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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, 1998.
( ) 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4090 South Memorial Parkway
Huntsville, Alabama 35815-1502
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(Address of principal executive offices) (Zip Code)
The registrant's telephone number including area code: (256) 883-1140
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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. [ ]
As of November 3, 1998, there were 13,854,932 shares outstanding of
Nichols Research Corporation voting Common Stock, $.01 par value. The aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $225,938,622 based on the closing price of such stock as reported
by the Nasdaq National Market on November 3, 1998, 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
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Portions of the Proxy Statement for the January 14, 1999 Part III
Annual Shareholders' Meeting
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Except for historical information contained herein, this document contains
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. These risks and uncertainties are
discussed in more detail in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of this Annual Report.
These forward-looking statements can be generally identified as such because the
content of the statements will usually contain such words as the Company or
management "believes," "anticipates," "expects," "plans," or words of similar
import. Similarly, statements that describe the Company's future plans,
objectives, goals, or strategies are forward-looking statements.
PART I
ITEM 1. BUSINESS
General
References herein to the "Company" mean Nichols Research Corporation
and its majority-owned subsidiaries and joint ventures.
The Company is a premier provider of high-performance technology-based
solutions and services where information access, movement, and evaluation are
mission critical to an organization's success. The Company provides these
services to a wide range of clients, in four markets: national security,
government information technology (IT), commercial IT, and healthcare IT. The
Company's substantial expertise and capabilities in a wide range of technologies
have been built over a 22-year period of providing advanced development,
scientific and application services to U.S. military programs, including air
defense systems, national 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 systems engineering; command,
control, communication, computers and intelligence (C4I) systems; virtual
reality-based training systems; test and evaluation; naval architecture; high
performance systems integration; information systems support; network and
computer facility outsourcing and management software and systems development;
data warehousing and mining; and systems security. 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(TM) 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 and represented
approximately 55% of revenues in fiscal year 1998, other growing markets for the
Company's services represented approximately 45% of revenues in fiscal year
1998.
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. Therefore,
references herein to contract terms and values include options.
Business Strategy
The Company's business strategy consists of three key elements: (i)
maintain the Company's leadership in technology applications in its current
markets; (ii) apply the Company's technology base to create solutions for new
clients in chosen markets; and (iii) make strategic acquisitions and form
alliances to gain industry knowledge and thereby expand the business base of the
Company.
Maintain Technology Leadership. The Company's substantial expertise and
capabilities in a wide range of technologies have been built over a 22-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 the Company to provide high-quality, sophisticated technical solutions
to clients utilizing 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 seek to make strategic acquisitions and form alliances that will
allow the Company to (i) develop technical services which it does not currently
provide, (ii) target markets that it does not currently serve and gain industry
knowledge in such markets, (iii) develop strategic relationships with clients,
and (iv) spin-out high growth/high margin businesses.
In order to better execute its business strategy, the Company is
organized into the following four strategic business units reflecting the
particular market focus of each line of business:
Defense and Intelligence, formerly Nichols Federal, provides technical
services primarily to U.S. Government defense agencies. For the year ended
August 31, 1998, the Defense and Intelligence unit produced approximately 55% of
the Company's revenues.
Government Information Technology, formerly Nichols InfoFed, provides
information and technology solutions and services to a variety of federal, state
and local governmental agencies. For the year ended August 31, 1998, the
Government Information Technology unit produced approximately 24% of the
Company's revenues.
Commercial Information Technology, formerly Nichols InfoTec, provides
information and technology services to various commercial clients, other than
healthcare clients. For the year ended August 31, 1998, the Commercial
Information Technology unit produced approximately 10% of the Company's
revenues.
Healthcare Information Technology, formerly Nichols SELECT, provides
administrative and information services to clients in the healthcare and
insurance industries. For the year ended August 31, 1998, the Healthcare
Information Technology unit produced approximately 11% of the Company's
revenues.
Acquisitions and Alliances
Since September 1, 1994, the Company has successfully completed ten
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.
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. Effective September 23, 1996,
CSC was merged into Nichols SELECT Corporation which was subsequently renamed
Nichols TXEN Corporation.
HealthGate Data Corporation (HealthGate). In October 1995, the Company
acquired approximately 20% of HealthGate. HealthGate is a global Internet media
company which develops and provides branded, interactive health and wellness
information solutions to each of the four primary healthcare constituencies:
patients, providers, payors and suppliers.
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
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 provided an opportunity for the Company to expand
its business relationship with the U.S. Navy.
Intertech Management Group, Inc. (Intertech). During fiscal year 1997, the
Company acquired approximately 36% of the capital stock of Intertech. Intertech
provides software and data processing services to the telecommunications
industry.
NCCIM L.L.C (NCCIM). In fiscal year 1997, NCCIM, a joint venture equally
owned by the Company and Colsa Corporation, was formed and awarded a five year
contract having a value with options of $193 million. Under this contract, NCCIM
provides support services for automation, telecommunications, visual information
and records management for the U.S. Army Aviation and Missile Command and other
federal, state and local government agencies.
TXEN, Inc. (TXEN). In fiscal year 1995, the Company purchased 19.9% of
TXEN's capital stock with an option to purchase the remaining 80.1%. In August
1997, the Company exercised its option to purchase the remaining 80.1% of the
capital stock of TXEN. TXEN provides information technology products and
services to the managed healthcare industry, including computerized claims
processing and administration services. As a result of the acquisition of TXEN,
the Company enhanced its knowledge of the healthcare industry and acquired a
business base in a rapidly expanding segment of the healthcare information
services industry. TXEN was merged into Nichols SELECT Corporation, which after
the merger changed its name to Nichols TXEN Corporation.
Mnemonic Systems, Incorporated (MSI). In April 1998, the Company
acquired MSI, a systems integration company providing services primarily within
the U.S. Department of Justice. The acquisition supports the Company's
performance of information technology services for government agencies other
than the Department of Defense (DOD).
Welkin Associates, Ltd. (Welkin). In July 1998, the Company acquired
Welkin, a provider of systems engineering and acquisition management services to
the national intelligence community. The acquisition supports the Company's work
in the national intelligence community and increases the Company's presence in
the Washington D.C. area.
Defense and Intelligence
The Company's Defense and Intelligence unit provides technical services
to U.S. defense and intelligence agencies. For the year ended August 31, 1998,
the Company's Defense and Intelligence unit produced approximately 55% of the
Company's revenues.
The Company 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 trainers and simulations, naval
architecture, and C4I. These technical services are rendered primarily for the
U.S. Army, U.S. Navy, U.S. Air Force, and national agencies. 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 $63.0
million in fiscal year 1996, $76.5 million in fiscal year 1997 and $71.7 million
in fiscal year 1998. Approximately 17% of the Company's revenues in fiscal year
1998 were from contracts related to BMD, compared to 20% of revenues in fiscal
year 1997, and 26% of revenues in fiscal year 1996. Ballistic Missile Defense
has existed for more than 29 years as a mission of the 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 U.S. Air Force, and other DOD
agencies.
Missile and Air Defense
For NMD and TMD programs, the Company's services include system
architecture definition, system analysis, system and element definition and
performance estimates, system engineering, lethality and vulnerability analysis,
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 five year contract awarded in
fiscal year 1997 by the U.S. Army Space and Missile Defense Command with an
estimated value of $250 million, 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 five year contract awarded in fiscal year 1998 by the
BMDO with an estimated total value of $100 million, the Company provides system
engineering support for sensor systems.
Air Force Space Programs
Under a seven year contract awarded in fiscal year 1993 by the U.S. Air
Force Space and Missile Systems Center with an estimated total value of $100
million, the Company provides engineering, analysis, and design for satellite
and missile development programs. The Company anticipates that this contract
will be recompeted in late fiscal year 1999. 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, and develops
software for satellite tracking systems.
Military Systems and Simulations
The Company specializes in the application of information technology
for military systems and the simulation of those systems. The Company has
developed FlexTM, a modeling and simulation software product.The Company
develops user-friendly interface technologies that assist in applying
information technology for military applications.
