SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED AUGUST 31, 1996.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ________ TO _________.
COMMISSION FILE NUMBER 0-15295
NICHOLS RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 63-0713665
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4040 SOUTH MEMORIAL PARKWAY
HUNTSVILLE, ALABAMA 35802-1326
(Address of principal executive offices) (Zip Code)
The registrant's telephone number including area code: (205) 883-1140
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
On October 21, 1996, the Company effected a 3 for 2 stock split on all
outstanding Common Stock. In this Form 10-K, all information concerning the
Common Stock and the price per share for said Common Stock has been adjusted to
give effect to such stock split. As of November 1, 1996, there were 11,564,637
shares of Nichols Research Corporation Common Stock, $.01 par value outstand-
ing. The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $234,725,934 based on the closing price
of such stock as reported by the Nasdaq National Market on November 1, 1996,
assuming that all shares beneficially held by officers and members of the
registrant's Board of Directors are shares owned by "affiliates," a status
which each of the officers and directors individually disclaims.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
Portions of the Proxy Statement for the January 9, 1997 Part III
Annual Shareholders' Meeting
<PAGE>
PART I
ITEM 1. 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.
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.
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 information services to U.S. defense agencies.
For the year ended August 31, 1996, Nichols Federal produced approximately 57%
of the Company's revenues.
NICHOLS INFOFED provides information services and systems integration to
federal, state and local governmental agencies. For the year ended August 31,
1996, Nichols InfoFed produced approximately 27% 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 year ended August 31, 1996, Nichols InfoTec produced approximately 10%
of the Company's revenues.
NICHOLS SELECT provides information services and systems integration to
healthcare and insurance industries. For the year ended August 31, 1996,
Nichols SELECT produced approximately 6% of the Company's revenues.
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.
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 year ended August 31, 1996, Nichols Federal produced approximately 57%
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 $64.4 million in fiscal 1994, $56.4 million in fiscal 1995, and
$63.0 million in fiscal 1996. Approximately 26% of the Company's revenues in
fiscal 1996 were from contracts related to BMD, compared to 33% of revenues in
fiscal 1995 and 44% of revenues in fiscal 1994. 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 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 $60 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 $11 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.
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 $133
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 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 year ended August 31,
1996, Nichols InfoFed produced approximately 27% 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 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 high performance computing
modernization contracts (the "HPCM Contracts") in the aggregate amount of $355
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 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 has awarded a total of only four
such contracts under a program to modernize its shared computer resources.
Under subcontracts in the aggregate of approximately $90 million, the Company
is supporting the Defense Research and Engineering Network (DREN) and the
Defense Enterprise Integration Service (DEIS) Program.
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.
Systems and Intelligence Programs
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 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.
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.
Military Systems and Simulation
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 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 year ended August 31, 1996, Nichols InfoTec produced
approximately 10% of the Company's revenues.
The Company was awarded a $19 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 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 was named a SAP Implementation Partner with SAP America
in 1996. 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.
The Company provides its 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.
NICHOLS SELECT
Nichols SELECT provides information services and systems integration to
the healthcare and insurance industries. For the year ended August 31, 1996,
Nichols SELECT produced approximately 6% 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 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"). In August 1996, the Company increased its investment to
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 3,500 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 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 generally directed by the strategic business unit presidents.
The strategic business unit presidents coordinate the marketing activities of
program development managers assigned to the executing 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 Nichols SELECT, 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.
The corporate marketing staff focuses on selected large procurements
and activities associated with major new clients. Resources from across
the Company are available to the corporate marketing staff to address major
marketing issues.
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 con-
tracts, the Company receives a fixed amount by labor category for services per-
formed and is reimbursed (without fee) for the cost of materials purchased to
perform the contract. Under a fixed-price contract, the Company agrees to per-
form 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, 1996
were approximately 51% from cost-reimbursement contracts, approximately 27%
from time-and-materials contracts and approximately 22% from fixed-price con-
tracts.
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 1995 and 1996.
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 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 $1 billion, including options
of $501.8 million, at August 31, 1996. The Company had a backlog of $505.7
million, including options of $259.8 million, at August 31, 1995, and a backlog
of $520.1 million, including options of $238.2 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 25% to 27% of the Company's backlog at August 31,
1996, will result in revenues for the year ending August 31, 1997.
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
August 31, 1996 was approximately $99.5 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 confidentiality 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.
EMPLOYEES
At August 31, 1996, the Company had 1,915 full-time employees. Of the
Company's professional employees, 97% hold undergraduate degrees and 44% 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.
ITEM 2. PROPERTIES
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 $5.7 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION OFFICER SINCE
Chris H. Horgen 50 Chief Executive Officer and Chairman 1976
Michael J. Mruz 51 President, Chief Operating Officer 1994
and Director
Roy J. Nichols 58 Senior Vice President and Vice Chairman 1976
Patsy L. Hattox 47 Corporate Vice President, Chief 1980
Administrative Officer, Secretary
and Director
J. Michael Coward 53 Corporate Vice President 1990
Allen E. Dillard 36 Vice President, Chief Financial Officer 1994
and Treasurer
Earl Madden 64 Vice President and Chief Procurement 1994
Officer
James C. Moule 60 President, Nichols Federal and 1988
Corporate Vice President
Thomas L. Patterson 53 President, Nichols SELECT and Corporate 1996
Vice President
Michael W. Solley 38 President, Nichols InfoFed and 1992
Corporate Vice President
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 to 1988, she held the
position of Division Director for Administration. Ms. Hattox holds a bachelors
degree in Business Administration from Athens State College.
J. Michael Coward joined the Company in 1990 and has been Corporate Vice
President for Corporate Marketing since July 1996. From April 1990 to July
1996, Mr. Coward was Vice President for Program Development and Deputy for
Corporate Development. Prior to joining the Company, he was employed by
Teledyne Brown Engineering from February 1969 until April 1990. At Teledyne
Brown Engineering, Mr. Coward was Director for Computer Applications. He holds
a bachelors degree in Mathematics from Lamar University and a masters
degree in Statistics from Texas A&M University.
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.
Thomas L. Patterson joined the Company in July 1996 as President of
Nichols SELECT. Mr. Patterson has also been President of TXEN, Inc., an
information technology company for managed care organizations, since he founded
it in 1989. The Company owns a 19.9% interest in TXEN, Inc. 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
degree in Mechanical Engineering and a masters degree in Engineering Mechanics
from the University of Alabama.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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.
Market and Stockholder Information
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 on the Nasdaq
National Market, and as adjusted for a 3 for 2 stock split on October 21, 1996.
1996 1995
HIGH LOW HIGH LOW
--------------------------------------------
First Quarter 16 3/8 12 8 3/8 7 1/8
Second Quarter 17 1/4 14 1/8 9 7/8 8
Third Quarter 22 5/8 15 1/2 10 3/8 9 3/8
Fourth Quarter 22 1/8 16 5/8 13 10 1/2
On November 1, 1996, the per share closing sale price of the Common
Stock on the Nasdaq National Market was $22-7/8. On November 1, 1996, there
were approximately 945 holders of record of the Common Stock. The price of
the stock reflects a 3 for 2 split on October 21, 1996.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL SUMMARY
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $242,308,000 $170,331,000 $143,153,000 $159,112,000 $117,205,000
-----------------------------------------------------------------------------
Net Income $9,392,000 $7,202,000 $6,506,000 $7,049,000 $5,906,000
-----------------------------------------------------------------------------
Net Income Per
Common Share(1) $0.92 $0.76 $0.70 $0.75 $0.65
-----------------------------------------------------------------------------
Stockholders'
Equity $112,961,000 $67,848,000 $57,308,000 $52,700,000 $43,937,000
-----------------------------------------------------------------------------
Long-term Debt $4,784,000 $5,366,000 $4,328,000 -- --
-----------------------------------------------------------------------------
Total Assets $161,964,000 $100,879,000 $80,761,000 $71,990,000 $62,180,000
</TABLE>
(1) The net income per common share reflects a three for two split on October
21, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Business Environment
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 DOD, other federal agencies, state and local
governments, healthcare and insurance organizations, and 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. 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. The Company's business and
financial performance are subject to risks and uncertainties, including those
discussed below.
In July 1996 the Company announced a formal organization definition for
its four strategic business units. The organizations reflect the particular
market focus of each line of business. Nichols Federal provides technical
services primarily to U.S. government defense agencies. Nichols InfoFed
provides information and technology services to a variety of governmental
agencies. Nichols InfoTec provides information and technology services to
various commercial clients, other than healthcare or insurance industry
clients. Nichols SELECT provides information services to clients in the
healthcare and insurance industries. For the year ended August 31, 1996, the
percentage of total revenues attributable to the four business units were
approximately 57% for Nichols Federal, 27% for Nichols InfoFed, 10% for Nichols
InfoTec, and 6% for Nichols SELECT.
