bank line of credit,
consisting of $12,000,000 secured by accounts receivable and $10,000,000
unsecured, with interest at the bank's commercial base rate.
In January 1995, the Company received $2,225,000 in bond proceeds from the
Alabama State Industrial Development Authority. The proceeds are restricted for
use in acquiring certain capital assets. At August 31, 1995, approximately
$1,769,000 of such restricted amounts are included on the consolidated balance
sheet as cash and temporary cash investments. The bonds are payable in equal
annual principal installments of $225,000 through January 2005. The bonds bear a
variable rate of interest computed weekly but contain an option for a fixed rate
for a specified length of time. The bonds are secured by a letter of credit.
Interest payments of $114,000 were made in fiscal year 1995.
The Company borrowed $5,771,000 in fiscal year 1994 under a term loan
agreement. The proceeds were used to purchase computer hardware. The agreement
requires equal monthly principal installments of $80,153 until February 2000.
The loan bears interest at LIBOR plus 0.75% and is secured by the computer
hardware which has a carrying value of $4,328,000. Interest payments of $134,000
and $298,000 were made in fiscal years 1994 and 1995, respectively. Interest
expense is included in the consolidated statements of income as a direct and
allocable cost.
NOTE 6 -- RELATED PARTY TRANSACTIONS AND COMMITMENTS
The Company leases office facilities under various operating leases,
including leases with companies in which certain officers and stockholders have
ownership interests. The leases generally have terms of one to ten years. Rent
expense for all operating leases was as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Total rent expense....................................... $4,065 $3,684 $3,561
Amounts to related parties............................... 1,088 1,038 1,002
</TABLE>
F-11
<PAGE> 52
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under operating leases with remaining terms
of one year or more are:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total......................................... $2,724 $2,281 $1,754 $1,229 $946
Amounts to related parties.................... 850 635 420 420 420
</TABLE>
NOTE 7 -- DEFINED CONTRIBUTION BENEFIT PLANS
Substantially all full-time employees are covered by one of several defined
contribution plans offered by the Company. Employees are permitted to defer from
0% to 15% of their salary depending on the plan in which they participate. A
Company matching contribution is determined based on employee deferral
percentage and ranges from 0% to a maximum of 2.5%. Discretionary contributions
may also be made to plans as determined annually by the Board of Directors.
Total provisions for employee retirement plans were approximately $4,050,000,
$3,475,000 and $4,130,000 for 1993, 1994 and 1995, respectively.
NOTE 8 -- EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS
The Company has employee stock option plans that provide for the issuance
of incentive stock options (as defined by the Internal Revenue Code) and
non-statutory stock options to key employees, including officers of the Company
and its subsidiaries, except those officers who are members of the Stock Option
Committee. Options are nontransferable and exercisable only during employment,
with certain exceptions. Options expire five years from the date of grant. At
August 31, 1995, 315,807 shares were available for grant under these plans.
The Company also has a stock option plan for non-employee members of the
Board of Directors. At August 31, 1995, 50,995 shares were available for grant
under this plan.
A summary of activity relating to stock options is as follows:
<TABLE>
<CAPTION>
INCENTIVE NON-EMPLOYEE NON-STATUTORY
STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS TOTAL
------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Options outstanding at August 31, 1992........ 680,062 8,338 43,000 731,400
Granted ($12.50-$18.00 per share)........... 271,094 4,000 -- 275,094
Exercised ($4.32-$8.64 per share)........... (163,676) -- (15,000) (178,676)
Expired..................................... (28,437) -- -- (28,437)
-------- ------- -------- --------
Options outstanding at August 31, 1993........ 759,043 12,338 28,000 799,381
Granted ($10.00-$15.50 per share)........... 151,942 4,000 70,000 225,942
Exercised ($4.50-$10.75 per share).......... (154,224) (1,333) (28,000) (183,557)
Expired..................................... (49,608) -- -- (49,608)
-------- ------- -------- --------
Options outstanding at August 31, 1994........ 707,153 15,005 70,000 792,158
Granted ($11.00-$18.50 per share)........... 304,349 6,000 -- 310,349
Exercised ($5.82-$15.13 per share).......... (130,593) (1,333) -- (131,926)
Expired..................................... (72,453) -- -- (72,453)
-------- ------- -------- --------
Options outstanding at August 31, 1995........ 808,456 19,672 70,000 898,128
======== ======= ======== ========
Options exercisable August 31, 1995
($5.82-$18.00 per share).................... 200,687 19,672 17,500 237,859
======== ======= ======== ========
</TABLE>
The Company has an employee stock purchase plan that allows eligible
employees to purchase common stock at less than fair market value. Effective
March 1, 1994, the plan was amended to reduce the purchase price from 90% to 85%
of fair market value on each quarterly purchase date. Purchases are limited to
the
F-12
<PAGE> 53
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lesser of 10% of an employee's annual compensation or $25,000. Shares of common
stock issued under this plan were 45,367, 47,583 and 45,164 in 1993, 1994 and
1995, respectively.
On September 1, 1994, a Restricted Stock Option for 70,000 shares of common
stock was granted to and exercised by an officer of the Company. The exercise
price was 90% of fair market value on the date of exercise. The issued shares
were restricted treasury stock.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which requires that financial
statements include certain disclosures about the stock-based employees
compensation and allows, but does not require, a fair value-based method of
accounting for such compensation. The Company believes that this fair
value-based method of accounting, if adopted, would not have a material effect
on the consolidated financial statements. The Company will adopt the disclosure
provisions of Statement No. 123 in fiscal year 1997.
NOTE 9 -- BUSINESS COMBINATIONS
On September 1, 1994, NRC acquired all of the outstanding stock of
Communications & Systems Specialists, Inc. (CSSi), an information systems
development company. Aggregate cash consideration of approximately $1,800,000
was paid. The acquisition was accounted for using the purchase method of
accounting, resulting in goodwill of approximately $340,000 and allocation of
$900,000 to a non-compete agreement between the predecessor's president and NRC.
The intangible assets are being amortized using the straight-line method;
goodwill over an estimated useful life of ten years and the non-compete over the
five-year term of the agreement. The consolidated financial statements include
the results of operations for the acquired company for the entire 1995 fiscal
year.