Army Tactical Systems and Technology
The Company provides development services for U.S. 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. Under a three year contract awarded in fiscal year 1997 with an
estimated total value of $104 million, the Company provides functional
engineering support to the U.S. Army Aviation and Missile Command's (AMCOM)
Research Development and Engineering Center for missile guidance and control.
The functional engineering support includes simulation-based analysis and
technical support. The Company anticipates that this contract will be recompeted
in fiscal year 1999.
Under a four year contract awarded in fiscal year 1996 by the U.S. Army
with an estimated contract value of $20 million, the Company is producing the
Avenger Institutional Conduct of Fire Trainer (ICOFT) and the Avenger Tabletop
Trainer. These two real-time training devices are being delivered to air defense
units of the U.S. Army, U.S. Marine Corps, and to U.S. allies under the Foreign
Military Sales Program.
Under a five year contract awarded in fiscal year 1998 by the Naval
Surface Warfare Center, Crane Division, with an estimated total value of $50
million, the Company is providing development, production, installation and
field support services for various air defense systems.
Army Simulation Programs
The Company provides engineering, analysis and development services for
U.S. Army tactical and strategic systems and advanced weapons system concepts,
which support Army project offices and research and development centers. The
Company develops high-fidelity digital, hardware-in-the-loop, and virtual
reality man-in-the-loop simulations for weapon systems, which are used for
cost-effective missile concept definition, design, and analysis. Under a four
year contract awarded in fiscal year 1996 with an estimated total value of $93
million, the Company provides systems analysis, design and fabrication,
simulation and software support, system, subsystem and component test and
evaluation support, and scientific computing support to the AMCOM Research
Development and Engineering Center for missile system simulation and analysis.
The Company anticipates that this contract will be recompeted during fiscal year
1999.
The Company has used the knowledge and capabilities that it gained from
creating computer simulations, performing computer and network integrations and
developing high resolution scene generations to establish an extensive business
base in Distributive Interactive Simulation (DIS), Virtual Prototype Simulation
(VPS) and Virtual Engagement (VE) simulations. DIS, which is migrating into the
High Level Architecture (HLA), is a simulation infrastructure 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. VPS
also provides the basis for the development of system trainers. VE simulations
support the integration and testing of weapons systems by engaging real or
virtual targets using a virtual missile interceptor. The Company has developed
virtual prototype simulators for several AMCOM systems, including Bradley
Linebacker, Line-Of-Sight-Anti-Tank (LOSAT) missile, Javelin, the Bradley
Fighting Vehicle (BFV) A2 and the Improved Target Acquisition System (ITAS). BFV
and ITAS include the Tube Launched Optically Guided Weapon (TOW) missile, Rapid
Force Projection Initiative (RFPI) Hunter Vehicle, Unmanned Ground Vehicle
(UGV), and Advanced Chaparral. The Company has developed a VE simulation for the
Patriot missile system which has been used in tests.
Defense Systems Integration
The Company provides system integration and development services for
the DOD, and supports DOD program managed activities as well as research and
development centers. The Company's capability to provide systems engineering and
integration solutions and services is broad based. The Company conducts analyses
of requirements, modernization of information technologies, process modeling,
design and rapid prototyping of designs and extensive simulation of the design
for operational application, training, testing and post deployment support and
analyses.
Digitization and C4I activities are a major force in the transformation
and modernization of the military in the next century. Tactical and strategic
digitization of the U.S. armed forces leverage the major IT advances in both the
commercial and government sectors of the U.S. economy. A major program supported
by the Company is the Rapid Forces Projection Initiative (RFPI) Advanced Concept
Technology Development (ACTD), for which the Company has acted as the systems
integration contractor since fiscal year 1994. The Company developed significant
solutions to the application of commercial-off-the-shelf components for military
needs including development of a Light Digital Tactical Operation Center
prototype and simulation center, and a distributed command and control computer
for the 101st Airborne Division of the U.S. Army. The Company has also assisted
in the development of the Institute of Electrical and Electronic Engineers
(IEEE) standards for information exchange by the military, such as the Sensor
Link Protocol for the Program Manager for Night Vision Devices. Under a five
year contract awarded in fiscal year 1997 with an estimated total value of $50
million, the Company supports the Office of the Secretary of Defense and joint
military services in the conduct of test planning, multi-service coordination,
and execution for joint testing and evaluations.
Advanced Tactical Systems
The Company performs basic research and provides engineering services
to the U.S. Air Force, U.S. Army, U.S. Navy, and Special Operations Command. The
Company supports the U.S. Air Force in the development of simulations and signal
processing algorithms for advanced guidance concepts for conventional weapon
systems. The Irma Multi-Sensor Signature Model, the U.S. Air Force's standard
air-to-surface target-in-background simulation, is an example of one such code.
Training concepts and course development are provided to the U.S. Army
Simulation, Training, and Instrumentation Command (STRICOM) and the Aviation
Center. Other areas of engineering support include special operations
technology, mine detection algorithms, avionics counter measures and formational
positioning systems, and special operations maritime electronics.
Naval Architecture
The Company provides naval architecture, marine engneering services,
services in ship acquisition management, production support, human systems
integration, and ship survivability and protection. The Company is also a leader
in the application of modeling and simulation technologies for naval solutions,
simulations development, training simulators, and virtual reality programs.
Under a five year contract awarded in fiscal year 1995 by the U.S.
Naval Sea Systems Command, with an estimated total value of $169 million, the
Company provides ship design services and technical support.
Under two five year contracts awarded in fiscal year 1998 for the Naval
Surface Warfare Center, Carderock Division, with an estimated total value of $23
million, the Company is performing marine scale model design, construction, and
testing services, and ship systems integration engineering.
Systems Engineering
The Company provides studies, analysis, acquisition management and
systems engineering services to elements of the intelligence community
sponsoring advanced technology systems essential to national security. The
Company delivers consulting services or direct support labor to augment the
capability of selected U.S. Government agencies to develop, acquire, and
integrate effectively complex systems or system components to achieve maximum
effectiveness in system operation.
Space Systems Applications
The Company provides integration and development support involving
satellite and other space applications. The Company performs contracts involving
the establishment of the architecture of future space surveillance and avionics
systems for the defense and intelligence community, and the development of
related prototype information processing systems. 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.
Intelligence Program Applications
The Company provides systems and software engineering services related
to the design, development, and support of real-time and embedded IT systems,
turnkey information systems, distributed client-server software systems,
object-oriented software solutions, and software applications to the various
U.S. Government intelligence agencies. The Company also provides engineering
services in the areas of network security, enterprise solutions, and
professional staff augmentation. The Company's information technology services
cover a broad spectrum of multi-vendor platforms and operating environments,
including client-server, scientific computing and digital signal processing.
Business practices employed by the Company are consistent with the Software
Engineering Institute Software and Systems Engineering Capability Maturity
Models.
Special Programs and Polarimetry Programs
The Company provides technical services related to scientific and
technical intelligence analysis, including hardware systems evaluation and
integration, hardware-in-the-loop testing and evaluation, analysis of foreign
weapons systems, foreign material exploitation, and system signature analysis
and prediction. Results of this work aid U.S. weapon system developers in
producing more effective products that give U.S. military forces greater combat
leverage.
The Company's 17-year record of such analysis and engineering support
has positioned the Company to develop polarization technology as an augmentation
to conventional optical sensor performance. The Company is continuing to develop
the fundamental technology, both independently and through integrated product
teams with government laboratories, while pursuing specific opportunities for
application of the technology under contracts from several government agencies.
Government Information Technology
The Company's Government Information Technology unit provides
information services and systems integration to federal, state and local
governmental agencies. For the year ended August 31, 1998, the Company's
Government Information Technology unit produced approximately 24% of the
Company's revenues.
The services offered by the Company 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.