Expansion through acquisitions is an important component of the Company's
overall business strategy. 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 solutions for government, commercial and healthcare
clients. 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 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, the
Company's ability to fund or finance acquisitions on acceptable terms, and the
Company's ability to maintain or enhance the profitability of any acquired
business.
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 competition for such contracts is
intense and many of the Company's competitors have greater resources than
the Company. While such contracts are working capital intensive, requiring
large equipment and software purchases to be funded by the Company before
payment from the customer, the Company believes such contracts offer attractive
revenue growth and margin expansion opportunities for the Company's range of
technical expertise and capabilities.
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
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.
Approximately 76%, 81% and 92% of the Company's total revenues in fiscal
1996, fiscal 1995 and fiscal 1994 were derived from contracts or subcontracts
funded by the U.S. Government. These U.S. Government contracts include military
weapons systems contracts funded by DOD that accounted for approximately 57%,
69% and 85% of the Company's total revenues in such years, respectively. 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 year ended August
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
11% of the Company's total revenues for such period. The Company's five
largest contracts (by revenues) generated approximately 37% of the Company's
total revenues for such period. Given the award of the $355 million high
performance computing modernization contracts awarded by the U.S. Army (the
"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 con-
tracts when they expire, could materially and adversely affect the Company.
Historically, a majority of the Company's revenues (57% for the year ended
August 31, 1996) are related to U.S. military weapons systems. 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. 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 26% of the Company's revenues in fiscal 1996 were from
contracts related to Ballistic Missile Defense (BMD), compared to 33% of
revenues in fiscal 1995 and 44% of revenues in fiscal 1994 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.
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'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, audit
adjustments, 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.
The Company's services are provided primarily through three types of
contracts: fixed-price, time-and-materials and cost-reimbursement contracts.
Fixed-price contracts require the Company to perform services under a contract
at a stipulated price. Time-and-materials contracts 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. Under cost-reimbursement
contracts, 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-reim-
bursement 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. The Company's
success will also depend upon its ability to attract, retain, train and
motivate highly skilled employees, particularly in the areas of information
technology, where such employees are in great demand.
Recent contract awards have significantly increased the Company's backlog.
Contract awards for the year ended August 31, 1996, totaled $598.7 million. Of
this amount, $355.0 million were the HPCM Contracts awarded by the U.S. Army
Information Systems and Selection Acquisition Agency. As a result, backlog has
increased to $1.0 billion at August 31, 1996 from $505.7 million at August 31,
1995.
Results of Operations
The following tables set forth, for the periods indicated, the percentages
which certain items in the consolidated statements of income bear to
consolidated revenues and the percentage change of such items for the periods
indicated:
<TABLE>
<CAPTION>
Percentage of Revenues Percentage Increase
Years ended August 31, (Decrease)
1996 1995 1994 1995-1996 1994-1995
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 42.3% 19.0%
Costs and expenses:
Direct and allocable costs 84.9 86.6 86.8 39.4 18.8
General and administrative expenses 9.1 7.6 6.6 71.5 36.1
---------------------
Total costs and expenses 94.0 94.2 93.4 42.0 20.1
---------------------
Operating profit 6.0 5.8 6.6 46.1 3.9
Other income (expense), net .1 .8 .6 (74.2) 62.3
--------------------
Income before income taxes 6.1 6.6 7.2 30.3 9.1
Income taxes 2.2 2.4 2.7 30.0 6.4
--------------------
Net income 3.9% 4.2% 4.5% 30.4 10.7
====================
</TABLE>
The following table summarizes the percentage of revenue by contract type
for the periods indicated:
Years ended August 31,
1996 1995 1994
---------------------
Cost-reimbursement 51% 48% 56%
Fixed-price 22 16 10
Time-and-materials 27 36 34
---------------------
100% 100% 100%
=====================
The table below presents contract award and backlog data for the periods
indicated:
Years ended August 31,
1996 1995 1994
-------------------------------------
(amounts in thousands)
Contract award amount $ 598,653 $ 174,049 $ 182,747
Backlog (with options) $ 1,003,135 $ 505,744 $ 520,133
Backlog (without options) $ 501,373 $ 287,977 $ 260,312
Backlog percentage by contract type:
Cost-reimbursement 60% 64% 73%
Fixed-price 30% 18% 12%
Time-and-materials 10% 18% 15%
COMPARISON OF OPERATING RESULTS FOR FISCAL 1996 WITH FISCAL 1995
REVENUES. Revenues increased $72.0 million (42.3%) in fiscal 1996.
Approximately 25% of the increase was attributable to revenues from the HPCM
Contracts. Approximately 35% of the increase was attributable to acquisitions
completed in fiscal year 1996 and late fiscal 1995. Approximately 40% of the
increase in revenues was attributable to the existing contract base.
OPERATING PROFIT. Operating profit increased $4.5 million (46.1%) in fiscal
1996. Costs and expenses were 94.0% of revenues for fiscal 1996 as compared to
94.2% for fiscal 1995. The reduction in direct and allocable costs as a
percentage of revenues was offset by increases in general and administrative
expenses. The Company used contract cost reductions and increased margins to
fund 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 decrease in other income (expense) for fiscal
1996 is the result of the use of cash to make strategic acquisitions and
investments and an increase in interest expense on borrowings used to make
strategic acquisitions.
INCOME TAXES. Income taxes as a percentage of income before taxes was 36.3%
in fiscal 1996 as compared to 36.4% in fiscal 1995.
NET INCOME. Net income increased $2.2 million (30.4%) for fiscal 1996 as
compared to fiscal 1995. The increase is the result of the reasons discussed
above.
COMPARISON OF 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 attributable to increases in funding for
existing tactical and theater missile programs, approximately 32% of the
increase was attributable to two large contract awards for information
technology services and 33% of the increase was attributable to 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
expense related to industrial development borrowings in 1995.
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.
Liquidity and Capital Resources
Historically, the Company's positive cash flow from operations and
available credit facilities, have provided adequate liquidity and working
capital to fully fund the Company's operational needs and support the
acquisition program. Working capital was $72.7 million, $46.8 million and $44.1
million at August 31, 1996, 1995 and 1994, respectively. Operating activities
used cash of $5.0 million for the year ended August 31, 1996 and provided
cash of $6.8 million and $7.5 million for the years ended August 31, 1995
and 1994, respectively. The Company realized proceeds from the sale of Common
Stock and reissuance of treasury stock of $33.3 million, $2.3 million and $1.9
million for the years ended August 31, 1996, 1995 and 1994, respectively. The
Company realized net proceeds of $30.7 million in fiscal 1996 from the sale of
its common stock pursuant to an effective registration statement covering
1,678,050 shares of the Company's common stock (as adjusted for a 3 for 2
stock split effective October 21, 1996). These proceeds were used to repay
$14.5 million of indebtedness under its existing bank line of credit
facility, which will provide the Company with flexibility to finance the
working capital requirements under the Company's system integration contracts.
These proceeds will also be used for general corporate purposes and for
potential acquisitions.
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
London Interbank Offered Rate 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. In fiscal 1996, the Company borrowed $14.5 million under this line
of credit. These proceeds, together with 108,066 shares of common stock from
treasury shares, were used to acquire all the outstanding capital stock of AME.
As of August 31, 1996 all outstanding borrowings under the line of credit had
been repaid. 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 were 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 nine years under a systems integration contract.
Purchases of property and equipment (including those financed under the
term loan agreement) were $5.1 million, $2.2 million and $7.3 million for the
years ended August 31, 1996, 1995 and 1994, respectively. There are no material
capital expenditure commitments at August 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 commercial and healthcare 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 approxi-
imately $1.5 million, and has an option to purchase the remaining 80.1% in
July 1997. In May 1996, the Company acquired all of the outstanding capital
stock of AME for cash consideration of approximately $15.1 million and 108,066
shares of Company stock.