On May 16, 1995, NRC acquired a 100% interest in Conway Computer Group
(CCG), a group of three commercial information service companies. Aggregate
consideration of approximately $3,000,000 was paid at closing; $2,000,000 in
cash and 68,123 shares of restricted treasury stock with an approximate value of
$1,000,000. An additional $900,000 of cash consideration is payable contingent
upon achieving specified future operating results as defined in the agreement.
The acquisition was accounted for using the purchase method of accounting,
resulting in goodwill of approximately $2,445,000, which is being amortized
using the straight-line method over an estimated useful life of twelve years.
The consolidated financial statements include the results of operations for the
acquired company from the date of acquisition.
On June 30, 1995, NRC acquired substantially all of the assets and
liabilities of Computer Services Corporation (CSC), a healthcare information
system and services company in the practice management area. Aggregate cash
consideration of approximately $7,550,000 was paid. The acquisition was
accounted for using the purchase method of accounting, resulting in goodwill of
approximately $6,189,000, which is being amortized using the straight-line
method over an estimated useful life of twelve years. The consolidated financial
statements include the results of operations for the acquired company from the
date of acquisition.
F-13
<PAGE> 54
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary presents information as if all
the acquisitions had occurred at the beginning of each fiscal year presented.
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>
YEARS ENDED AUGUST
31,
(UNAUDITED)
---------------------
1994 1995
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues....................................................... $163,885 $181,737
Net income..................................................... 6,443 7,292
Net income per common share.................................... $ 1.02 $ 1.15
</TABLE>
On May 31, 1996, the Company entered into a stock purchase agreement and
purchased all of the issued and outstanding capital stock of Advanced Marine
Enterprises, Inc. (AME), a Virginia corporation. The purchase price was
approximately $17,522,000, of which $15,122,000 was paid in cash and $2,400,000
was paid in Common Stock of the Company. The cash was borrowed under the
Company's existing credit agreement. The transaction was accounted for as a
purchase and the consolidated balance sheet at May 31, 1996 includes the
accounts of AME.
NOTE 10 -- INVESTMENT IN AFFILIATE
In December 1994, the Company acquired a 19.9% interest in TXEN, Inc., an
information systems and services company in the managed healthcare industry. The
Company paid approximately $1,500,000 and holds an option to acquire all
outstanding shares in the future. The investment is accounted for using the
equity method due to the purchase option agreement and is included in noncurrent
other assets on the consolidated balance sheet at August 31, 1995. An officer of
the Company holds a 4.5% interest in TXEN, Inc. and would be beneficially
impacted if the Company exercises its option.
In October 1995, the Company entered into an agreement to purchase 1,000
shares of Series B Preferred Stock of HealthGate Data Corporation (HealthGate).
HealthGate provides a biomedical and health information system on the World Wide
Web. The agreement provides for four equal purchase installments of $400,000,
contingent upon HealthGate achieving certain milestones as defined in the
agreement. Three installments have been made as of May 31, 1996 with the
remaining installment due June 1996. The 1,000 shares of preferred stock are
convertible into 20% of the common stock on a fully diluted basis at the date of
the agreement.
In January 1996, the Company invested approximately $200,000 to acquire a
50% interest in a joint venture, HealthShare, L.L.C. HealthShare's mission is to
provide an integrated information system and support services that enhances the
quality and efficiency of healthcare delivery at a reduced cost.
F-14
<PAGE> 55
NICHOLS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING NET INCOME PER
REVENUES PROFIT NET INCOME COMMON SHARE
-------- --------- ---------- ----------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1994:
First Quarter............................ $ 34,079 $ 2,464 $1,693 $.27
Second Quarter........................... 32,787 2,348 1,632 .26
Third Quarter............................ 35,561 2,319 1,600 .26
Fourth Quarter........................... 40,726 2,328 1,581 .26
YEAR ENDED AUGUST 31, 1995:
First Quarter............................ $ 36,231 $ 2,270 $1,628 $.27
Second Quarter........................... 36,174 2,296 1,676 .27
Third Quarter............................ 44,444 2,470 1,829 .29
Fourth Quarter........................... 53,482 2,794 2,069 .32
NINE MONTHS ENDED MAY 31, 1996:
First Quarter............................ $ 49,030 $ 2,938 $2,014 $.30
Second Quarter........................... 49,003 3,093 2,051 .31
Third Quarter............................ 55,169 3,557 2,376 .35
</TABLE>
Second and third quarter operating profit for the year ended August 31,1995
were adjusted from the amounts reported in the Quarterly Reports on Form 10-Q by
$8,000 and $57,000, respectively, to reflect the effect of reporting interest
expense as other expense.
F-15
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Advanced Marine Enterprises, Inc.
We have audited the accompanying balance sheet of Advanced Marine
Enterprises, Inc. as of May 31, 1996, and the related statements of income,
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Marine Enterprises,
Inc. at May 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
July 1, 1996
F-16
<PAGE> 57
ADVANCED MARINE ENTERPRISES, INC.
BALANCE SHEET
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 412,284
Accounts receivable (Note 2).................................................. 7,028,322
Employee advances and other receivables....................................... 26,571
Prepaid expenses.............................................................. 172,837
-----------
Total current assets.................................................. 7,640,014
Property, equipment and improvements:
Furniture and fixtures........................................................ 422,582
Computers and related equipment............................................... 4,425,393
Automobiles................................................................... 143,323
Leasehold improvements........................................................ 349,301
-----------
5,340,599
Less accumulated depreciation and amortization................................ (3,385,675)
-----------
Net property, equipment and improvements...................................... 1,954,924
Other assets.................................................................... 4,763
-----------
Total assets.......................................................... $ 9,599,701
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 2,176,176
Accrued expenses.............................................................. 1,057,851
Accrued compensation and benefits............................................. 1,037,428
Billings in excess of cost and estimated earnings............................. 305,827
-----------
Total current liabilities............................................. 4,577,282
Commitments and contingencies (Notes 4 and 8)
Stockholders' equity:
Common stock, Series A, $1 par value; authorized 60,000 shares, 27,900 shares
issued and outstanding (Note 5)............................................ 27,900
Common stock, Series B, $1 par value; authorized 500,000 shares, 271,642
shares issued and outstanding.............................................. 271,642
Additional paid-in capital.................................................... 949,906
Retained earnings............................................................. 4,167,528
Less cost of 30,192 shares treasury stock (Note 7)............................ (394,557)
-----------
Total stockholders' equity............................................ 5,022,419
-----------
Total liabilities and stockholders' equity............................ $ 9,599,701
==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 58
ADVANCED MARINE ENTERPRISES, INC.