Under two three year contracts (excluding options) awarded in fiscal
year 1996 by the U.S. Army Information Systems Selection and Acquisition Agency,
the Company acts as the lead systems integrator for the DOD High Performance
Computing Modernization Program. Under these contracts, the Company supplies
computer hardware and software, provides maintenance and systems integration and
provides Internet services to DOD shared resource centers in Dayton, Ohio and
Vicksburg, Mississippi. The U.S. Government has awarded a total of only four
such contracts under a program to modernize its shared computer resources. These
shared resource centers offer government scientists and engineers access to
state-of-the-art high performance computing and communications capabilities. The
programs provide for periodic upgrades in systems to insure state-of-the-art
technology is installed in these centers. These awards established the Company
as a leader in systems integration of high performance computers. The Company
anticipates that these contracts will be recompeted in fiscal year 1999.
Other contracts include an eight year contract awarded in fiscal year
1994 with the State of Alabama, with an estimated total value of $53 million 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 two
eight year contracts awarded in fiscal year 1992 by the Defense Intelligence
Agency's Missile and Space Intelligence Center with an estimated total value of
$34 million, the Company provides acquisition, installation, Intranet and
Internet services, and technical and management services for a high performance
scientific computer center.
In August 1998 the Company was awarded two eight year subcontracts
under the General Services Administration's Seat Management Program with an
estimated total value of $100 million. The Company has responsibility under
these subcontracts for high performance computing services and for delivery of
high-end scientific and engineering workstations.
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
performing its final option year under a $35 million contract awarded in fiscal
year 1995 by 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.
In fiscal year 1998, the Company was awarded a seven year subcontract
for $16 million to support the Space and Missile Defense Center. The Company
will provide computer support and network administrative services and operate
and maintain software applications.
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.
Law Enforcement and Criminal Justice
The Company is a provider of proprietary and state-of-the-art innovative
technology and services to the investigative and law enforcement communities
both domestically and internationally. The Company's focus is to improve the
effectiveness of the criminal justice system. The Company provides software
development, maintenance and technical support to the Federal Bureau of
Investigation. The Company supports the Drug Enforcement Agency (DEA) by using
digital imaging techniques to populate databases used in DEA investigations. The
Company licenses a proprietary software product known as DRUGFIRETM which is a
forensic firearms examination and analysis system installed throughout the
United States and in six other countries. The Company also plans to introduce in
fiscal year 1999, another software product, ScenePro, which will be an
automated, multi-media crime scene toolkit.
Commercial Information Technology
The Company provides information technology and services to commercial
customers, state and local government agencies and judicial systems. The
services offered by the Company include systems integration and engineering,
application software development and deployment, data warehousing and mining,
information security, staff augmentation, and SAP R/3 consulting and
implementation. For the year ended August 31, 1998, the Company's Commercial
Information Technology unit generated approximately 10% of the Company's
revenues.
SAP (TM) Licensing and Implementation
Nichols ENTEC Systems, L.L.C. (ENTEC) is a joint venture presently owned
60% by the Company and 40% by DSM Copolymer, Inc., formed to license and
implement SAP (TM) software. This software is used to manage accounting, human
resources, production planning, materials management, and the sales and
distribution functions. According to SAP publications, this software has been
purchased by more than 9,000 customers worldwide. ENTEC is a National
Implementation Partner with SAP America, specializing in the implementation of
SAP R/3 enterprise-wide business software. In addition, ENTEC is both a SAP (TM)
Certified Business Solutions Partner and ASAP Partner. ENTEC sells SAP R/3
software to companies with annual revenues of less than $200 million in the
states of Arkansas, Louisiana, Mississippi, and Alabama. ENTEC provides a single
point of contact for the customer interested in purchasing software, hardware,
and services to implement a complete system. ENTEC was awarded a two year
contract in fiscal year 1998 by DynMcDermott Petroleum Operations Company, with
an estimated total value of $10 million, to deliver and implement SAP R/3
software for the Department of Energy's Strategic Petroleum Reserve. ENTEC
clients include DSM Copolymer, Aluma-Form/Dixie Electrical Manufacturing
Company, Tractor Supply Company, and Philips.
Consulting and Professional Services
The Company provides IT consulting and professional services such as
networking and system integration client server, custom business application
software development, contract programming, staff augmentation and training. The
Company provides these IT consulting services for clients with all types of
systems and networks. Programming and design capabilities range from traditional
software languages to modern graphical user interface development tools. The
Company's experience covers a broad spectrum of platforms and operating
environments. The Company's clients include the State of Alabama, MobileComm,
The Vanguard Group, Philips, the Virginia Courts System, and the University of
Mississippi Medical Center.
Healthcare Information Technology
The Company provides information technology-based administrative
services for the healthcare industry. For the year ended August 31, 1998, the
Company's Healthcare Information Technology unit produced approximately 11% of
the Company's revenues.
Nichols TXEN Corporation
The Company formed CSC Acquisition, Inc. ("Acquisition") as a
wholly-owned subsidiary on June 6, 1995. On June 30, 1995, the Company acquired
all of the assets and certain liabilities of Computer Services Corporation
(CSC). Since its incorporation in 1967, CSC performed administrative services
and information technology services for, and sold turnkey computer systems to,
physician practices. The Company formed Nichols SELECT Corporation (Nichols
SELECT) as a wholly-owned subsidiary on September 17, 1996. On September 23,
1996, Acquisition was merged into Nichols SELECT. On December 16, 1994, the
Company acquired 19.9% of the capital stock of TXEN, Inc. (TXEN) with an option
to acquire the remaining 80.1% of TXEN. Since its incorporation in 1989, TXEN
provided technology information outsourcing and administrative outsourcing
services for the managed health care industry. On August 29, 1997, the Company
acquired the remaining 80.1% of TXEN through a merger of TXEN into Nichols
SELECT, which after the merger continued to be wholly-owned by the Company.
After the TXEN acquisition, Nichols SELECT changed its name to Nichols TXEN
Corporation.
The Company, through its wholly-owned subsidiary, Nichols TXEN
Corporation, is a leading provider of outsourcing solutions for information
technology and administrative services in the managed care and physician
practice management segments of the health care industry. The Company's
outsourcing services improve quality and reduce costs by minimizing the time and
personnel needed to process health care transactions by offering customers a
broad range of medical billing and claims processing solutions. The Company
provides services under contracts and generates revenues primarily based on the
number of transactions processed or the number of enrolled health plan members
per month. As a result of the Company's fee structure and high customer
retention, approximately 72% and 77% of Nichols TXEN's revenues for fiscal years
1997 and 1998, respectively, were recurring.
The Company, through Nichols TXEN, offers a broad range of products and
services which allow customers the flexibility to perform administrative
functions with their own staff utilizing the Company's technology or to
outsource to the Company certain administrative and processing functions. Each
customer contracts with the Company for the level of outsourcing service needed.
The Company's outsourcing solutions provide customers with significant benefits,
including: (i) a variable rate operating cost structure for outsourced services;
(ii) speed of implementation; (iii) reduced capital expenditures for
administrative health care technologies; (iv) access to knowledgeable and
experienced personnel; (v) sophisticated application software and decision
support tools; and (vi) streamlined administrative functions. As a result, the
Company's services enable customers to concentrate on providing quality health
care by focusing on core competencies. The Company maintains a centralized
network data center to process transactions and provide technology services for
its customers. The Company believes that its ability to offer both technical
solutions and administrative services through a network data center
differentiates the Company from competitors that offer only turnkey software
solutions or only administrative services.
The Company, through Nichols TXEN, has organized its healthcare and
administrative services into two business divisions. The Managed Care Services
division provides the Company's technology and services to health maintenance
organizations (HMOs), physician-hospital organizations (PHOs), independent
practice associations (IPAs), integrated delivery systems (IDSs), provider
sponsored organizations (PSOs), Medicare and Medicaid HMOs, insurance carriers
and managed third-party administrators (Managed TPAs). The Practice Management
Services division provides the Company's technology and services to
hospital-based and other physician groups, hospital emergency departments and
physician networks. As of October 1, 1998, the Company had 90 managed care
services customers representing over 3.0 million lives nationwide and over 235
practice management services customers representing approximately 3,000
physicians primarily in the Southeast.