In fiscal 1996, the Company was 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 under the Company's system
integration contracts 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 system 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
1996 1995 1994
----------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments (Note 1) $ 21,419 $ 17,196 $ 19,355
Accounts receivable (Note 2) 90,232 53,103 39,620
Deferred income taxes (Note 1 and 4) 1,519 1,351 1,283
Other 2,384 1,593 2,010
----------------------------------------
Total current assets 115,554 73,243 62,268
Long-term investments (Note 1 and 3) 4,483 4,530 7,894
Property and equipment (Note 1):
Computers and related equipment 17,182 11,973 9,742
Furniture, equipment and improvements 6,915 5,149 3,919
Equipment-contracts 5,771 5,771 5,771
----------------------------------------
29,868 22,893 19,432
Less accumulated depreciation 14,721 11,434 8,924
----------------------------------------
Net property and equipment 15,147 11,459 10,508
Goodwill (net of accumulated amortization of $1,246
and $171) (Note 1 and 9) 21,004 8,803 --
Other assets (Note 10) 5,776 2,844 91
----------------------------------------
Total assets $ 161,964 $ 100,879 $ 80,761
========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (Continued)
August 31,
1996 1995 1994
----------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,032 $ 16,886 $ 12,483
Accrued compensation and benefits (Note 7) 9,037 6,897 4,731
Income taxes payable (Note 4) 238 969 --
Current maturities of long-term debt (Note 5) 764 1,187 962
Other 1,808 531 --
----------------------------------------
Total current liabilities 42,879 26,470 18,176
Deferred income taxes (Note 4) 1,340 1,195 949
Long-term debt (Note 5):
Industrial development bonds 1,777 2,000 --
Long-term notes 3,007 3,366 4,328
----------------------------------------
Total long-term debt 4,784 5,366 4,328
Commitments (Note 6)
Stockholders' equity (Note 1 and 8):
Common stock, par value $.01 per share
Authorized - 20,000,000, 10,000,000 and
10,000,000 shares, respectively.
Issued - 11,651,018, 9,658,840 and 9,393,205
shares respectively 117 97 94
Additional paid-in capital 59,071 24,225 22,497
Retained earnings 55,061 45,669 38,467
Less cost of 168,500, 276,566 and 483,750
shares treasury stock, respectively (1,288) (2,143) (3,750)
----------------------------------------
Total stockholders' equity 112,961 67,848 57,308
----------------------------------------
Total liabilities and stockholders' equity $ 161,964 $ 100,879 $ 80,761
========================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended August 31,
1996 1995 1994
-----------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C>
Revenues (Note 1) $ 242,308 $ 170,331 $ 143,153
Costs and expenses:
Direct and allocable costs 205,798 147,584 124,202
General and administrative expenses 22,150 12,917 9,492
------------------------------------------
Total costs and expenses 227,948 160,501 133,694
------------------------------------------
Operating profit 14,360 9,830 9,459
Other income (expense):
Interest expense (Note 5) (625) (114) -
Other income, principally interest 1,009 1,602 917
------------------------------------------
Income before income taxes 14,744 11,318 10,376
Income taxes (Note 4) 5,352 4,116 3,870
------------------------------------------
Net income $ 9,392 $ 7,202 $ 6,506
==========================================
Earnings per share (Note 1) $ 0.92 $ 0.76 $ 0.70
==========================================
Weighted average number of common and common
equivalent shares outstanding 10,238,699 9,418,664 9,307,964
==========================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
--------------------------------------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1993 9,046,494 $ 90 $ 20,649 $ 31,961 $ - $ 52,700
Exercise of stock options 275,336 3 1,326 - - 1,329
Employee stock purchases 71,375 1 522 - - 523
Purchase of 483,750 shares of
treasury stock - - - - (3,750) (3,750)
Net Income - - - 6,506 - 6,506
--------------------------------------------------------------------
Balance, August 31, 1994 9,393,205 94 22,497 38,467 (3,750) 57,308
Exercise of stock options 197,889 2 938 - - 940
Reissue of 207,184 shares of
treasury stock - - 213 - 1,607 1,820
Employee stock purchases 67,746 1 577 - - 578
Net income - - - 7,202 - 7,202
--------------------------------------------------------------------
Balance, August 31, 1995 9,658,840 97 24,225 45,669 (2,143) 67,848
Sale of common stock 1,678,050 17 30,663 - - 30,680
Exercise of stock options 249,425 2 1,644 - - 1,646
Employee stock purchases 64,703 1 1,016 - - 1,017
Reissue of 108,066 shares of
treasury stock - - 1,523 - 855 2,378
Net income - - - 9,392 - 9,392
--------------------------------------------------------------------
Balance, August 31, 1996 11,651,018 $ 117 $ 59,071 $ 55,061 $ (1,288) $ 112,961
====================================================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended August 31,
1996 1995 1994
--------------------------------
(amounts in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,392 $ 7,202 $ 6,506
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 4,588 2,907 1,858
Gain on sale of furniture, fixtures and equipment - - (14)
Loss on the sale of investments - 34 -
Deferred income taxes (23) 178 647
Changes in assets and liabilities (net of effects
of acquisitions):
Accounts receivable (30,097) (10,919) 1,165
Other assets (1,165) 846 (1,053)
Accounts payable 12,110 3,497 (107)
Accrued compensation and benefits 1,028 1,921 (1,248)
Income taxes payable (731) 840 (240)
Other current liabilities (148) 326 (4)
--------------------------------
Total adjustments (14,438) (370) 1,004
--------------------------------
Net cash provided (used) by operating activities (5,046) 6,832 7,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,062) (2,213) (7,301)
Purchase of long-term investments - - (7,894)
Payment for non-compete agreement - (900) -
Payments for acquisitions, net of cash acquired (15,503) (10,547) -
Payment for investment in affiliates (2,504) (1,535) -
Proceeds from the sale of property and equipment - - 32
Proceeds from sale of long-term investments - 3,284 1,000
-------------------------------
Net cash provided (used) by investing activities (23,069) (11,911) (14,163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 33,343 1,518 1,852
Proceeds from long-term debt - 2,225 5,771
Payments of long-term debt (1,005) (1,557) (481)
Proceeds from borrowings on line of credit 14,500 - -
Payments of line of credit borrowings (14,500) - -
Purchase of treasury stock - - (3,750)
Proceeds from sale of treasury stock - 734 -
-------------------------------
Net cash provided by financing activities 32,338 2,920 3,392
-------------------------------
Net increase (decrease) in cash and temporary cash
investments 4,223 (2,159) (3,261)
Cash and temporary cash investments at
beginning of year 17,196 19,355 22,616
-------------------------------
Cash and temporary cash investments at
end of year $ 21,419 $ 17,196 $ 19,355
===============================
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended August 31,
1996 1995 1994
-------------------------------
(amounts in thousands)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Deferred compensation resulting from the exercise of
restricted stock options and issuance of treasury
stock $ - $ 81 $ -
Issuance of treasury stock as consideration in
acquisition 2,378 1,005 -
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 are Communications & Systems
Specialists, Inc. (CSSi), NRC Technical Services Corporation (NRCTSC), Conway
Computer Group, Inc., (CCG), Computer Services Corporation (CSC), and Advanced
Marine Enterprises, Inc. (AME). All significant intercompany balances and
transactions have been eliminated in consolidation.
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 be 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.
EARNINGS PER SHARE. Earnings per 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 earnings per 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, 1996, temporary
cash investments consisted of various money market accounts, primarily with an
Alabama bank.
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 are 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 fifteen years. The carrying amount of goodwill is evaluated
and 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.
STOCK OPTIONS. The Company grants stock for a fixed number of shares to
employees with an exercise option 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.
RECLASSIFICATION. Certain prior period amounts have been reclassified to
conform with the current year's presentation.
SUBSEQUENT EVENTS. On October 9, 1996, the Board of Directors declared a
three-for-two stock split which will be payable to shareholders of record on
October 21, 1996. The split will be effected on November 4, 1996 by a stock
dividend of one share for every two shares of Common Stock outstanding, with
cash paid in lieu of fractional shares based on the stock value on record date.
All references to the number of shares and per share amounts have been
restated to reflect the effect of the split for all periods presented.
USE OF ESTIMATES. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from the
estimates.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
August 31,
1996 1995 1994
-----------------------------------------------
(amounts in thousands)
Billed..........................$ 38,546 $ 25,201 $ 15,955
Unbilled........................ 51,686 27,902 23,665
-----------------------------------------------
$ 90,232 $ 53,103 $ 39,620
===============================================
Accounts receivable include $72,243,000, $36,717,000 and $32,900,000 due
from the U.S. Government at August 31, 1996, 1995 and 1994, respectively.
Unbilled accounts receivable include retainages of $3,534,000, $3,373,000
and $2,745,000 at August 31, 1996, 1995 and 1994, respectively. Unbilled
amounts are classified as current assets since substantially all amounts will
be realized within one year.
Costs related to certain contracts are subject to adjustment from
negotiations and audit between the Company and its customers, including
representatives of the U.S. Government. Revenues for such contracts and the
related unbilled receivables have been recorded in amounts that are expected to
be realized.