STATEMENT OF INCOME
YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
Revenue......................................................................... $35,543,255
Costs and expenses:
Direct and allocable expenses................................................. 22,873,960
General and administrative expenses........................................... 10,772,582
-----------
Total costs and expenses.............................................. 33,646,542
-----------
Operating profit................................................................ 1,896,713
Other income (expense):
Other income.................................................................. 97,951
Interest expense.............................................................. (4,197)
-----------
Net income............................................................ $ 1,990,467
==========
</TABLE>
See accompanying notes.
F-18
<PAGE> 59
ADVANCED MARINE ENTERPRISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK,
SERIES A COMMON STOCK, SERIES B
--------------------- ----------------------
NUMBER OF NUMBER OF ADDITIONAL TOTAL
SHARES SHARES PAID-IN RETAINED TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK EQUITY
----------- ------- ----------- -------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31,
1995................ 7,425 $ 7,425 266,354 $266,354 $ 171,603 $ 6,071,959 $(325,108) $ 6,192,233
Stock issued.......... 20,475 20,475 5,288 5,288 778,303 -- -- 804,066
Stock repurchased..... -- -- -- -- -- -- (69,449) (69,449)
Dividends paid........ -- -- -- -- -- (3,894,898) -- (3,894,898)
Net income............ -- -- -- -- -- 1,990,467 -- 1,990,467
------ ------- ------- -------- -------- ---------- --------- ----------
BALANCE AT MAY 31,
1996................ 27,900 $27,900 271,642 $271,642 $ 949,906 $ 4,167,528 $(394,557) $ 5,022,419
====== ======= ======= ======== ======== ========== ========= ==========
</TABLE>
See accompanying notes.
F-19
<PAGE> 60
ADVANCED MARINE ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $1,990,467
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of property, equipment and improvements........................... 4,392
Depreciation and amortization.................................................. 778,960
Changes in assets and liabilities:
Accounts receivable......................................................... 3,185,397
Employee advances and other receivables..................................... 118,271
Other assets................................................................ (52,461)
Accounts payable............................................................ 883,573
Accrued expenses............................................................ 33,561
Accrued compensation and benefits........................................... (319,676)
Billings in excess of cost and estimated earnings........................... (247,376)
----------
Net cash provided by operating activities........................................ 6,375,108
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, equipment and improvements....................... 30,200
Purchase of property, equipment and improvements................................. (1,329,198)
----------
Net cash used in investing activities............................................ (1,298,998)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock............................................................. 804,066
Purchase of treasury stock....................................................... (69,449)
Net payments under line of credit agreement...................................... (1,371,771)
Dividends paid................................................................... (3,894,898)
----------
Net cash used in financing activities............................................ (4,532,052)
----------
Net increase in cash and cash equivalents........................................ 544,058
Bank overdrafts at beginning of year............................................. (131,774)
----------
Cash and cash equivalents at end of year......................................... $ 412,284
=========
</TABLE>
See accompanying notes.
F-20
<PAGE> 61
ADVANCED MARINE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Advanced Marine Enterprises, Inc. (AME) provides naval architectural and
marine engineering services, including the development and support of analytic
software systems, modeling and simulation services and simulator systems, to the
Department of Navy and other customers.
Revenue Recognition
The major portion of the Company's revenues result from services performed
under U.S. Government contracts, either directly or through subcontracts.
Revenue on cost-plus-fee contracts (including award fee) is recognized based on
reimbursable costs incurred plus estimated fees earned thereon. Revenue on
fixed-price contracts is recognized using the percentage of completion method
based on costs incurred in relation to total estimated costs. Revenue on
time-and-materials contracts is recognized to the extent of fixed billable rates
for hours plus reimbursable costs. Provisions for losses on contracts are
recognized in the period in which the loss is first determinable. Contracts in
process are stated at cost incurred plus estimated earnings, less amounts billed
to customers. Consistent with industry standards, amounts relating to long-term
contracts are classified as current assets although a portion of these amounts
are not expected to be realized within one year.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Temporary Cash Investments
The Company considers as cash and cash equivalents those securities that
are available upon demand or have maturities of three months or less at the time
of purchase. The Company adopted Financial Accounting Standard Board Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, in
the current year. Such adoption had no material affect on the accompanying
financial statements. The Company records investments at their fair value which
approximates market value.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation of
property and equipment is being provided over the estimated useful lives of the
assets, ranging from three to seven years, principally by use of the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of their estimate useful lives or the life of the
respective lease, ranging from one to five years.
NOTE 2 -- ACCOUNTS RECEIVABLE
The following summary shows the elements of accounts receivable from
long-term contracts and programs at May 31, 1996:
<TABLE>
<S> <C>
Billed receivables....................................................... $2,416,601
Recoverable costs and accrued profit on progress completed -- not
billed................................................................. 4,611,721
----------
$7,028,322
=========
</TABLE>
Accounts receivable includes $6,233,554 due from the U.S. Government at May
31, 1996. Unbilled accounts receivable include retainages of $886,593 at May 31,
1996.
F-21
<PAGE> 62
ADVANCED MARINE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- BANK OVERDRAFT
The Company maintains a line of credit with a bank which provides that
checks presented for payment in excess of the Company's cash balance be covered
by draws from the line of credit. Interest payments were $4,197 for the year
ended May 31, 1996. In connection with the transaction described in Note 9, the
line of credit agreement was terminated on May 31, 1996.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Government contracts
Certain of the Company's contracts are with agencies of the U.S.
Government, with over 90% of its revenues for the year ended May 31, 1996 from
the U.S. Navy. The Company's income from these contracts is subject to audit,
with audits having been completed through the year ended May 31, 1992. In the
opinion of management, adjustments, if any, would not have a material effect on
the financial position of the Company at May 31, 1996.