Workers' Compensation Services
The Company develops and supports two major packaged software products
which are used for property and 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. The
Company also provides information technology consulting services, customized
software development, and packaged solutions for the property and casualty
insurance industry. Customers using the software include the State of Alaska,
The Kroger Company, Employers' Security Insurance Co., and American Federated
General Agency. The Company recently expanded its services by offering a
continuum of technology-based services built around a network data center. For
the fiscal year ended August 31, 1998, revenues from the Company's workers
compensation services were less than 1% of total revenues. Beginning in fiscal
year 1999, the Company's workers' compensation services became part of the
Company's Commercial IT unit.
HealthGate
The Company owns approximately 20% of HealthGate Data Corporation
(HealthGate). HealthGate is a global Internet media company which develops and
provides branded, interactive health and wellness information solutions to each
of the four primary healthcare constituencies: patients, providers, payors and
suppliers.
Competition
The Company competes against technical services companies in the defense
and aerospace industries, including TRW, Inc., GRC International, Inc., BTG,
Inc., and CACI International, Inc. 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 dominant company. Procurement reforms 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
recompetes 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 the Defense and Intelligence and Government IT units, 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 for bids under $10 million. The decision to submit a
bid or proposal for bids greater than $10 million is made by the Chief Marketing
Officer through a formal bid review process.
For the Commercial IT and Healthcare IT units, the Company's marketing
services are directed by such units' vice presidents 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. The corporate proposal staff and the corporate marketing staff report to
the Chief Marketing Officer.
Government Contracts
A substantial portion of the Company's revenues are derived from
contracts and subcontracts with the DOD and other federal government agencies. A
majority of the Company's contracts are competitively bid and awarded on the
basis of technical merit, personnel qualifications, experience, and price. The
Company also receives some contract awards involving special technical
capabilities on a negotiated, noncompetitive basis due to the Company's unique
technical capabilities in special areas. Future revenues and income of the
Company could be materially affected by changes in procurement policies, a
reduction in expenditures for the services provided by the Company, and other
risks generally associated with federal government contracts.
The Company performs its services under federal government contracts
that usually require performance over a period of one to five years. Long-term
contracts may be conditioned upon continued availability of Congressional
appropriations. Variances between anticipated budget and Congressional
appropriations may result in delay, reduction or termination of such contracts.
Contractors often experience revenue uncertainties with respect to available
contract funding during the first quarter of the government's fiscal year
beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company's federal government contracts are performed under
cost-reimbursement contracts, time-and-materials contracts and fixed-price
contracts. Cost-reimbursement contracts provide for reimbursement of costs (to
the extent allowable under Federal Acquisition Regulations) and for payment of a
fee. The fee may be either fixed by the contract (cost-plus-fixed fee) or
variable, based upon cost, quality, delivery, and the customer's subjective
evaluation of the work (cost-plus-award fee). Under time-and-materials
contracts, the Company receives a fixed amount by labor category for services
performed and is reimbursed (without fee) for the cost of materials purchased to
perform the contract. Under a fixed-price contract, the Company agrees to
perform certain work for a fixed price and, accordingly, realizes the benefit or
detriment to the extent that the actual cost of performing the work differs from
the contract price. Contract revenues for the year ended August 31, 1998 were
approximately 43% from cost-reimbursement contracts, approximately 33% from
time-and-materials contracts and 24% from fixed-price contracts.
The Company's allowable federal government contract costs and fees are
subject to audit by the Defense Contract Audit Agency (DCAA). Audits may result
in non-reimbursement of some contract costs and fees. To date, the Company has
experienced no material adjustments as a result of audits by the DCAA. The DCAA
has not completed its audit of the Company's federal contracts for fiscal year
1998.
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 $1.3 billion, including
options of $954.1 million, at August 31, 1998. The Company had a backlog of $1.2
billion, including options of $928.0 million, at August 31, 1997, and a backlog
of $1.0 billion, including options of $501.8 million, at August 31, 1996.
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 20% to 25% of the Company's backlog at August 31, 1998 will result
in revenues for the year ending August 31, 1999.
The backlog of contract awards is influenced by the number of new
contracts awarded and by the number of contracts awarded where the Company has
an existing contract that is recompeted. The Company performs under several
large multi-year contracts which, upon expiration, are recompeted. Historically,
the Company has been successful in winning recompeted contracts where it has
been the incumbent contractor. However, the Company cannot give assurance that
it will experience continued success with respect to future awards of recompeted
contracts.
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, 1998
was approximately $214.6 million. The funded components of the Company's backlog
at August 31, 1997 and 1996, were $162.2 million and $99.5 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, historical 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, 1998 the Company had approximately 3,000 full-time
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relationship with its employees to be good.
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases approximately 253,000 square feet of
office space in Huntsville, Alabama, and approximately 512,000 square feet of
office space in approximately 30 other locations throughout the United States.
The Company's leases expire at varying periods from 1998 to 2005, and currently
call for minimum annual lease payments of approximately $9.3 million. Certain of
the lessors under such leases are affiliated with the Company. See Note 8 to
Notes to the Company's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Pursuant to a purchase agreement dated April 15, 1998, the Company
purchased all of the capital stock of Mnemonic Systems, Inc. (MSI), from Artis
B. Isaac (Isaac). The purchase agreement contains an indemnity from Isaac in
favor of the Company against damages arising out of that certain litigation
pending in the United District Court for the District of Columbia captioned Otto
B. Isaac and Kathryn Isaac, Plaintiffs, v. Mnemonic Systems Inc. and Artis B.
Isaac, Defendants instituted on August 8, 1996, wherein the plaintiffs alleged,
among other matters, breach of contract, promissory estoppel, fraud, and
negligent misrepresentation in connection with the employment of Otto B. Isaac
by MSI and the subsequent termination of such employment relationship. MSI and
Isaac have denied the allegations and have counterclaimed for breach of contract
and fraud. In addition to the contractual indemnity, an escrow account funded by
the seller in the amount of approximately $800,000 exists to secure Isaac's
indemnity obligation to the Company, which the Company believes will be adequate
to cover the potential liability associated with this litigation.
On July 1, 1998, Forensic Technology WAI, Inc. (Forensic), filed suit
against MSI in United States District Court for the Eastern District of
Virginia, Alexandria Division, seeking injunctive relief, as well as monetary
damages. Forensic has alleged that the DRUGFIRE system offered by MSI and used
for the examination of fired cartridges infringes a United States patent issued
to Forensic on August 5, 1997. MSI believes that the DRUGFIRE system is
non-infringing, and that there are various grounds for invalidating the Forensic
patent. The Company has made a claim for indemnity against Isaac pursuant to the
contractual indemnity provisions of the purchase agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the executive officers of the Company as of
August 31, 1998, is set forth below. Officers serve at the discretion of the
Board of Directors.
<TABLE>
<CAPTION>
Officer
Name Age Position Since
<S> <C> <C> <C>
Chris H. Horgen 52 Chairman 1976
Michael J. Mruz 53 Chief Executive Officer, President, Chief Operating 1994
Officer and Director
Roy J. Nichols 60 Senior Vice President and Vice Chairman 1976
Patsy L. Hattox 49 Corporate Vice President, Chief Administrative 1980
Officer, Secretary and Director
J. Michael Coward 55 Corporate Vice President and Chief Marketing Officer 1990
Allen E. Dillard 38 Corporate Vice President, Chief Financial Officer
and Treasurer 1992
Michael W. Solley 40 Executive Vice President 1992
John Rose 52 President, Army Business Operations 1998
James C. Moule 62 President, Navy and Air Force Business Operations 1988
Carl W. Monk, Jr. 51 President, National Programs Business Operations 1998
Thomas L. Patterson 56 Chairman, Healthcare IT and Director 1996
Paul D. Reaves 41 Chief Executive Officer, Healthcare IT 1998
H. Grey Wood 42 President, Healthcare IT 1998
Maurice Romine 57 President, Commercial IT 1996
</TABLE>
Messrs. Horgen, Nichols, Coward, Dillard, Solley and Moule and Ms. Hattox
have been principally employed by the Company for over five years. Mr. Horgen
serves as a director of SouthTrust Bank of Alabama, N.A. Mr. Nichols serves as a
director of Adtran, Inc.