NOTE 3 - LONG-TERM INVESTMENTS
The following is a summary of long-term investments as of:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
(amounts in thousands)
AUGUST 31, 1996
Held to maturity:
Municipal obligations...$ 3,479 $ - $ (20) $ 3,459
Preferred stocks........ 1,004 - (26) 978
----------------------------------------------------
$ 4,483 $ - $ (46) $ 4,437
====================================================
AUGUST 31, 1995
Held to maturity:
Municipal obligations...$ 3,526 $ - $ (40) $ 3,486
Preferred stocks........ 1,004 - (26) 978
----------------------------------------------------
$ 4,530 $ - $ (66) $ 4,464
====================================================
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
====================================================
Contractual maturities of debt securities held to maturity occur ratably
over the next three 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 $34,000 and are included as
other income.
<PAGE>
NOTE 4 - INCOME TAXES
The provisions for income taxes consist of the following:
Years ended August 31,
1996 1995 1994
----------------------------------------------
(amounts in thousands)
Current:
Federal.....................$ 4,716 $ 3,439 $ 2,688
State....................... 659 499 535
----------------------------------------------
5,375 3,938 3,223
Deferred:
Federal..................... (20) 156 540
State....................... (3) 22 107
----------------------------------------------
(23) 178 647
----------------------------------------------
$ 5,352 $ 4,116 $ 3,870
==============================================
The significant components of deferred tax assets and liabilities as of:
August 31,
1996 1995 1994
-----------------------------------------
(amounts in thousands)
Current deferred tax assets:
Accrued liabilities not
currently deductible................$ 1,519 $ 1,351 $ 1,283
Non-current deferred tax liabilities:
Basis difference for property
and equipment....................... (1,340) (1,195) (949)
----------------------------------------
$ 179 $ 156 $ 334
========================================
Income tax expense as a percentage of income before income taxes varies from
the federal statutory rate due to the following:
Years ended August 31,
1996 1995 1994
-----------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
benefit 2.9 3.0 4.1
Other (0.6) (0.6) (0.8)
-----------------------------------------
36.3% 36.4% 37.3%
=========================================
The Company made income tax payments of approximately $6,106,000,
$2,283,000 and $4,259,000 in 1996, 1995 and 1994, respectively.
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT
The Company has a bank line of credit which provides for borrowings up to
$73,500,000. Borrowings are secured primarily by accounts receivable. A
commitment fee of 1/8 of 1% 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 are no outstanding borrowings on this facility
at August 31, 1996.
In January 1995, the Company received $2,225,000 in bond proceeds from the
Alabama State Industrial Development Authority. The proceeds were restricted
for use in acquiring certain capital assets by July 1996. The bonds are payable
in equal annual principal installments of $222,500 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 $144,000 and $114,000 were made in
fiscal years 1996 and 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 $44,847 until February 2003.
The loan bears interest at LIBOR plus 0.75% and is secured by the computer
hardware which has a carrying value of $3,543,000. Interest payments of
$278,000, $298,000 and $134,000 were made in fiscal years 1996, 1995, and 1994,
respectively. Interest expense is included in the consolidated statements of
income as a direct and allocable cost.
NOTE 6 - RELATED PARTY TRANSACTIONS AND COMMITMENTS
The Company leases office facilities under various operating leases,
including leases with companies in which certain officers and stockholders have
ownership interests. The leases generally have terms of one to ten years. Rent
expense for all operating leases was as follows:
Years Ended August 31,
1996 1995 1994
-----------------------------------------
(amounts in thousands)
Total rent expense...................$ 4,666 $ 3,561 $ 3,684
Amounts to related parties........... 980 1,002 1,003
Future minimum lease payments under operating leases with remaining terms of
one year or more are:
Years ended August 31,
1997 1998 1999 2000 2001 thereafter
-------------------------------------------------------------
(amounts in thousands)
Total.............$ 5,710 $ 5,220 $ 3,882 $ 2,886 $ 1,713 $ 1,213
Amounts to
related parties... 554 554 554 554 45 -
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 $4,226,000,
$4,130,000 and $3,475,000 for 1996, 1995 and 1994, 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
nonstatutory 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, 1996, 1,025,622 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, 1996, 67,492 shares were available for grant
under this plan.
A summary of activity relating to stock options is as follows:
<TABLE>
<CAPTION>
INCENTIVE NON-EMPLOYEE NONSTATUTORY
STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at August 31, 1993 1,138,564 18,508 42,000 1,199,072
Granted ($6.67-$10.34 per share)....... 227,913 6,000 105,000 338,913
Exercised ($3.00-$7.17 per share)...... (231,336) (2,000) (42,000) (275,336)
Expired................................ (74,412) - - (74,412)
--------------------------------------------------------------
Options outstanding at August 31, 1994 1,060,729 22,508 105,000 1,188,237
Granted ($7.34-$12.34 per share)....... 456,523 9,000 - 465,523
Exercised ($3.88-$10.09 per share)..... (195,889) (2,000) - (197,889)
Expired................................ (108,680) - - (108,680)
--------------------------------------------------------------
Options outstanding at August 31, 1995 1,212,683 29,508 105,000 1,347,191
Granted ($12.01-$22.26 per share)...... 192,084 9,000 105,000 306,084
Exercised ($3.88-$10.09 per share)..... (243,923) (5,502) - (249,425)
Expired................................ (98,995) - - (98,995)
--------------------------------------------------------------
Options outstanding at August 31, 1996 1,061,849 33,006 210,000 1,304,855
==============================================================
Options exercisable August 31, 1996
($6.67 - $15.59 per share)............. 275,509 33,006 26,250 334,765
===============================================================
</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 lesser of 10% of an employee's annual compensation or $25,000. Shares of
common stock issued under this plan were 64,703, 67,746 and 71,375 in 1996,
1995 and 1994, respectively.
On September 1, 1994, a Restricted Stock Option for 105,000 shares of common
stock was granted to and exercised by an officer of the Company. The exercise
price was 90% of the 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
All acquisitions have been accounted for as purchases and operations of the
companies acquired have been included in the accompanying consolidated
financial statements from their respective dates of acquisition. The excess of
purchase price over fair value of identifiable assets and liabilities acquired
is included as goodwill. Certain of the purchase agreements provide for
contingent payments based on certain operating results for periods ranging from
one to five years from date of acquisition.
On May 31, 1996 the Company acquired all of the outstanding capital stock of
Advanced Marine Enterprises, Inc. (AME). AME provides naval architectural and
marine engineering services to primarily U.S. Government clients. The initial
purchase price of approximately $17.5 million consisted of $15.1 million in
cash and 108,066 shares of the Company's stock valued at $2.4 million. The
resulting goodwill of approximately $12.5 million is being amortized using the
straight line method over fifteen years.
The following unaudited pro forma summary presents information as if all the
acquisitions had occurred at the beginning of each fiscal year presented. The
pro forma information is presented for informational purposes only. It is based
on historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results
of operations of the combined companies.
Years ended August 31,
1996 1995
(unaudited)
---------------------------------------------
(amounts in thousands, except per share data)
Revenues...................................$ 270,179 $ 212,222
Net income................................. 9,830 7,777
Earnings per share.........................$ .92 $ .81
NOTE 10 - INVESTMENT IN AFFILIATES
In December 1994, the Company acquired a 19.9% interest in TXEN, Inc., an
information systems and services company in the managed care industry. The
Company paid approximately $1.5 million and holds an option to acquire the
remaining shares beginning in July 1997. 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, 1996.
An officer of the Company holds a 4.5% interest in TXEN, Inc. and would be
beneficially impacted if the Company exercises its option.
During 1996, the Company purchased 1,425 shares of Preferred Stock of
HealthGate Data Corporation (HealthGate) for approximately $2.0 million.
HealthGate provides a biomedical and health information system on the World
Wide Web. The 1,425 shares of Preferred Stock are convertible to approximately
20% of the common stock on a fully diluted basis.
In January 1996, the Company invested approximately $750,000 for 50%
interest in a joint venture, HealthShare, L.L.C. HealthShare's mission is to
provide an integrated information system and support services that enhance the
quality and efficiency of healthcare at a reduced cost.