The Defense Contract Audit Agency (DCAA) performed an incurred cost audit
of the Company's books and records for the three years ended May 31, 1995 and
have issued their preliminary findings which included a significant proposed
adjustment. Pursuant to the Stock Purchase Agreement described in Note 9, the
Company is entitled to indemnification by the stockholders identified therein in
an amount equal to any adjustments that arise in connection with this audit. In
the opinion of management, final adjustments as a result of this audit, if any,
would not have a material effect on the financial position of the Company at May
31, 1996.
Profit-sharing plan
The Company has a profit-sharing plan which provides for the distribution
of cash awards to eligible employees. Contributions under the plan are at the
discretion of the Board of Directors in an amount not to exceed the maximum
amount allowable under applicable provisions of the Internal Revenue Code. The
contribution for the year ended May 31, 1996 was $500,000.
Operating leases
The Company leases its office space over periods ranging from one to five
years. Certain of these leases provide for annual increases based on increases
in real estate taxes, operating costs and the Consumer Price Index. Rent expense
was $1,934,902 for the period ended May 31, 1996. Minimum rental payments
required under operating leases, and the future minimum sublease rentals, for
the years ending May 31, are as follows:
<TABLE>
<S> <C>
1997..................................................................... $1,651,236
1998..................................................................... 1,160,628
1999..................................................................... 890,045
2000..................................................................... 870,576
2001..................................................................... 798,028
----------
$5,370,513
=========
</TABLE>
F-22
<PAGE> 63
ADVANCED MARINE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- STOCK OPTION PLANS
Under the terms of its employee stock option plan, adopted January 27,
1987, options to purchase shares of the Company's Series A common stock are
granted at a price equal to the market price of the stock at the date of grant
as determined by the Company's stock purchase agreement. Following is a summary
of transactions for the year ending May 31, 1996:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION
------------
<S> <C>
Outstanding, beginning of year.......................................... 18,975
Granted during the year................................................. 6,788
Exercised during the year (at prices ranging from $8.83 to $19.04)...... (25,763)
Outstanding, end of year................................................ --
------------
Eligible for exercise, end of year...................................... --
==========
</TABLE>
NOTE 6 -- INCOME TAXES
No provision has been made for federal or state income tax for the year
ended May 31, 1996. Under Subchapter S of the Internal Revenue Code, the Company
has elected not to be taxed as a corporation and the shareholders have consented
to include their pro-rata share of the income or loss in their individual tax
returns.
NOTE 7 -- TREASURY STOCK
As of May 31, 1996, officers of the Company have sold a total of 9,288
shares of common stock to the Company at a cost of $125,287.
NOTE 8 -- LITIGATION
The Company, and certain employees of the Company, are defendants in an
action titled PRC, Inc. v. Advanced Marine Enterprises, Inc., et al., wherein
PRC, Inc. alleged that the Company and certain of its employees conspired to
unlawfully take the business of the PRC Engineering Department. The judge in
this matter issued preliminary findings and preliminary damages in the form of a
bench ruling in favor of PRC, Inc. The Company has been ordered to pay PRC
Inc.'s attorney fees, and a hearing to quantify the amount of such award is
expected in late July 1996. Pursuant to the Stock Purchase Agreement described
in Note 9, the Company is entitled to indemnification by the stockholders
identified therein in an amount equal to any damages that arise in connection
with this matter.
Two former employees, in unrelated matters, have made claims for damages
arising out of termination of their employment. The outcome of the pending
claims cannot be determined at this time. Pursuant to the Stock Purchase
Agreement described in Note 9, the Company is entitled to indemnification by the
stockholders identified therein in an amount equal to any damages that arise in
connection with these matters.
NOTE 9 -- SUBSEQUENT EVENT
On May 31, 1996, Nichols Research Corporation (NRC) entered into a Stock
Purchase Agreement (the Agreement) and purchased all of the issued and
outstanding capital stock of AME from the shareholders of AME pursuant to that
Agreement. The AME shares were purchased for $16,500,000 in cash and common
stock of NRC. The purchase price is based on a base book value of the Company of
$4,000,000. If the Company's actual book value as of May 31, 1996, is greater or
less than base book value, the purchase price will be increased or decreased by
the same dollar amount as the difference and will be a post-closing adjustment
to the consideration paid at closing. Actual book value will be the amount of
the Company's net assets less liabilities per the balance sheet of the Company
as of May 31, 1996.
F-23
<PAGE> 64
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TXEN, Inc.
We have audited the accompanying balance sheet of TXEN Inc. as of June 30,
1995, and the related statements of income, stockholders' equity and cash flows
for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TXEN, Inc. at June 30, 1995,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
September 22, 1995,
except for Note 3, as to which
the date is November 1, 1995
F-24
<PAGE> 65
TXEN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MAY 31,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $1,173,537 $ 841,393
Accounts receivable, net of allowance for doubtful accounts of
$100,000....................................................... 1,075,629 1,127,396
Prepaid expenses.................................................. 49,348 104,282
Income taxes receivable........................................... 50,150 60,983
Deferred income taxes............................................. 143,797 156,080
Inventory......................................................... 19,717 47,117
Other............................................................. 5,481 4,206
---------- -----------
Total current assets...................................... 2,517,659 2,341,457
Property and equipment, net......................................... 1,629,587 2,208,785
---------- -----------
Total assets.............................................. $4,147,246 $ 4,550,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Interest payable.................................................. $ 170,556 $ 193,640
Note payable to stockholder....................................... 50,000 8,333
Customer deposits................................................. 124,512 139,822
Accounts payable and accrued expenses............................. 327,162 65,386
Accrued salaries, bonuses and vacation............................ 103,813 56,262
Current portion of note payable................................... 1,080,593 1,533,806
Deferred revenue.................................................. 633,947 966,238
Other............................................................. 1,271 1,271
---------- -----------
Total current liabilities........................................... 2,491,854 2,964,758
Accrued officers salaries........................................... 317,000 277,500
Deferred income taxes............................................... 31,438 31,437
Stockholders' equity:
Preferred stock, $.002 par value; 1 share authorized, 1 share
issued and outstanding (liquidation preference of
$1,500,000).................................................... 1,500,000 1,500,000
Class A common stock, $.002 par value; 5,000,000 shares
authorized, issued and outstanding............................. 10,000 10,000
Class B common stock, $.002 par value; 1,250,000 shares
authorized, -0- shares issued and outstanding.................. -- --
Additional paid-in capital.......................................... 409,500 409,500
Retained earnings (deficit)......................................... (378,783) (450,996)
Notes and accrued interest receivable from stockholders............. (233,763) (191,957)
---------- -----------
Total stockholders' equity.......................................... 1,306,954 1,276,547
---------- -----------
Total liabilities and stockholders' equity.......................... $4,147,246 $ 4,550,242
========= =========
</TABLE>
See accompanying notes.