Michael J. Mruz became President of the Company in August 1994, its
Chief Operating Officer and a Director in September 1994, and its Chief
Executive Officer in September 1997. 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.
John P. Rose became the President of the Company's Army Business
Operations on May 1, 1998. General Rose retired as a Brigadier General from the
U.S. Army in April, 1998. He served as the Director of Requirements on the Army
Staff from July 1995 to April 1998. From July 1992 to July 1995, General Rose
served as Director of North Atlantic Treaty Organization (NATO) Force Programs
at the Supreme Headquarters Allied Powers Europe (SHAPE), Belgium. In that
capacity he orchestrated military requirements for NATO nations in the post Cold
War environment.
Carl W. Monk, Jr. was named president of the Company's National
Programs Business Operations in September 1998. Mr. Monk joined the Company
in July 1998 with the acquisition of Welkin. Mr. Monk was the founder and
CEO of Welkin from its inception in 1988 through its merger with the Company
in 1998.
Thomas L. Patterson is Chairman of Nichols TXEN Corporation, a
wholly-owned subsidiary of the Company. He has been active in the healthcare,
managed care, and insurance markets since 1980. Mr. Patterson was co-founder and
President of TXEN, Inc., an information technology company for managed care
organizations, from 1989 to 1997. From 1980 to 1989, he was President of SEAKO,
Inc., an information technology company for practice management and managed care
systems.
Paul D. Reaves has been Chief Executive Officer of Nichols TXEN Corporation
since May 1998. Mr. Reaves was a co-founder of TXEN, Inc., and he served as
Executive Vice President of TXEN, Inc., from 1989 to 1997. From 1981 to 1989,
Mr. Reaves was employed by SEAKO, Inc. in programming, implementation, customer
support and sales and marketing. Mr. Reaves served as Vice President of SEAKO,
Inc. from 1985 to 1989.
H. Grey Wood has been President of Nichols TXEN Corporation since
January 1998 and was Vice President and General Manager of TXEN, Inc. from 1995
to 1998. From 1993 to 1995, he was Director and General Manger of the Physician
Practice Management Group of CSC Healthcare Systems, Inc., a vendor of turnkey
practice management and managed care software.
Maurice G. Romine became President of Nichols InfoTec Corporation, a
wholly-owned subsidiary of the Company, in May 1997. He served as Vice
President/General Manager of Nichols InfoTec Corporation from November 1996
until May 1997, and Vice President of the Company's Commercial Information
Technology Systems from February 1996 to November 1996. Prior to joining the
Company, Mr. Romine was employed by Intergraph Corporation, an interactive
computer graphics systems company, where he served as Executive Vice-President,
Corporate Marketing, from November 1989 to October 1992, and held various
management and technical positions from October 1976 to November 1989.
<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 cash dividends on its Common
Stock. The Company presently intends to retain its earnings for use in its
business, and therefore does not anticipate paying any cash dividends. Future
cash dividends, if any, will be determined by the Board of Directors in light of
Company's earnings, financial condition, capital requirements, and such other
factors as the Board may deem relevant. The Company's existing loan agreement
presently restricts the payment of cash dividends if the Company is in default.
Market and Stockholder Information
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol NRES. 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.
1998 1997
High Low High Low
First Quarter 28 1/8 20 3/4 25 2/3 18 2/3
Second Quarter 26 5/8 20 3/8 29 3/4 21 1/2
Third Quarter 28 3/8 22 26 1/8 14 5/8
Fourth Quarter 28 3/4 20 1/8 25 3/4 17 3/4
On November 3, 1998, the per share closing sale price of the Common
Stock on the Nasdaq National Market was $19.875. On November 3, 1998, there were
approximately 1,607 holders of record of the Common Stock.
Recent Sales of Unregistered Securities
On July 28, 1998, the Company issued 415,671 shares of Common Stock to
shareholders of Welkin in connection with the merger of a wholly-owned
subsidiary of the Company with and into Welkin. The offering was exempt from
registration under Section 4(2) of the Securities Act of 1933 as a transaction
not involving any public offering.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL SUMMARY
Pro forma Pro forma
1998 1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 427,043,000 $427,043,000 $ 398,142,000 $ 398,142,000 $256,605,000 $ 180,698,000 $149,874,000
Net income $16,958,000*** $ 14,423,000 13,199,000** $ 1,199,000 $ 10,063,000 $ 7,651,000 $ 6,858,000
Earnings per
common share * $ 1.25 $ 1.06 $ 1.09 $ 0.10 $ 1.00 $ 0.80 $ 0.72
Earnings per
common share
assuming
dilution* $ 1.20 $ 1.02 $ 1.04 $ 0.09 $ 0.94 $ 0.77 $ 0.70
Stockholders'
equity $ 166,472,000 $166,472,000 $ 146,968,000 $ 146,968,000 $115,052,000 $ 69,358,000 $ 58,365,000
Long-term debt $ 2,948,000 $ 2,948,000 $ 4,025,000 $ 4,025,000 $ 4,784,000 $ 5,366,000 $ 4,328,000
Goodwill and
other intangibles,
net $ 54,214,000 $ 54,214,000 $ 48,130,000 $ 48,130,000 $21,004,000 $ 8,803,000 $ -
Total assets $ 224,061,000 $224,061,000 $ 210,132,000 $ 210,132,000 $165,321,000 $ 103,283,000 $82,318,000
</TABLE>
* As adjusted for a three-for-two stock split effective October 21, 1996.
** Excludes a $12.0 million write off of purchased in-process research and
development.
*** Excludes $4.1 million of pretax special charges.
NOTE: All prior periods have been restated to reflect the fiscal year 1998
merger with Welkin, which was accounted for as a pooling of interests.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, this document contains
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. These risks and uncertainties are
discussed in more detail below. These forward-looking statements can be
generally identified as such because the content of the statements will usually
contain such words as the Company or management "believes," "anticipates,"
"expects," "plans," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives, goals, or strategies are
forward-looking statements.
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 Department of Defense (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 investments to expand the
business of the Company and gain industry knowledge.
The Company is organized into four strategic business units, reflecting
the particular market focus of each line of business. The Defense and
Intelligence unit, formerly Nichols Federal, provides technical services
primarily to U.S. Government defense agencies. The Government Information
Technology unit, formerly Nichols InfoFed, provides information and technology
solutions and services to a variety of governmental agencies. The Commercial
Information Technology unit, formerly Nichols InfoTec, provides information and
technology services to various commercial clients, other than healthcare
clients. The Healthcare Information Technology unit, formerly Nichols SELECT,
provides information and administrative services to clients in the healthcare
and insurance industries. For the year ended August 31, 1998, the percentage of
total revenues attributable to the four business units was approximately 55% for
Defense and Intelligence, 24% for Government IT, 10% for Commercial IT, and 11%
for Healthcare IT.
Risk Factors
The Company's business and financial performance are subject to risks
and uncertainties, including those discussed below.
Acquisition Strategy
Expansion through acquisitions is an important component of the
Company's overall business strategy. The Company has successfully completed ten
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. 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.
Performance of Large Systems Integration Contracts
As part of the Company's business strategy to enter new markets, the
Company continues 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.
Variability of Quarterly Earnings or Operating Results
The Company's revenues and earnings may fluctuate from quarter to
quarter based on such factors as the number, size, and scope of projects in
which the Company is engaged, the contractual terms and degree of completion of
such projects, expenditures required by the Company in connection with such
projects, any delays incurred in connection with such projects, employee
utilization rates, the adequacy of provisions for losses, the accuracy of
estimates of resources required to complete ongoing projects, and general
economic conditions. Under certain contracts, the Company is required to
purchase, integrate and deliver to the customer large amounts of computer
processing systems and other equipment. Revenues are accrued as costs to deliver
these systems are incurred, 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 and modifications.
Concentration of Revenues
Approximately 75%, 88%, and 76% of the Company's total revenues in
fiscal year 1998, fiscal year 1997 and fiscal year 1996, respectively, were
derived from contracts or subcontracts funded by the U.S. Government. These U.S.
Government contracts include military weapons systems contracts funded by the
DOD that accounted for approximately 55%, 53%, and 57% 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 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.