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating Earnings
Revenues Profit Net Income Per Share
--------------------------------------------------
(amounts in thousands, except per share data)
Year ended August 31, 1996
First Quarter $ 49,030 $ 2,938 $ 2,014 $ 0.20
Second Quarter 49,003 3,093 2,051 0.21
Third Quarter 55,169 3,557 2,376 0.23
Fourth Quarter 89,106 4,772 2,951 0.28
Year ended August 31, 1995
First Quarter $ 36,231 $ 2,270 $ 1,628 $ 0.18
Second Quarter 36,174 2,296 1,676 0.18
Third Quarter 44,444 2,470 1,829 0.19
Fourth Quarter 53,482 2,794 2,069 0.21
Second and third quarter operating profit for the year ended August 31, 1995
were adjusted from the amounts reported in Form 10-Q by $8,000 and $57,000,
respectively, to reflect the effect of reporting interest expense as other
expense.
<PAGE>
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, 1996, 1995 and 1994, 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, 1996, 1995 and 1994, 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 9, 1996
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under "Election of Directors" on pages 3
through 5 of Nichols Research Corporation Proxy Statement relative to the
Annual Meeting of Shareholders to be held January 9, 1997, is incorporated by
reference in this Form 10-K Annual Report. Information regarding delinquent
Form 3, 4 or 5 filers appearing under "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 14 of the Nichols Research Corporation Proxy
Statement relative to the Annual Meeting of Shareholders to be held January 9,
1997, is incorporated by reference in this Form 10-K Annual Report. Information
relating to the executive officers of the Company as of August 31, 1996, is set
forth on pages 14 through 15 of this Form 10-K Annual Report. Officers serve
at the discretion of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Executive Compensation" on pages 6
through 13 of the Nichols Research Corporation Proxy Statement relative to the
Annual Meeting of Shareholders to be held January 9, 1997, is incorporated by
reference in this Form 10-K Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under "Common Stock Outstanding and Principal
Shareholders" on pages 1 through 3 of the Nichols Research Corporation Proxy
Statement relative to the Annual Meeting of Shareholders to be held January 9,
1997, is incorporated by reference in this Form 10-K Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under "Certain Relationships and Related
Transactions" on page 14 of the Nichols Research Corporation Proxy Statement
relative to the Annual Meeting of Shareholders to be held January 9, 1997, is
incorporated by reference in this Form 10-K Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The financial statements and other financial information of Nichols
Research Corporation set forth below and the Report of Independent Auditors
thereon are incorporated by reference from pages 22 through 35 of this Form
10-K Annual Report:
Consolidated Balance Sheets at August 31, 1996, 1995, and 1994
Consolidated Statements of Income for the three years ended August 31,
1996
Consolidated Statements of Stockholder's Equity for the three years
ended August 31, 1996
Consolidated Statements of Cash Flows for the three years ended August
31, 1996
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Selected Quarterly Financial Data
(2) All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits:
EXHIBIT NUMBER
AND METHOD OF
FILING REFERENCE DESCRIPTION
2.1 L Stock Purchase Agreement dated May 31, 1996, between Regis-
trant and the shareholders of Advanced Marine Enterprises,
Inc.
3.1 M Certificate of Incorporation and Amendment thereto.
3.2 K By-laws and Amendments thereto.
4.0 D Specimen Stock Certificate.
10.1 J Lease Agreement dated August 26, 1993, between Registrant,
as Lessee, and Parkway Properties I, as Lessor, for office
space on Nichols Drive in Huntsville, Alabama.
10.2 B&C Employee Incentive Stock Option Plan of Registrant,
together with amendments thereto.*
10.3 B Performance Bonus Plan of Registrant dated July 1, 1986.*
10.4 D&F Non-Employee Officer and Director Stock Option Plan of
Registrant.*
10.5 D&I 1988 Employees' Stock Purchase Plan of Registrant and
Amendments Number One and Two thereto.*
10.6 J Lease dated February 18, 1992, between Parkway Properties
II, as Lessor, and Registrant, as Lessee, for office space
located at 4035 Chris Drive, Huntsville, Alabama, together
with exhibits.
10.7 A Lease dated January 25, 1996, between High Tech Properties,
as Lessor, and Registrant, as Lessee, for office space
located at 1900 Golf Road, Huntsville, Alabama, together
with exhibits.
10.8 E Nichols Research Corporation 1989 Incentive Stock Option
Plan.*
10.9 J Credit Agreement dated February 9, 1994, between the Regis-
trant and SouthTrust Bank relating to a $22,000,000 revolv-
ing line of credit and a $5,771,000 term loan.
10.10 G Nichols Research Corporation 1991 Stock Option Plan.*
10.11 H Amendments Three and Four to the 1988 Employees' Stock Pur-
chase Plan of Registrant.*
10.12 H Amendment to Non-Employee Officer and Director Stock Option
Plan of Registrant.*
10.13 H Amendment to 1989 Incentive Stock Option Plan of
Registrant.*
10.14 J Amendment Number Five to the 1988 Employees' Stock
Purchase Plan of Registrant.*
10.15 J Amendment Number Two to the Non-Employee Officer and
Director Stock Option Plan of Registrant.*
10.16 J Amendment Number One to the 1991 Stock Option Plan of
Registrant.*
10.17 K Amendments Two & Three to the 1991 Stock Option Plan of
Registrant.*
10.18 K Credit Agreement dated August 16, 1995, between the
Registrant, SouthTrust Bank of Alabama, NA, First
Alabama Bank, and Corestates Bank, NA.
10.19 K Lease dated July 31, 1995, between Parkway Properties, as
Lessor, and Registrant, as Lessee, for office space
located at 1910 Nichols Drive, Huntsville, Alabama.
10.20 K Employment Agreement dated May 16, 1995, between
Registrant and John A. Conway, Jr.*
10.21 K Employment Agreement dated June 30, 1995, between
Registrant and Donald Y. Menendez.*
10.22 K Employment Agreement dated August 24, 1995, and Amendment
thereto between Registrant and D. Bruce McIndoe.*
10.23 K Convertible Preferred Stock Purchase Agreement dated
December 16, 1994, between Registrant and TXEN, Inc.
10.24 K Stock Purchase Option Agreement dated December 16, 1994,
among Registrant, TXEN, Inc. and shareholders of TXEN, Inc.
10.25 K Restricted Stock Purchase Agreement dated September 1, 1994
between Registrant and Michael J. Mruz.*
10.26 M Amendment Number One to Stock Purchase Option Agreement
among Registrant, TXEN, Inc., and the shareholders of TXEN,
Inc. dated July 16, 1996.
10.27 M Amendment Number One to Convertible Stock Purchase Agree-
ment between Registrant and TXEN, Inc., dated July 16,
1996.
10.28 L Employment Agreement dated May 31, 1996, between Advanced
Marine Enterprises, Inc., and John T. Drewry.*
10.29 L Employment Agreement dated May 31, 1996, between Advanced
Marine Enterprises, Inc., and Otto P. Jons.*
11 A Computation of Earnings Per Share.
21 A Subsidiaries of Registrant.
23 A Consent of Ernst & Young LLP, Independent Auditors.
27 A Financial Data Schedule.
99.1 A Consent of Thomas L. Patterson.
__________________
A Filed herewith.
B Incorporated by reference to exhibits filed with the Com-
pany's registration statement on Form S-1 under the
Securities Act of 1933, File No. 33-10323.
C Incorporated by reference to exhibits filed with the Com-
pany's registration statement on Form S-8 under the
Securities Act of 1933, File No. 33-13464.
D Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year
ended August 31, 1989, under the Securities Exchange Act of
1934.
E Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year ended
August 31, 1990, under the Securities Exchange Act of 1934.
F Incorporated by reference to exhibits filed with the Com-
pany's registration statement on Form S-8 under the
Securities Act of 1933, File No. 33-38568.
G Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year
ended August 31, 1992, under the Securities Exchange Act of
1934.
H Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year ended
August 31, 1993, under the Securities Exchange Act of 1934.
I Incorporated by reference to exhibits filed with the Com-
pany's registration statement on Form S-8 under the Securi-
ties Act of 1933, File No. 33-26909.
J Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year ended
August 31, 1994, under the Securities Exchange Act of 1934.
K Incorporated by reference to exhibits filed with the Com-
pany's Annual Report on Form 10-K for the fiscal year ended
ended August 31, 1995, under the Securities Exchange Act of
1934.
L Incorporated by reference to exhibits filed with the Com-
pany's Current Report on Form 8-K dated May 31, 1996, as
amended, under the Securities Exchange Act of 1934.
M Incorporated by reference to exhibits filed with the Com-
pany's registration statement on Form S-3 under the Securi-
ties Act of 1933, File No. 333-08787.
* Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.
(b) Form 8-K. A Current Report on Form 8-K dated May 31, 1996,
reporting the Registrant's acquisition of Advanced Marine
Enterprises, Inc. (AME), was filed with the Commission on
June 17, 1996. An Amendment to that Form 8-K was filed
with the Commission on July 24, 1996, to file the financial
statements and pro forma financial information of AME.