F-25
<PAGE> 66
TXEN, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
YEAR ENDED MAY 31,
JUNE 30, -------------------------
1995 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues........................................... $4,705,500 $3,998,183 $6,284,469
Cost of sales.......................................... 688,603 604,306 573,581
Selling and administrative expenses.................... 3,386,687 2,801,117 5,898,595
---------- ---------- ----------
Operating profit (loss)................................ 630,210 592,760 (187,707)
Other income (expense):
Interest expense..................................... (145,570) (132,448) (136,838)
Interest income...................................... 73,361 63,569 91,811
Gain on sale of asset................................ 11,339 11,339 --
Other................................................ 515 472 126
---------- ---------- ----------
Income (loss) before income taxes...................... 569,855 535,692 (232,608)
Income tax benefit..................................... 112,359 105,622 160,395
---------- ---------- ----------
Net income (loss)...................................... $ 682,214 $ 641,314 $ (72,213)
========= ========= =========
</TABLE>
See accompanying notes.
F-26
<PAGE> 67
TXEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1995 AND ELEVEN MONTHS
ENDED MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RETAINED RECEIVABLE TOTAL
PREFERRED COMMON PAID-IN EARNINGS FROM STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) STOCKHOLDER EQUITY
---------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994............... $ -- $10,000 $409,500 $(1,060,997) $(199,703) $ (841,200)
Accrued interest on note
receivable......................... -- -- -- -- (34,060) (34,060)
Issuance of preferred stock.......... 1,500,000 -- -- -- -- 1,500,000
Net income........................... -- -- -- 682,214 -- 682,214
---------- ------- -------- --------- --------- ----------
BALANCE, JUNE 30, 1995............... 1,500,000 10,000 409,500 (378,783) (233,763) 1,306,954
Accrued interest on note receivable
(unaudited)........................ -- -- -- -- (17,143) (17,143)
Payment on note (unaudited).......... -- -- -- -- 58,949 58,949
Net loss (unaudited)................. -- -- -- (72,213) -- (72,213)
---------- ------- -------- --------- --------- ----------
BALANCE, MAY 31, 1996 (UNAUDITED).... $1,500,000 $10,000 $409,500 $ (450,996) $(191,957) $ 1,276,547
========== ======= ======== ========= ========= ==========
</TABLE>
See accompanying notes.
F-27
<PAGE> 68
TXEN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
YEAR ENDED MAY 31,
JUNE 30, -------------------------
1995 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 682,214 $ 641,314 $ (72,213)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 345,823 263,665 523,374
Deferred income taxes............................. (112,359) (105,622) (12,284)
Provision for doubtful accounts................... 42,171 -- --
Gain on sale of equipment......................... (11,339) (11,339) --
Changes in operating assets and liabilities:
Accounts receivable............................. (727,974) (624,014) (51,767)
Prepaid expenses................................ (7,934) (37,252) (54,934)
Income tax receivable........................... (50,150) -- (10,833)
Inventory....................................... (17,538) (20,422) (27,400)
Other assets.................................... 6,543 7,543 1,275
Interest payable................................ 34,125 30,060 23,084
Customer deposits............................... 41,665 9,856 15,310
Accounts payable and accrued expenses........... 252,334 118,666 (261,776)
Accrued salaries, bonuses and vacation.......... (4,230) 3,043 (87,051)
Deferred revenue................................ 332,300 332,072 332,291
---------- ---------- ----------
Net cash provided by operating activities.............. 805,651 607,570 317,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment........... 23,824 23,824 --
Purchases of property and equipment.................... (974,313) (862,731) (1,102,572)
---------- ---------- ----------
Net cash used in investing activities.................. (950,489) (838,907) (1,102,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings (payments) on note payable to
bank................................................. (38,000) -- 453,213
Principal payments on note payable..................... (208,439) (209,977) (41,667)
Proceeds from sale of preferred stock.................. 1,500,000 1,500,000 --
(Increase) decrease in notes receivable from
stockholders......................................... (34,060) (33,631) 41,806
---------- ---------- ----------
Net cash provided by financing activities.............. 1,219,501 1,256,392 453,352
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents... 1,074,663 1,025,055 (332,144)
Cash and cash equivalents at beginning of period....... 98,874 98,874 1,173,537
---------- ---------- ----------
Cash and cash equivalents at end of period............. $1,173,537 $1,123,929 $ 841,393
========= ========= =========
</TABLE>
See accompanying notes.
F-28
<PAGE> 69
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND MAY 31, 1996
(ALL INFORMATION AS OF MAY 31, 1996 AND FOR THE ELEVEN
MONTHS ENDED MAY 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- ACCOUNTING POLICIES
Organization
TXEN, Inc. (the Company) facilitates the administration of health benefits
by providing healthcare organizations hardware and software solutions through
either outsourcing or turnkey agreements. The Company also provides data
processing services through management service organization (MSO) agreements.
Basis of Presentation
The interim financial statements as of May 31, 1996 and for the eleven
months ended May 31, 1995 and 1996 have not been examined by independent
auditors, but in the opinion of the Company, all adjustments consisting of the
normal recurring accruals necessary for a fair presentation of the results of
the period, have been made.
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 in the period
they are earned.
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
vendor obligations is deferred and recognized once the remaining obligations
become insignificant. The Company considers the delivery criteria as having been
achieved if demonstration software has been delivered which has substantially
all of the functionality of the subsequently delivered production version.