Certain of the Company's contracts individually contribute a
significant percentage of the Company's revenues. The Company's seven largest
contracts (by revenues) are with the U.S. Government and generated approximately
43% of the Company's total revenues for the year ended August 31, 1998. The
Company expects revenues to continue to be concentrated in a relatively small
number of large U.S. Government contracts. Termination of such contracts, or the
Company's inability to renew or replace such contracts when they expire, could
materially and adversely affect the Company's revenues and income. During fiscal
year 1999, five of these seven contracts are expected to be recompeted.
Reductions or Changes in Military Weapons Expenditures
Historically, a majority of the Company's revenues (55% for the year
ended August 31, 1998) 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. While not anticipated, the loss or
significant curtailment of the Company's U.S. military contracts would
materially and adversely affect the Company's revenues and income.
Approximately 17% of the Company's revenues in fiscal year 1998 were
from contracts related to Ballistic Missile Defense (BMD), compared to 20% of
revenues in fiscal year 1997 and 26% of revenues in fiscal year 1996 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 U.S. 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.
Uncertainties Associated with Government Contracts
The Company performs its services under U.S. Government contracts that
usually require performance over a period of one to five years. Long-term
contracts may be conditioned upon continued availability of Congressional
appropriations. Variances between anticipated budgets and Congressional
appropriations may result in delay, reduction, or termination of such contracts.
Contractors can experience revenue uncertainties with respect to available
contract funding during the first quarter of the government's fiscal year
beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company'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.
Contract Profit Exposure
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-reimbursement contracts because the Company assumes
the responsibility for the delivery of specified skills at a fixed hourly rate.
Although management believes that adequate provision for its fixed-price and
time-and-materials contracts is reflected in the Company's financial statements,
no assurance can be given that this provision is adequate or that losses on
fixed-price and time-and-materials contracts will not occur in the future.
To compete successfully for business, the Company must satisfy client
requirements at competitive rates. Although the Company continually attempts to
lower its costs, there are other information technology and technical services
companies that may provide the same or similar services at comparable or lower
rates than the Company. Additionally, certain of the Company's clients require
that their vendors reduce rates after services have commenced. 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.
Year 2000
Many computer programs were designed and developed without considering
the upcoming change in the century, which could lead to failure in computer
applications or create erroneous results due to those computer programs not
recognizing the year 2000. This issue is referred to as the "Year 2000" problem.
Although the Company believes that its Year 2000 compliance program is
comprehensive, the Company may not be able to identify, successfully remedy or
assess all date-handling problems in its business systems or operations or those
of its customers and suppliers. As a result, the Year 2000 problem could have a
materially adverse affect on the Company's business, financial condition or
results of operations.
Amortization of Intangible Assets Related to TXEN Acquisition
In fiscal year 1995, the Company purchased 19.9% of the capital stock
of TXEN, Inc. (TXEN), for approximately $1.5 million. In August 1997, the
Company exercised its option to acquire the remaining 80.1% of the capital stock
of TXEN for aggregate consideration of approximately $43.8 million. The total
purchase price for the TXEN acquisition was allocated to the TXEN assets and
liabilities. The excess of the purchase price over the fair market value of the
tangible net assets acquired of approximately $42.1 million was allocated to the
following intangibles: $12.0 million to in-process research and development,
$15.6 million to goodwill, $12.7 million to other intangibles and $1.8 million
to capitalized software development. In-process research and development of
$12.0 million was expensed in the fourth quarter of 1997. Goodwill and other
intangibles of $27.6 million are being amortized using the straight-line method
over an estimated useful life of 20 years.
Of the total purchase price for the acquisition of TXEN, $12.0 million
was allocated to ten software programs and systems constituting in-process
technology. The fair value of the acquired in-process technology was determined
based on an analysis of the markets, projected cash flows and risks associated
with achieving such cash flows. At the date of acquisition, the technological
feasibility of the acquired technology had not been established and the acquired
technology has no alternative future uses. There can be no assurance that the
purchased in-process technology will be successfully developed. The acquired
in-process technology consisted of ten software and systems development projects
to reduce the time and personnel needed to perform managed care administrative
functions and provide enhanced information reports. At the date of acquisition,
the Company estimated that the cost to complete the projects was $1.75 million
of which $445,000 was spent in fiscal year 1998 and of which $1.3 million is
expected to be spent in fiscal year 1999. The Company expects to benefit from
such projects commencing in the second quarter of fiscal year 1999. The Company
expects the projects will be completed in the third quarter of fiscal 1999. To
the extent the in-process technology is not successfully developed, this could
have a material adverse impact on the Company's operating results and financial
condition.
In connection with the Company's filing of a Form S-3 registration
statement, the Company is engaged in discussions with the staff of the
Securities and Exchange Commission regarding the purchase price allocation
related to its August 1997 acquisition of TXEN. These discussions principally
relate to the amount allocated to in-process research and development and the
useful life of twenty years assigned to goodwill. The Company and its
independent auditors, Ernst & Young LLP, believe the purchase price allocation
recorded in connection with the TXEN acquisition, and related amortization
charges, are in accordance with widely recognized appraisal practices and
generally accepted accounting principles. However, the staff of the Securities
and Exchange Commission has recently expressed views concerning valuation of
in-process research and development in business combinations which, if
determined to be applicable, would probably result in a reduction in the amount
allocated to in-process research and development. If there are any significant
changes as a result of these discussions to the amounts allocated to purchased
in-process research and development or other intangible assets, or changes in
the lives over which such amounts are amortized, these could result in a
material reduction in the amount of the charge for in-process research and
development reflected in the Company's financial results for the year ended
August 31, 1997 and increased amortization expense in 1998 and subsequent
periods which could be material.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentages which certain items bear to consolidated revenues and the percentage
change of such items for the periods indicated. The amounts for fiscal years
1998 and 1997 include the impact of special charges to operating profit:
<TABLE>
<CAPTION>
Percentage Increase
Percentage of Revenues (Decrease)
Years Ended August 31, Years Ended August 31,
1998 1997 1996 1998-1997 1997-1996
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 7.3% 55.2%
Cost and expenses:
Direct and allocable.................... 83.3 88.3 85.1 1.3 60.9
General and administrative.............. 9.2 6.3 8.4 56.9 16.4
Amortization of intangibles............. 1.0 0.5 0.5 121.3 53.0
Special charges......................... 1.0 3.0 __ (65.6) n/a
---------------------------------------------
Total cost and expenses............. 94.5 98.1 94.0 3.4 61.9
Operating profit............................. 5.5 1.9 6.0 202.0 (49.9)
Other income (expense), net.................. 0.1 0.3 0.2 (67.3) 167.5
Income before income taxes................... 5.6 2.2 6.2 168.2 (44.2)
Income taxes................................. 2.2 1.9 2.3 21.6 32.0
---------------------------------------------
Net income................................... 3.4% 0.3% 3.9% 1,102.9% (88.1)%
=============================================
</TABLE>
The following table summarizes the percentage of revenues by contract
type for the periods indicated:
Years Ended August 31,
1998 1997 1996
---- ---- ----
Cost-reimbursement................................... 43% 49% 51%
Fixed-price.......................................... 33 35 22
Time-and-materials................................... 24 16 27
The table below presents contract award and backlog data for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended August 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Contract award amount................................$ 453,527 $ 679,174 $ 598,653
Backlog (with options)...............................$ 1,264,201 $ 1,228,362 $ 1,003,135
Backlog (without options)............................$ 310,071 $ 300,337 $ 501,373
Backlog percentage by contract type:
Cost-reimbursement.............................. 44% 45% 60%
Fixed-price..................................... 37% 30% 30%
Time-and-materials.............................. 19% 25% 10%
</TABLE>
The backlog of contract awards is influenced by the number of new
contracts awarded and by the number of contracts awarded where the Company has
an existing contract that is recompeted. The Company performs under several
large multi-year contracts which, upon expiration, are recompeted. Historically,
the Company has been successful in winning recompeted contracts where it has
been the incumbent contractor. However, the Company cannot give assurance that
it will experience continued success with respect to future awards of recompeted
contracts. Of the $599 million in contract awards for fiscal year 1996, $355
million or 59% were with respect to the two high performance systems integration
contract awards. Of the $679 million in contract awards for fiscal year 1997,
$447 million or 65% were awards related to recompetition of contracts where the
Company was the incumbent. Of the $454 million of contract awards in fiscal year
1998, $77 million or 17% were awards related to recompetition of existing
contracts where the Company was the incumbent. The Company expects that in
fiscal year 1999, five of the Company's largest contracts by revenues will be
recompeted.