(c) Exhibits. The response to this portion of Item 14 is sub-
mitted as a separate section of this report.
(d) Financial Statement Schedules. The response to this portion
of Item 14 is submitted as a separate section of this
report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
by the undersigned, thereunto duly authorized.
NICHOLS RESEARCH CORPORATION
Chris H. Horgen
NOVEMBER 25, 1996 -----------------------------
Chris H. Horgen
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
Chris H. Horgen
- ------------------------ Chief Executive Officer November 25, 1996
Chris H. Horgen and Chairmain of the Board
(Prinicipal Executive
Officer)
Michael J. Mruz
- ------------------------ President, Chief Operating November 25, 1996
Michael J. Mruz Officer and Director
Patsy L. Hattox
- ------------------------ Vice President, Chief November 25, 1996
Patsy L. Hattox Administrative Officer,
Secretary and Director
Roy J. Nichols
- ------------------------ Senior Vice President November 25, 1996
Roy J. Nichols and Director
- ------------------------ Director
Roger P. Heinisch
John R. Wynn
- ------------------------ Director November 25, 1996
John R. Wynn
- ------------------------ Director
William E. Odom
James R. Thompson, Jr.
- ------------------------ Director November 25, 1996
James R. Thompson, Jr.
- ------------------------ Director
Phil E. Depoy
- ------------------------ Director
Robert W. Hager
Allen E. Dillard
- ------------------------ Chief Financial Officer November 25, 1996
Allen E. Dillard and Corporate Treasurer
(Principal Financial and
Accounting Officer)
STATE OF ALABAMA
MADISON COUNTY
LEASE
THIS LEASE made, entered into and executed, in duplicate on this the 25th day
of January, 1996 by and between HIGH TECH PROPERTIES hereinafter referred to as
LANDLORD, which expression shall include the successors and assigns of the
LANDLORD, and NICHOLS RESEARCH CORPORATION hereinafter referred to as TENANT
which expression shall include the successors, heirs, executors, administrators
and assigns of the TENANT.
WITNESSETH, that
LANDLORD is the owner of, or otherwise has a good and lawful right to lease,
let and demise the following described premises, situated in Huntsville,
Madison County, Alabama, (hereinafter referred to as the demised premises), to-
wit:
KNOWN AS THAT CERTAIN BUILDING LOCATED AT 1900 GOLF ROAD,
HUNTSVILLE, AL 35802 AND CONSISTING OF APPROXIMATELY
17,850 SQUARE FEET.
LANDLORD has agreed and, subject to the covenants, terms and conditions
hereinafter set forth, does hereby lease, let and demise the premises above
described unto TENANT, and TENANT does hereby rent said premises from LANDLORD
upon said covenants, terms and conditions.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter made, the LANDLORD hereby leases to TENANT, and TENANT
hires from LANDLORD, the demised premises above described for us as:
1. TERM AND RENT. This lease is for a term of 5 years, beginning on the 1st
day of January, 1996, and ending on the 31st day of December, 2000. The total
rent is to be $669,375.00 ($11,156.25 ) Dollars per month, due on the FIRST day
of each month in advance and considered delinquent after the fifth day of each
month. LANDLORD covenants to keep the TENANT in possession of the premises for
the term of this lease, subject to the terms and conditions herein, in
consideration whereof TENANT agrees to pay the rent as hereinabove specified
at the place designated by LANDLORD. (If TENANT shall take possession on the
day other than the first day of the month, the first month's rent shall be
prorated.) In the event that the TENANT holds over for more that one day
after expiration of the term of this lease without the consent of the LANDLORD,
the LANDLORD may, at its option, deem such holdover a renewal of this lease for
an addition term of one year under the same terms covenants and conditions
thereof, except rent, or the LANDLORD may take such steps as may be required
to remove TENANT from the leased property. In the event LANDLORD shall deem
holdover by TENANT a renewal of this lease, rent for the renewal terms shall be
the rent charged for the initial term increased by the same percentage as the
consumer price index has increased since the date this lease was originally
executed.
2. CONDITION AND MAINTENANCE OF PREMISES. LANDLORD represents that insofar as
it can reasonably ascertain, the demised premises at the time of the
commencement of the TENANT'S obligation to pay rent hereunder will be in first
class tenantable condition with no broken glass and heating and air conditions
plant, plumbing, wiring, and all other apparatus or fixtures in good working
condition. The LANDLORD will, at LANDLORD'S expense, property maintain the
exterior of said building, parking areas, and adjacent side walks and make at
LANDLORD'S expense, all structural and all exterior repairs, including all
repairs to roof, walls and window frames in the building necessary or required
to maintain the demised premises in such condition during the term of this
lease or any extension thereof, and will maintain and repair the heating and
air conditioning system (provided, however, that where any such repairs, those
caused by fire or other insurable casualty, are made necessary by or as a
result of the voluntary waste, negligence, or abusive conduct of the TENANT or
of any person for whose conduct the TENANT is legally responsible, the TENANT
shall forthwith reimburse the LANDLORD for the expense of any and all such
repairs). LANDLORD shall make all interior repairs necessary or required by
any act, omission, negligence or misconduct of the Landlord or of any person
for whose conduct the LANDLORD is responsible. The LANDLORD further covenants
to save the TENANT harmless and indemnified from all injury, loss or damage to
any person or property, all liability incurred, suffered or claimed by reason
of the LANDLORD'S neglect or failure to observe and perform the terms,
covenants and conditions or any of them, in this paragraph contained and on the
part of the LESSOR to be performed and observed.
3. COMPLIANCE WITH THE LAW. The TENANT in its use and occupancy of the
premises will comply with all local, state and federal laws and ordinances
applicable thereto, as well as the lawful requirements of all competent
authorities; the TENANT will not knowingly permit said premises to be used for
any unlawful, improper or offensive purpose. The TENANT agrees to comply with
all reasonable rules and regulations for said building as may hereafter be
adopted by LANDLORD and TENANT agrees to require TENANT'S employees and
invitees when on the premises to comply with said rules and regulations.
4. TENANT'S DUTY TO KEEP PREMISES IN REPAIR. Subject to the duties of the
LANDLORD as provided herein, the TENANT will keep all and singular the said
leased premises in such repair as the same are at the commencement of the said
term or may be put in by the LANDLORD during the continuance thereof, damage
due to reasonable wear and tear and damage by negligent acts or omissions of
the LANDLORD being excepted. promptly replace all glass broken by TENANT during
the said term by other of the same size and quality, damage by fire or other
casualty excepted.
5. INSURANCE (LIABILITY). During the lease term, TENANT shall, at its own
expense, maintain in full force a policy or policies of comprehensive liability
TENANT will insurance, written by one or more responsible insurance companies
licensed to do business in the State of Alabama, that will insure against
liability for injury to persons and property and for death of any person
occurring in or about the Leased Premises.
The liability under such insurance shall not be less than Three Hundred
Thousand and no/100 ($300,000.00) Dollars for any one person injured or killed,
not less than Five Hundred Thousand and no/100 ($500,000.00) Dollars for any
one accident, and not less than Twenty Five Thousand and no/100 ($25,000.00)
Dollars for property damage.
6. INSURANCE (HAZARD). LANDLORD shall keep the building (including all
improvements, alterations, additions and changes made thereto by LANDLORD)
insured against damage or destruction by fire and the perils commonly covered
under the extended coverage endorsement to the extent of ninety percent (90%)
of the full insurable value thereof; the proceeds of such policy or policies
shall be used for the repair of the Leased Premises.
7. TENANT'S EMPLOYEES AND INVITEES. TENANT is responsible for the acts and
conduct of TENANT'S employees and invitees while in or about the leased
premises insofar as such acts and conduct result in physical damage to said
premises and TENANT is liable for such damage done them to the same extent as
if done by the TENANT.
8. UTILITIES. The TENANT, at TENANT'S expense, shall pay all utility meter
deposit fees and such sewer service and such utilities (including but not
limiting same to water, electric current and gas) throughout the term hereof as
Tenant requires for operation and occupancy of Leased Premises.
9. JANITORIAL SERVICE. The TENANT, at TENANT'S expense, shall furnish to the
Leased Premises, janitorial services sufficient to maintain the building in a
clean and sanitary condition.
10. LANDLORD RIGHT OF ENTRY. LANDLORD shall have the right at all times to
enter said leased premises to inspect same and may at any time remove placards,
sign, fixtures, alterations or additions not in conformity with this lease and
may make such repairs and alterations as with this lease and may make such
repairs and alteration as may be deemed by the LANDLORD necessary to the
preservations of leased premises or the building; the LANDLORD is not required
to repair the premises leased herein except as specifically provided in the
lease.