Professional services: Revenue from professional services is recognized
either (i) as the services are performed based on the Company's standard rates
for the applicable services; or, (ii) as contract milestones are achieved, if
specified and required under the contract with the customer. Revenue from
postcontract customer support is recognized in the period the customer support
services are provided.
Software Development Costs
Under Financial Accounting Standards Statement 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 up
until the time that the product or enhancement is available for release to
customers, after which the capitalized costs are to be amortized over the
product's estimated life giving consideration to estimates of recoverability and
net realizable value. There were no capitalized software development costs as of
June 30, 1995 and May 31, 1996.
Inventory
Inventory is carried at the lower of cost or market using the specific
identification method.
F-29
<PAGE> 70
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method for items purchased prior to July 1,
1994, and double declining balance for items purchased on or after July 1, 1994.
Property and equipment are depreciated over the estimated useful lives of the
assets (generally three to seven years).
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.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 1995:
<TABLE>
<S> <C>
Computer equipment............................................... $1,748,790
Software......................................................... 238,437
Other............................................................ 2,366
Furniture and fixtures........................................... 335,097
----------
2,324,690
Less accumulated depreciation.................................... (695,103)
----------
$1,629,587
=========
</TABLE>
NOTE 3 -- NOTES PAYABLE TO BANK
The Company has a $1,000,000 revolving credit line with a bank payable on
demand. There were no borrowings under the credit line at June 30, 1995 and
$553,780 (unaudited) at May 31, 1996. Borrowings under this credit line are
collateralized by all assets of the Company and the general guaranty of the
primary shareholders.
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 $1,080,593 at June 30, 1995,
and matures on March 17, 1996, bears interest at prime plus 1/2% and is
cross-collateralized with assets pledged under the credit line.
The Company paid $111,445 in interest during the year ended June 30, 1995.
At June 30, 1995, the Company was in violation of certain covenants in the
debt agreement with the bank. On November 1, 1995, the bank waived these
covenants through the maturity date of the note.
F-30
<PAGE> 71
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LEASES
The Company operates in leased premises and also leases certain equipment.
The future minimum lease payments under operating leases, in the aggregate, for
the years ending June 30 are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 364,461
1997............................................................ 273,867
1998............................................................ 243,762
1999............................................................ 63,382
---------
$ 945,472
========
</TABLE>
Rent expense for the year ended June 30, 1995 was $135,444. The Company is
also subleasing space to another tenant over the next three years. The total of
minimum sublease rentals to be received in the future under this sublease is
$39,993.
NOTE 5 -- STOCKHOLDERS' EQUITY
On December 16, 1994, the Company entered into a Stock Purchase Option
Agreement (the Agreement) with Nichols Research Corporation (NRC). Under the
terms of the Agreement, the Company sold one share of convertible Preferred
Stock to NRC for $1,500,000, and provided NRC with the option to purchase the
remaining 80.1% interest in the Company at a later date, beginning July 1998.
Simultaneously with the sale of the Preferred Stock, the Company effected a
five-for-one-stock split of the Class A Common Stock. The Company also
authorized 1,250,000 shares of Class B Common Stock which is reserved for
issuance upon the conversion of the Preferred Stock.
The convertible Preferred Stock may be converted into the number of shares
of Class B Common Stock which, upon the issuance of the Class B Common Stock,
shall constitute 19.99% of all of the outstanding capital stock of the Company
outstanding at the time of conversion. The holder of the Preferred Stock shall
have the right at any time to convert it to Class B Common Stock. The Company
shall have the right at any time prior to September 30, 1996, to convert the
Preferred Stock to Class B Common Stock if on June 30, 1995 or June 30, 1996,
the value of the Company exceeds $6,500,000 as defined by the Articles of
Incorporation. If the Preferred Stock has not been converted into Class B Common
Stock prior to September 30, 1996, then the holder of the Preferred Stock may
require the Company to redeem all of its Preferred Stock at a price equal to
$1,500,000 in a lump sum distribution of 20 equal quarterly installments over
five years.
The holder of the convertible Preferred Stock is entitled to receive
dividends at a rate equal to the rate declared on the Class A Common Stock and
computed based on the number of shares of Class B Common Stock the Preferred
Stock would have been converted into on the date of determination of holders of
Class A Common Stock. The holder of the share of Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Class B
Common Stock into which such share of Preferred Stock could be converted on the
record date.
During July 1996, the Company revised the terms of the stock purchase
option mentioned above allowing NRC to exercise the purchase option as soon as
July 1997. Under this revised purchase option agreement, the purchase formula
will be based on a 22.5% discount of NRC's price/earnings multiple. NRC's
price/earnings multiple will be the average price/earnings multiple from March
1, 1997 to June 30, 1997, with a minimum multiple of 14.7 and a maximum multiple
of 27.1. The purchase price will be based upon the Company's audited net income
for the fiscal year ended June 30, 1997, multiplied by the price/earnings
multiple as described above.
NOTE 6 -- INCOME TAXES
At June 30, 1995, the Company had net operating loss carryforwards of
$34,192 expiring in 2006 through 2009. During the year ended June 30, 1995, the
valuation allowance decreased from $325,302 to $ -0-.
F-31
<PAGE> 72
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's current deferred tax liabilities
and assets at June 30, 1995 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax over book depreciation.................................... $ 146,255
Deferred tax assets:
Allowance for doubtful accounts............................... 36,220
Accrued salaries and interest................................. 189,632
Accrued vacation.............................................. 20,378
Net operating loss carryforwards.............................. 12,384
---------
Total deferred tax assets....................................... 258,614
Valuation allowance............................................. --
---------
Net deferred tax assets......................................... $ 112,359
========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<S> <C>
Current:
Federal....................................................... $ 167,001
State......................................................... 17,062
Benefit of operating loss carryforward........................ (184,063)
---------
Total current................................................... --
Deferred:
Federal....................................................... 97,954
State......................................................... 14,405
---------
Total deferred.................................................. 112,359
---------
$ 112,359
========
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
The Company has a note payable to a shareholder of the Company for $50,000
at June 30, 1995, bearing interest at 8%. 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 shareholders of
the Company of $233,763 at June 30, 1995 and $191,957 (unaudited) at May 31,
1996, which bear interest at 8%. Accrued interest on the notes receivable at
June 30, 1995 was $38,013.