Comparison of Operating Results for Fiscal Year 1998 with Fiscal Year 1997
Revenues. Revenues increased $28.9 million (7.3%) for the year ended
August 31,1998. The Company's Defense and Intelligence unit, which represented
approximately 55% of consolidated revenues for the year, reported an increase of
$16 million (7%), primarily as a result of continued growth in existing contract
base. The Government IT unit, representing approximately 24% of consolidated
revenues for the year, reported a decrease of $30 million, primarily as a result
of reduced orders on two existing systems integration contracts. Commercial IT
revenues increased $15 million (58%) for the year, primarily as a result of SAP
software sales and integration services. Healthcare IT revenues increased $28
million (175%) for the year, primarily as a result of the acquisition of TXEN,
Inc. completed in August 1997.
Operating Profit. In the third quarter of fiscal year 1998 the Company
expensed $2 million of purchased in-process research and development activities
related to the acquisition of Mnemonic Systems, Incorporated (MSI). In the
fourth quarter of fiscal year 1998 the Company expensed $2.1 million in special
charges of which, $1.9 million related to the impairment of assets associated
with the insurance line of business (see Note 4 of the Notes to Consolidated
Financial Statements) and $0.2 million related to expenses incurred to
consummate the merger with Welkin Associates, Ltd. (Welkin), accounted for as a
pooling of interests. In the fourth quarter of fiscal year 1997 the Company
expensed $12 million of purchased in-process research and development activities
related to the acquisition of the remaining 80.1% of TXEN, Inc. (TXEN).
Operating profit including the write-offs of purchased in-process research and
development and special charges, increased $15.6 million (202%) for year ended
August 31, 1998 as compared to year ended August 31, 1997. Operating profit
excluding the write-offs of purchased in-process research and development and
special charges, increased $7.8 million (39.3%) for the year ended August 31,
1998 as compared to the year ended August 31, 1997. Direct and allocable costs
during fiscal year 1998 decreased as a percent of revenues compared to fiscal
year 1997 as a result of fewer hardware purchases for systems integration
contracts. General and administrative expense increased $14.2 million (56.9%)
for the year ended August 31, 1998 compared to the year ended August 31, 1997,
primarily as a result of the acquisition of TXEN completed in August 1997.
Amortization of intangibles increased $2.6 million (121.3%) for the year ended
August 31, 1998 as compared to the year ended August 31, 1997 primarily as a
result of the amortization of the intangibles recorded with the TXEN acquisition
completed in August 1997. The $4.1 million pre-tax special charges represents
1.0% of total costs and expenses for the year ended August 31, 1998. The $12.0
million pre-tax special charges represents 3.0% of total costs and expenses for
the year ended August 31, 1997. Total costs and expenses were 94.5% of revenues
for the year ended August 31, 1998 as compared to 98.1% of revenues for the year
ended August 31, 1997.
Operating Margin. Operating margin including the special charges was
5.5% of revenues for the year ended August 31, 1998 as compared to 1.9% of
revenues for the year ended August 31, 1997. Operating margin excluding the
special charges was 6.4% of revenues for the year ended August 31, 1998 as
compared to 5.0% of revenues for the year ended August 31, 1997. The Company's
Defense and Intelligence unit realized a 6.0% operating margin for the year
ended August 31, 1998 as compared to 4.2% for the year ended August 31, 1997.
The improved margins are primarily the result of improved margins on
time-and-material contracts. The Company's Government IT unit realized operating
margins, excluding the special charges, of 6.0% for the year ended August 31,
1998 as compared to 5.5% for the year ended August 31, 1997. The improved
margins are the result of increased margins on modifications awarded to existing
contracts during fiscal year 1998. The Company's Commercial IT unit realized
operating margins of 4.7% for the year ended August 31, 1998 as compared to 8.5%
for the year ended August 31, 1997. The decreased margins are a result of
increased costs related to infrastructure additions and client receivable
write-offs. The Company's Healthcare IT unit realized operating margins,
excluding special charges, of 12.3% for the year ended August 31, 1998 as
compared to 5.0% for the year ended August 31, 1997. The improved margins are
the result of the managed care operations acquired with the acquisition of TXEN
completed in August 1997.
Other Income (Expense). Other income (expense) decreased $.7 million for
the year ended August 31, 1998 as compared to the year ended August 31, 1997.
Other income includes equity in earnings of unconsolidated affiliates and
interest income. Other expense includes interest expense and minority interest.
Interest income is from the investment of the Company's cash reserves.
Substantially all available cash is invested in interest-bearing accounts or
fixed income instruments. Interest expense is primarily from the long-term
borrowings of the Company and the commitment fee on unused line of credit.
Equity in earnings of unconsolidated affiliates for the year ended
August 31, 1998 primarily represents the Company's share of the earnings of
NCCIM, L.L.C., a joint venture, 50% of which is owned by the Company; while the
comparable amount for the year ended August 31, 1997 primarily represents the
Company's share of earnings of TXEN. As of August 29, 1997, TXEN became a
wholly-owned subsidiary of the Company.
Minority interest primarily represents the minority partner's share of
earnings of Nichols ENTEC Systems, L.L.C., a joint venture, 60% of which is
owned by the Company. The increase in minority interest of $0.7 million for the
year ended August 31, 1998 as compared to the year ended August 31,1997 is
primarily the result of an increase in SAP software sales and integration
services in the Commercial IT unit.
Income Taxes. Income taxes as a percentage of income before taxes was
39.2% for the year ended August 31, 1998 as compared to 86.4% for the year ended
August 31, 1997. The decrease is primarily a result of the differences between
financial and taxable income related to the amortization of intangibles and
deductibility of special charges. In fiscal year 1997 the $12.0 million
write-off of purchased in-process research and development was not deductible
for tax purposes. In fiscal year 1998 the amortization expense of the intangible
assets acquired in the August 1997 acquisition of TXEN was not deductible for
tax purposes.
Net Income. Net income including the special charges increased $13.2
million (1,103%) for the year ended August 31, 1998, as compared to the year
ended August 31, 1997. Net income excluding the special charges increased $3.7
million (28.3%) for the year ended August 31, 1998 as compared to the year ended
August 31, 1997. The increases are a result of the items discussed above.
Earnings Per Common Share Assuming Dilution. Earnings per common share
assuming dilution including the special charges were $1.02 for the year ended
August 31, 1998 as compared to $0.09 for the year ended August 31, 1997.
Earnings per common share assuming dilution excluding the special charges were
$1.20 for the year ended August 31, 1998 compared to $1.04 for the year ended
August 31, 1997. Net income including the special charges increased $13.2
million (1,103%) for the year ended August 31, 1998 as compared to the year
ended August 31, 1997. Net income excluding special charges increased $3.7
million (28.3%) for the year ended August 31, 1998 as compared to the year ended
August 31, 1997. Weighted average common shares and common equivalent shares
increased 11.1% (1,412,291 shares) for the year ended August 31, 1998 as
compared to the year ended August 31, 1997.
Comparison of Operating Results for Fiscal Year 1997 with Fiscal Year 1996
Revenues. Revenues increased $141.5 million (55.2%) in fiscal year
1997. Approximately 70% of the increase was attributable to revenues from two
high performance system integration contracts awarded in 1996. During fiscal
year 1997, these two contracts generated approximately 30% of the Company's
total revenues. At August 31, 1997 a substantial portion of the two contract
values had been realized. These contracts generated less than 15% of the
Company's total revenues in fiscal year 1998.Approximately 20% of the increase
in revenues was attributable to acquisitions completed late in fiscal year 1996.