11. PREMISES UNFIT FOR USE, EMINENT DOMAIN, FIRE. It is agree that if the
leased premises, or any part thereof or the whole or any part of the buildings
of which they are a part, shall be taken for any street or other public use
under any statute by right of eminent domain or shall be destroyed or damaged
by fire or other casualty (under circumstances where such fire or other
casualty was not caused by a negligent act of omissions of the TENANT or its
agents, servants or employees) so as to be thereby unfit for use, then, and in
such case the rent hereinabove reserved, or a just proportion thereof,
according to the nature and extent of the damage sustained by the leased
premises shall be abated until the leased premises shall have been fully
repaired or restored by the LANDLORD. In the event of such damage or
destruction or taking TENANT may, however, elect to terminate this lease in its
entirety if LANDLORD is unable or unwilling to repair or to restore the demised
premises to tenantable condition for the use of the TENANT within thirty (30)
days of the date of such taking, damage or destruction. In the event of any
such taking for public use as hereinabove referred to, or damage or destruction
of the premises for which restitution is to be make, whether all or any part of
the demised premises be taken, damaged or destroyed, nothing herein shall
preclude the TENANT from intervening in any condemnation proceedings involving
the demised premises and from taking appropriate legal steps to prove its
damage which might result from the taking, damage or destruction.
12. TAXES AND LICENSES.
(a) TENANT to Pay Personal Property Taxes. TENANT agrees to pay all taxes
levied upon personal property not owned by LANDLORD and kept or stored on the
Leases Premises by TENANT.
(b) LANDLORD to Pay Real Property Taxes and Assessments. LANDLORD shall pay
all taxes and assessments lived against the land, building and improvements
other than for the personal property of TENANT.
13. ASSIGNMENT. TENANT will not assign this lease, or sublease the premises,
or any portion thereof, or permit any transfer thereof by operation of law,
without the written consent of the LANDLORD first obtained, which consent
shall not be unreasonable withheld.
14. ALTERATIONS OF LEASED PREMISES; FIXTURES; SIGNS.
(a) Alterations. TENANT shall not make any structural changes or alterations
in or to any part of the building, or to the Leased Premises, except upon the
prior written consent of the LANDLORD, which consent shall not be unreasonable
withheld. Notwithstanding the foregoing, the parties agree that TENANT may,
from time to time without the approval of LANDLORD, make at TENANT'S expense,
alterations to the interior of the Leased Premises provided the same do not
materially diminish the value of the Leased Premises.
(b) Fixtures. TENANT may install and affix to the Leased Premises such
fixtures and equipment as TENANT deems desirable and all such fixtures and
equipment shall remain the property of TENANT and may be removed at any time
provided that TENANT, at its expense, shall repair any damage caused by reason
of such removal.
(c) Signs and Advertisements. TENANT shall not attach any sign to the
exterior of the leased premises unless the design nature and content thereof
have been approved by LANDLORD. The TENANT shall at its expense maintain and
repair any such sign and may upon the expiration of the term of the Lease or
any renewal thereof, remove said signs.
15. CARE OF LEASED PREMISES. TENANT shall not permit allow or cause any act
or deed to be performed or any practice to be adopted or followed in or about
said Leased Premises which shall cause, or be likely to cause, injury or damage
to any person, or to said Leased Premises, or to the building, or to the
sidewalks and pavements adjoining the Leased Premises. TENANT, at all times,
shall keep said Leased Premises in a neat and orderly condition. TENANT agrees
to permit no waste of the property but to take good care of the same.
16. DAMAGE OR LOSS OF PROPERTY. LANDLORD shall not be liable for any loss of
any property of the TENANT from said Leased Premises, or for any damage to any
property of the TENANT, however, occurring, except only such damage in the
latter instance as may result directly from the failure of LANDLORD to perform
any act required of him under the terms and conditions of this Lease.
17. QUIET ENJOYMENT. The LANDLORD covenants that the TENANT upon paying rent,
herein specified and observing the covenants hereof, shall peaceable and
quietly have, hold and enjoy the demised premises during the term hereof and
any extensions thereto, and at all time when the TENANT may hereafter be a
TENANT at will of said premises.
18. SURRENDER OF PREMISES. The TENANT shall, at the expiration of said term,
or any extension thereof, peaceable yield up to the LANDLORD the demised
premises and all additions made upon the same by the LANDLORD, in as good
repair in all respects as the same now are or may be hereafter put in the
LANDLORD, damage by fire, or other casualty caused by negligent acts or
omissions of the LANDLORD and reasonable wear and tear excepted.
19. PERSONAL INJURY. As a part of the consideration hereof the TENANT hereby
covenants and agrees to hold the LANDLORD, its agents and employees free and
harmless and indemnified from any and all liability for claims or suits for
damages, for personal injury or death, sustained by TENANT, or sustained by any
other person, while on the leased premises during the terms of this lease as
the result of the negligence of the TENANT, or of its servants, agents or
employees, acting within the line and scope of their authority. LANDLORD
hereby covenants and agrees to hold the TENANT, its agents and employees free
and harmless and indemnified from any and all liability for claims or suits for
damages for personal injury or death, sustained by TENANT or sustained by any
employee, invitee or guest of TENANT while on the premises of the LANDLORD,
during the term of this lease, as the result of the negligence of the LANDLORD
or its servants, agents or employees, acting within the line and scope of their
authority. Said indemnity by each party shall include all reasonable
attorney's fees and other expenses and Court costs connected therewith.
20. DEFAULT BY TENANT. Landlord shall have the right to terminate this lease
upon the following listed defaults by TENANT and shall be entitled to elect to
collect periodic damages or total damages as follows:
a. The occurrence of any of the following shall constitute an event of
default:
(1) Delinquency in the due and punctual payment of any rent or additional rent
payable under this period of five days after written notice.
(2) Delinquency by the Tenant in the performance of or compliance with any of
the conditions contained in this lease other than those referred to in the
foregoing subparagraph (1), for a period of thirty (30) days after written
notice thereof from the LANDLORD to the TENANT, except for any such 30 day
period, in which event the time permitted to the TENANT to cure such default,
provided the TENANT commences promptly and proceeds diligently to cure such
default, and provide further that such period of time shall not be so extended
as to jeopardize the interest of the LANDLORD or the TENANT to any civil or
criminal liabilities.
(3) Filing by the TENANT in any court pursuant to any statue, either of the
United States or any state, or a petition in bankruptcy or insolvency, or for
reorganization, or for the appointment of a receiver or trustee of all or a
portion of the TENANT'S property or an assignment by the TENANT for the benefit
of creditors.
(4) Filing against the TENANT in any court pursuant to any statue, either of
the United States or of any state, of a petition in bankruptcy or insolvency,
or for reorganization or for appointment of a receiver or trustee of all or a
portion of the TENANT'S property, if within ninety (90) days after the
commencement of any such proceeding against the TENANT such petition shall not
have been dismissed.
b. Upon the occurrence of an event of default, the LANDLORD at any time
thereafter may give written notice to the TENANT specifying such event of
default and stating that this lease shall expire on the date specified in such
notice, and upon the date specified in such notice this lease and all rights of
the TENANT hereunder shall terminate.
c. Upon the expiration of this lease pursuant to paragraph (b) of this
article, the TENANT shall peacefully surrender the demised property to the
LANDLORD, and the LANDLORD, upon or at any time after any such expiration, may
without further notice reenter the leased property and repossess it by force,
summary proceedings ejectment, or otherwise, and may dispossess the TENANT and
remove the TENANT and all other persons and property from the leased property
and may have, hold, and enjoy the leased property including the right to
receive all rental income therefrom.
d. At any time after any such expiration, the LANDLORD may relet the demised
premises or any part thereof, in the name of the LANDLORD or otherwise, for
such term (which may be greater of less of the term of this lease) and on such
conditions (which may include concessions or free rent) as the LANDLORD, in its
uncontrolled discretion, may determine, and may collect and receive the rent
therefor. The landlord shall in no way be responsible or liable for any
failure to relet the leased property or any part thereof, or any failure to
collect any rent due upon any such reletting.