NOTE 8 -- SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan (Plan) for all eligible
employees pursuant to Section 401(k) of the Internal Revenue Code. The Company
will match employee contributions to the Plan at a level determined annually by
the Company's Board of Directors. The Company's contribution for the year ended
June 30, 1995 was $4,406.
NOTE 9 -- STOCKHOLDERS' AGREEMENT
Certain members of management are also stockholders of the Company. Under a
stock purchase agreement, the Company is committed to purchase management's
Common Stock of the Company in the event of death, retirement or termination of
employment. The price to be paid for the Common Stock shall be set by the Board
of Directors.
F-32
<PAGE> 73
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated financial information has
been prepared based on the historical financial statements of Nichols Research
Corporation (the Company), Advanced Marine Enterprises, Inc. (AME) and TXEN,
Inc. (TXEN). Such pro forma information gives effect to the acquisition of AME
and the probable acquisition of TXEN. The pro forma condensed consolidated
statements of income were prepared assuming that the acquisition of AME took
place as of the beginning of the year ended August 31, 1995. The pro forma
condensed consolidated balance sheet data of the Company and TXEN was prepared
assuming that the Company's proposed acquisition of TXEN took place as of May
31, 1996, and the pro forma condensed consolidated income statement data was
prepared assuming that the proposed acquisition took place as of the beginning
of the year ended August 31, 1995. The unaudited financial information furnished
herein reflects all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly state
the Company's financial position and results of operations for the periods
presented. The pro forma financial information does not purport to present the
consolidated financial position and consolidated results of operations of the
Company had the Company's acquisition of AME and proposed acquisition of TXEN
actually occurred on the dates indicated; nor does it purport to be indicative
of results that will be attained in the future.
The pro forma condensed consolidated financial statement information should
be read in conjunction with the Company's consolidated financial statements and
notes thereto, AME's audited financial statements and notes thereto, and TXEN's
financial statements and notes thereto, all included herein.
F-33
<PAGE> 74
NICHOLS RESEARCH CORPORATION
AND ADVANCED MARINE ENTERPRISES, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
AME HISTORICAL NRC AND AME PRO
NRC HISTORICAL YEAR ENDED FORMA YEAR
YEAR ENDED AUGUST 31, PRO FORMA ENDED AUGUST
AUGUST 31, 1995 1995 ADJUSTMENTS 31, 1995
--------------- -------------- ----------- ---------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $ 170,331 $ 30,485 $ -- $ 200,816
Costs and expenses:
Direct and allocable costs........ 147,584 20,471 -- 168,055
General and administrative
expenses....................... 12,917 8,212 833(1) 21,962
--------------- -------------- ----------- ---------------
Total costs and
expenses................ 160,501 28,683 833 190,017
--------------- -------------- ----------- ---------------
Operating profit.................... 9,830 1,802 (833) 10,799
Other income (expense):
Interest expense.................. (114) (17) (250)(2) (381)
Other income, principally
interest....................... 1,602 60 -- 1,662
--------------- -------------- ----------- ---------------
Income before income taxes.......... 11,318 1,845 (1,083) 12,080
Income taxes........................ 4,116 -- 277(3) 4,393
--------------- -------------- ----------- ---------------
Net income.......................... $ 7,202 $ 1,845 $(1,360) $ 7,687
=========== =========== ========= ===========
Net income per common share......... $ 1.15 $ 1.21
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding....................... 6,279,109 72,044(4) 6,351,153
=========== ========= ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated statements of income.
F-34
<PAGE> 75
NICHOLS RESEARCH CORPORATION
AND ADVANCED MARINE ENTERPRISES, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
NRC AND AME
PRO FORMA
NRC HISTORICAL AME HISTORICAL NINE MONTHS
NINE MONTHS NINE MONTHS ENDED
ENDED ENDED PRO FORMA MAY 31,
MAY 31, 1996 MAY 31, 1996 ADJUSTMENTS 1996
-------------- -------------- ----------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................... $153,202 $ 27,871 $ -- $ 181,073
Costs and expenses:
Direct and allocable contract
costs............................. 129,735 17,853 -- 147,588
General and administrative
expenses.......................... 13,879 8,611 625(1) 23,115
-------------- -------------- ----------- -----------
Total costs and expenses..... 143,614 26,464 625 170,703
-------------- -------------- ----------- -----------
Operating profit....................... 9,588 1,407 (625) 10,370
Other income (expense):
Interest expense..................... (226) (5) (188)(2) (419 )
Other income, principally interest... 749 98 -- 847
-------------- -------------- ----------- -----------
Income before income taxes............. 10,111 1,500 (813) 10,798
Income taxes........................... 3,670 -- 249(3) 3,919
-------------- -------------- ----------- -----------
Net income............................. $ 6,441 $ 1,500 $(1,062) $ 6,879
=========== =========== ========= ===========
Net income per common share............ $ .96 $ 1.01
=========== ===========
Weighted average number of common and
common equivalent shares
outstanding.......................... 6,741,527 72,044(4) 6,813,571
=========== ========= ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated statements of income.
F-35
<PAGE> 76
NOTES TO NICHOLS RESEARCH CORPORATION
AND ADVANCED MARINE ENTERPRISE, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
PRO FORMA INCOME STATEMENT ADJUSTMENTS
(1) To record the amortization of goodwill for the year ended August 31, 1995
and the nine months ended May 31, 1996, based on estimated goodwill of
$12,500,000 amortized over fifteen years.
(2) To record the net interest cost of the acquisition based upon the Company's
average borrowing rate and average amounts earned on invested cash and cash
equivalents for the year ended August 31, 1995 and the nine months ended May
31, 1996.
(3) Under Subchapter S of the Internal Revenue Code, AME elected not to be taxed
as a corporation and the shareholders have consented to include their
pro-rata share of the income or loss in their individual tax returns.
Therefore, no provision has been made for federal or state income taxes for
the year ended August 31, 1995 or the nine months ended May 31, 1996. The
pro forma adjustment represents an assumed tax provision based upon AME's
income for the year ended August 31, 1995, and nine months ended May 31,
1996, less the amortization of goodwill and net interest expense calculated
using the Company's effective rate of 36.37% and 36.30% for the year ended
August 31, 1995 and the nine months ended May 31, 1996, respectively.