e. No such expiration of this lease shall relive the TENANT of its liability
and obligations under this lease, and such liability and obligations, shall
survive any such expiration. In the event of any such expiration, whether or
not the demised premises or any part the rent and additional rent required to
be paid by the TENANT up to the time of such expiration, and thereafter the
TENANT, until the such expiration, shall be liable to the LANDLORD for, and
shall pay to the LANDLORD as and for liquidated and agreed current damages for
the TENANT'S default:
(1) The equivalent of the amount of the rent and additional rent which would
be payable under this lease by the TENANT if this lease were still in effect,
less
(2) The net proceeds of any reletting effected pursuant to the provisions of
paragraph (d) of this article, after deducting all the LANDLORD'S expenses in
connection with such reletting, including without limitation, all repossession
cost, brokerage commissions, legal expenses, reasonable attorneys' fees,
alteration costs, and expenses of preparation for such reletting.
f. Then TENANT shall pay such current damages, herein called deficiency, to
the LANDLORD monthly on the days on which the rent and additional rent would
have been payable under this lease if this lease were still in effect, and the
LANDLORD shall be entitled to recover from the TENANT each monthly deficiency,
as such deficiency shall arise. At any time after any such expiration, whether
or not the LANDLORD shall have collected any monthly deficiency, the LANDLORD
shall be entitled to recover from the TENANT, and the TENANT shall pay to the
LANDLORD, on demand, as and for liquidated and agreed final damages for the
TENANT'S default, an amount equal to the difference between the rent and
additional rent reserved hereunder for the unexpired portion of the lease term
and then fair and reasonable rental value of the leased property for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and
the fair and reasonable rental value of the leased property for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent per annum. If the leased property or
any part therof is relet by the LANDLORD for the unexpired term of this lease,
or any part thereof, before presentation of proof of such liquidated damages to
any court, commission, or tribunal, the amount of rent reserved upon such
reletting shall be deemed prima facie to be the fair and reasonable rental
value for the part or the whole of the leased property so relet during the term
of the reletting. Nothing herein contained shall limit or prejudice the right
of the LANDLORD to prove for and obtain as liquidated damages by reason of such
termination an amount equal to the maximum allowed by any statute or rule of
law in effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal to, or
less than the amount of the difference referred to above.
g. The TENANT hereby expressly waives, so far as permitted by law, the service
of any notice of intention to reenter provided for in any statue, or of the
institution of legal proceedings to that end. The TENANT, for and on behalf of
itself and all persons claiming through or under the TENANT, also waive any
right of redemption or reentry or repossession or to restore the operation of
this lease in case the TENANT shall be dispossessed by a judgment or by warrant
of any court or judge or in case of reentry or repossession by the LANDLORD.
h. The terms "enter", "reenter", "entry", or "reentry", as used in this lease
are not restricted to their technical legal meaning.
i. In the event a civil action shall be brought for recovery of possession of
the demised premises or for the recovery of any rent due under the provisions
of this lease, or because of the breach of any other covenant herein contained,
on the part of TENANT to be kept or performed, TENANT shall pay to LANDLORD a
reasonable attorney's fee which shall be fixed by the Court.
21. NOTICES.
All notices hereunder shall be served by certified mail, and if intended for
the LANDLORD shall be addressed to the LANDLORD (HIGH TECH PROPERTIES) at the
following address:
C/O L & H PROPERTIES
1900 GOLF ROAD, SUITE B
HUNTSVILLE, AL 35802
and if intended for the TENANT shall be addressed to the demised premises or to
such other address as may be requested by the LANDLORD or TENANT in writing.
22. WAIVER.
No assent, express or implied, by the LANDLORD to any breach of any of the
TENANT covenant, or by the TENANT to any breach of the LANDLORD'S covenants
shall be deemed to be a waiver of any succeeding breach of the same covenant.
23. ADDITIONAL PROVISIONS.
1. NRC has the option to terminate the lease at the end of the 2nd Anniversary
Year by giving a 6 month written notice and paying $17,850.00 penalty.
2. NRC has the option to terminate the lease at the end of the 3rd Anniversary
Year by giving a 6 month written notice and paying $13,387.50 penalty.
3. NRC has the option to renew the lease for 1 additional year, based on the
same terms and conditions as the original lease.
24. COMPLETE AGREEMENT.
The LANDLORD and TENANT further covenant with each other that all covenants,
agreements, and representations relating to the premises or any part therof,
whether oral or written, made by an between the parties, either personally or
by their authorized agents, prior to the execution and acceptance hereof, be
deemed to have been fully performed and discharged; that each of the parties
hereto has read and understood this lease; and that all prior covenants and
agreements, so far as they have any force and validity, have been included
herein.
Feminine and neuter pronouns may be substituted for those of the masculine
form, and the plural form may be substituted for the singular number, in any
place herein where the context may require substitution.
IN WITNESS WHEREOF, the LANDLORD and TENANT have executed this lease on the
date first above written.
LANDLORD TENANT
R. H. Latham Allen E. Dillard
By:_______________________________ By:____________________________________
R. H. Latham Allen E. Dillard
WITNESS FOR LANDLORD WITNESS FOR TENANT
Paula J. Stotts Patti M. Prince
- ---------------------------------- ---------------------------------------
NICHOLS RESEARCH CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------
Primary: 1994 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 6,054,503 6,112,576 6,443,489
Net common shares issuable on exercise of 150,806 166,533 382,310
certain stock options (1)
--------------------------------------------
Average common and common equivalent shares 6,205,309 6,279,109 6,825,799
outstanding
============================================
Net income $6,506,000 $7,202,000 $9,392,112
============================================
Per share amount $1.05 $1.15 $1.38
============================================
</TABLE>
(1) Net common shares issuable on exercise of certain stock options is
calculated based upon the treasury stock method using the average market price.
SUBSIDIARIES OF REGISTRANT
State of
Name of Subsidiary Incorporation
------------------ -------------
1) Communications Systems & Specialists, Inc. Delaware
2) Computer Services Corporation Alabama
3) NRC Technical Services Corporation Alabama
4) Conway Computer Group, Inc. Alabama
5) Advanced Marine Enterprises, Inc. Virginia
Consent of Independent Auditors
We consent to the inclusion in this Annual Report (Form 10-K) of Nichols
Research Corporation of our report dated October 9, 1996, included in the 1996
Annual Report to Shareholders of Nichols Research Corporation.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-13464) pertaining to the Nichols Research Corporation 1984
Incentive Stock Option Plan and in the related Prospectus of our report dated
October 9, 1996, with respect to the consolidated financial statements of
Nichols Research Corporation included in this Annual Report Form 10-K for the
year ended August 31, 1996.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-26909) pertaining to the Nichols Research Corporation 1988
Employees Stock Purchase Plan and in the related Prospectus of our report
dated October 9, 1996, with respect to the consolidated financial statements
of Nichols Research Corporation included in this Annual Report on Form 10-K for
the year ended August 31, 1996.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38568) pertaining to the Nichols Research Corporation Non-
Employees Officer and Director Stock Option Plan and in the related Prospectus
of our report dated October 9, 1996, with respect to the consolidated financial
statements of Nichols Research Corporation included in this Annual Report on
Form 10-K for the year ended August 31, 1996.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-44409) pertaining to the Nichols Research Corporation 1989
Incentive Stock Option Plan and in the related Prospectus of our report dated
October 9, 1996, with respect to the consolidated financial statements of
Nichols Research Corporation included in this Annual Report on Form 10-K for
the year ended August 31, 1996.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-55454) pertaining to the Nichols Research Corporation 1991
Stock Option Plan and in the related Prospectus of our report dated October
9, 1996, with respect to the consolidated financial statements of Nichols
Research Corporation included in this Annual Report on Form 10-K for the year
ended August 31, 1996.
Ernst & Young LLP
Birmingham, Alabama
November 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000806388
<NAME> NICHOLS RESEARCH CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 21,419
<SECURITIES> 0
<RECEIVABLES> 90,232
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 115,554
<PP&E> 29,868
<DEPRECIATION> 14,721
<TOTAL-ASSETS> 161,964
<CURRENT-LIABILITIES> 42,879
<BONDS> 4,784
0
0
<COMMON> 117
<OTHER-SE> 112,844
<TOTAL-LIABILITY-AND-EQUITY> 161,964
<SALES> 242,308
<TOTAL-REVENUES> 242,308
<CGS> 205,798
<TOTAL-COSTS> 205,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> 14,744
<INCOME-TAX> 5,352
<INCOME-CONTINUING> 9,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,392
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
</TABLE>
CONSENT
-------
I, the undersigned, hereby consent to being named as nominee to the
Nichols Research Corporation Board of Directors in the Proxy Statement
relative to the Annual Meeting of Shareholders to be held January 9, 1997,
and hereby consent to serve as a director of Nichols Research Corporation,
if elected.
Dated this 14th day of November, 1996.
Thomas L. Patterson
__________________________________
Thomas L. Patterson