(4) Net income per common share assumes the shares issued in conjunction with
the acquisition were issued on September 1, 1994 and were outstanding for
the entire year.
F-36
<PAGE> 77
NICHOLS RESEARCH CORPORATION AND TXEN, INC.
In December 1994, Nichols Research Corporation (the Company) acquired a
19.9% interest in TXEN, Inc. (TXEN), an information system and services company
in the managed care industry. The Company paid approximately $1,500,000 and owns
an option to acquire all outstanding shares of TXEN in the future. Chris H.
Horgen, Chief Executive Officer of the Company, owns a 4.5% interest in TXEN,
which he acquired on February 15, 1993, and would be beneficially impacted if
the Company exercised its option. The investment is accounted for by the Company
using the equity method due to the purchase option agreement and is included in
noncurrent other assets on the consolidated balance sheet at August 31, 1995.
The Company and TXEN have agreed to revised provisions for the purchase of
the remaining shares of TXEN and have moved the purchase option date from July
1998 to July 1997. Under the revised terms of the purchase option agreement, the
purchase formula will be based on a 22.5% discount of the Company's price/
earnings multiple. The Company's price/earnings multiple will be the average
price/earnings multiple from March 1, 1997 to June 30, 1997, with a minimum
multiple of 14.7 and a maximum multiple of 27.1. If the option is exercised, the
purchase price will be based upon TXEN's audited net income for the fiscal year
ended June 30, 1997 multiplied by the Company's price/earnings multiple as
described above. The purchase price would be paid primarily with the Company's
Common Stock.
Management believes that the probable acquisition of TXEN will be
anti-dilutive to the net income per common share of the Company because (i) the
purchase price is based upon a percentage (77.5%) of the Company's
price/earnings multiple and (ii) in the event the acquisition became subject to
the provisions related to the minimum multiple described above, the Company
would choose not to exercise the option to acquire the remaining outstanding
common stock of TXEN. Thus, while the pro forma information presented below
appears to be dilutive, the acquisition is not anticipated to occur under such
circumstances.
The following unaudited pro forma financial information is based upon an
anticipated acquisition price of the following:
<TABLE>
<S> <C>
NRC price/earnings multiple at May 31, 1996............................. 26.00
Price/earnings multiple discounted by 22.5%............................. 20.15
TXEN forecasted earnings for the year ending June 30, 1997.............. $ 1,200,000
Total value based on NRC discounted price/earning multiple.............. $24,180,000
Valuation of outstanding shares not owned by NRC (80.1%)................ $19,368,200
Consideration:
NRC Common Stock (90%)................................................ $17,431,400
Cash (10%)............................................................ 1,936,800
Consideration previously paid......................................... 1,500,000
-----------
Total purchase price.......................................... $20,868,200
==========
</TABLE>
F-37
<PAGE> 78
Selected pro forma income statement information:
<TABLE>
<CAPTION>
NRC AND AME
NRC AND AME NRC, AME AND PRO FORMA NRC, AME AND
PRO FORMA TXEN PRO FORMA CONSOLIDATED TXEN PRO FORMA
CONSOLIDATED CONSOLIDATED INCOME STATEMENT CONSOLIDATED
INCOME STATEMENT INCOME STATEMENT NINE MONTHS INCOME STATEMENT
YEAR ENDED YEAR ENDED ENDED NINE MONTHS ENDED
AUGUST 31, 1995 AUGUST 31, 1995(A)(B) MAY 31, 1996 MAY 31, 1996(A)(B)
---------------- --------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues............. $200,816 $ 205,574 $181,073 $186,416
Operating profit..... 10,799 9,896 10,370 9,275
Net income........... 7,687 6,745 6,879 5,824
Net income per common
share.............. $ 1.21 $ .98 $ 1.01 $ .79
</TABLE>
Selected pro forma balance sheet information:
<TABLE>
<CAPTION>
NRC AND TXEN
PRO FORMA
NRC CONSOLIDATED
CONSOLIDATED BALANCE
BALANCE SHEET SHEET
(INCLUDING AS OF
AME) AS OF MAY 31,
MAY 31, 1996 1996(C)
------------- ------------
<S> <C> <C>
Working capital........................................... $ 40,815 $ 38,895
Total assets.............................................. 127,686 150,327
Long-term debt (excluding current maturities)............. 4,493 5,415
Stockholders' equity...................................... 78,888 96,319
</TABLE>
- ---------------
(a) Pro forma income statement data assumes the acquisition of TXEN took place
as of the beginning of the year ended August 31, 1995, and reflects
amortization of goodwill based on the purchase price described above of
$1,306,000 and $980,000 for the year ended August 31, 1995 and nine months
ended May 31, 1996, respectively.
(b) Earnings per share assumes the shares issued in conjunction with the
proposed acquisition were issued on September 1, 1994 and were outstanding
for the entire fiscal year.
(c) Pro forma balance sheet data assumes estimated cash consideration of
$1,936,800 to complete the acquisition after giving effect to the Company's
estimated 540,508 shares included in the total purchase price. For purposes
of this pro forma financial information it is assumed that the cash
necessary to complete the acquisition will be borrowed under the Company's
existing credit agreement. Estimated goodwill of $19,591,200 is based on
total consideration paid of approximately $20,868,200 and net assets of TXEN
estimated at $1,277,000.
F-38
<PAGE> 79
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- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED, NOR DOES
IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SHARES
OF COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Price Range of Common Stock........... 10
Dividend Policy....................... 10
Capitalization........................ 11
Selected Consolidated Historical and
Pro Forma Financial Data............ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 20
Management............................ 33
Principal and Selling Stockholders.... 36
Description of Common Stock........... 37
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Available Information................. 39
Incorporation of Certain Documents by
Reference........................... 40
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
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1,000,000 SHARES
(LOGO) NICHOLS RESEARCH CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
THE ROBINSON-HUMPHREY
COMPANY, INC.
OPPENHEIMER & CO., INC.
FERRIS, BAKER WATTS
INCORPORATED
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