Approximately 10% of the increase in revenues was attributable to the existing
contract base.
Operating Profit. The Company expensed $12.0 million of costs in the
fourth quarter of fiscal year 1997 for research and development activities
in-process at the time of the acquisition of the remaining 80.1% of TXEN stock.
Including the $12.0 million write-off of purchased in-process research and
development associated with the acquisition of TXEN, operating profit decreased
$7.7 million (49.9%) in fiscal year 1997. Excluding the $12.0 million write-off
of purchased in-process research and development, operating profit increased
$4.3 million (27.8%) in fiscal year 1997. Including the write-off of purchased
in-process research and development, costs and expenses were 98.1% of revenues
for fiscal year 1997 compared to 94.0% of revenues for fiscal year 1996. The
write-off of purchased in-process research and development represents 3.0% of
total costs and expenses. Excluding the purchase of in-process research and
development, costs and expenses were 95.0% of revenues for fiscal year 1997.
Direct and allocable costs increased 60.9% ($133.0 million) in fiscal year 1997
as compared to fiscal year 1996. The increase is primarily the result of
increased purchases of hardware, software and subcontractor services in the
performance of certain government contracts. Direct and allocable costs as a
percent of revenues increased to 88.3% in fiscal year 1997 as compared to 85.1%
of revenues in fiscal year 1996 as a result of lower margins typically realized
on the purchased hardware, software, and subcontractor services. General and
administrative expenses increased 16.4% ($3.5 million) in fiscal year 1997 as
compared to fiscal year 1996. The increase is primarily a result of investments
in marketing and infrastructure resources made in fiscal year 1997 which are
expected to support future commercial revenues.
Other Income (Expense). Other income (expense) increased $0.7 million
in fiscal year 1997 as compared to fiscal year 1996. Other income includes
equity in earnings of unconsolidated affiliates and interest income. Other
expense includes interest expense and minority interest. Equity in earnings of
unconsolidated affiliates primarily represents the Company's share of earnings
of TXEN. As of August 29, 1997, TXEN became a wholly-owned subsidiary of the
Company. Interest income is from the investment of the Company's cash reserves.
Substantially all available cash is invested in interest-bearing accounts or
short-term fixed income instruments. Minority interest primarily represents the
minority partner's share of earnings of Holland Technology Group and Holland
Software Solutions, joint ventures, 60% of which are owned by the Company.
Income Taxes. Income taxes as a percentage of income before taxes was
86.4% in fiscal year 1997 and 36.5% in fiscal year 1996. The $12.0 million
write-off of purchased in-process research and development in the fourth quarter
of fiscal year 1997 is not deductible for tax purposes.
Net Income. Including the $12.0 million write-off of purchased
in-process research and development, net income decreased $8.9 million (88.1%)
for fiscal year 1997 as compared to fiscal year 1996. The decrease is the result
of the impact of the $12.0 million write-off of purchased in-process research
and development.
Earnings Per Share Assuming Dilution. Earnings per share assuming
dilution for fiscal year 1997 were $0.09 as compared to $0.94 for fiscal year
1996, a decrease of 90.0%. Excluding the $12.0 million write-off of purchased
in-process research and development, earnings per share assuming dilution were
$1.04 for fiscal year 1997 as compared to $0.94 for fiscal year 1996, a 10.2%
increase. Excluding the $12.0 million write-off of purchased in-process research
and development, net income increased 31.2% ($3.1 million), while weighted
average shares outstanding increased 19.0% (2,031,407 shares) for fiscal year
1997 as compared to fiscal year 1996.
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 $78.0 million and $68.8 million at August 31, 1998
and 1997, respectively. Operating activities provided cash of $10.1 million and
$16.9 million for the years ended August 31, 1998 and 1997, respectively.
Investing activities used cash of $22.0 million and $29.2 million for the years
ended August 31, 1998 and 1997, respectively. Financing activities used cash of
$0.7 million for the year ended August 31, 1998 and provided cash of $14.1
million for the year ended August 31, 1997.
Cash provided by operating activities decreased $6.8 million for the
year ended August 31, 1998 as compared to the year ended August 31, 1997. The
decrease is the result of a decrease in the non-cash adjustments to reconcile
net income to net cash provided by operations ($3.9 million) and changes in
operating assets and liabilities, net of the effects of acquisitions ($16.1
million) offset by increased net income ($13.2 million).
Cash used for investing activities was $22.0 million for the year ended
August 31, 1998. The Company acquired all of the capital stock of MSI for
aggregate consideration of approximately $12.5 million. Purchases of property
and equipment were $9.3 million and $4.8 million for the years ended August 31,
1998 and 1997, respectively. The Company realized net proceeds of $2.3 million
from the maturity of long-term investments. An additional $1.0 million capital
investment was made for affiliates accounted for using the equity method.
Cash used for financing activities was $0.7 million for the year ended
August 31, 1998. The primary use of cash for financing activities was for the
net repayment of a $5.0 million indebtedness under the bank line of credit. The
Company realized proceeds from the sale of common stock of $5.6 million and $4.6
million for the years ended August 31, 1998 and 1997, respectively.
The Company renegotiated its bank line of credit in November 1997. The
agreement provides for unsecured borrowings up to $100,000,000. The credit
agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a
margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of
approximately 0.125% on the unused portion of the line of credit. The short-term
commitment agreement ($50,000,000) is renewable annually and the long-term
commitment agreement ($50,000,000) is renewable in November, 2000. There were
$5,000,000 outstanding borrowings on this line of credit at August 31, 1998.
The Company is regularly evaluating potential acquisition candidates and
expects to complete other transactions in fiscal year 1999. The purchase price
allocation for TXEN was finalized during the first fiscal quarter of 1998. The
$30.1 million, preliminarily classified as goodwill, was allocated as follows;
$15.6 million to goodwill, $12.7 million to other intangibles and $1.8 million
to capitalized software development. Goodwill and other intangibles of $27.6
million are being amortized using the straight-line method over an estimated
useful life of twenty years. Other intangibles of $0.7 million are being
amortized using the straight-line method over an estimated useful life of seven
years. The amount allocated to capitalized software development is being
amortized using the straight-line method over an estimated useful life of five
years. The acquisition of MSI was completed during the third fiscal quarter of
1998. The MSI acquisition resulted in the write-off of $2.0 million, pre-tax,
purchased in-process research and development and the recording of approximately
$10.0 million in goodwill which is being amortized using the straight-line
method over an estimated useful life of 15 years.
The Company has entered into preliminary negotiations with DSM Copolymer
to acquire an additional 35% interest in the ENTEC joint venture from DSM
Copolymer for $6.0 million plus an earn-out based on ENTEC revenues and profits.
If the negotiations are successful, the Company would own a 95% interest in the
joint venture. Closing is expected to occur during the second quarter of fiscal
year 1999.
The Company continues to actively pursue contracts for information
system development and computer system integration activities, which could
require the Company to acquire substantial amounts of computer hardware for
resale or lease to customers. 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, for the next four fiscal quarters, its
existing capital resources, together with available borrowing capacity, will be
sufficient to fund operating needs, finance acquisitions of property and
equipment, and make strategic acquisitions, if appropriate.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, Earnings Per Share. The overall objective of Statement
No. 128 is to simplify the calculation of earnings per share (EPS) and achieve
comparability with recently issued international accounting standards. The
Company first reported on the new EPS basis in the second quarter ended February
28, 1998. All prior period EPS amounts (including information regarding EPS in
interim financial statements, earnings summaries, and selected financial data)
have been restated to conform to the provisions of Statement No. 128.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income (SFAS 130). Statement No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. Adoption of Statement No.
130 by the Company on September 1, 1998 will have no impact on the Company's
consolidated results of operations or stockholders' equity.
In June 1997, the FASB issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information (SFAS 131). Statement No. 131
changes the method of determining segments from that currently required, and
requires the reporting of certain information about such segments. The Company
has not finalized how its segments will be reported or whether and to what
extent segment information will differ from that currently presented.
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.
Year 2000
Overview
Historically, certain computerized systems have had two digits rather
than four digits to define the applicable year, which could result in
recognizing a date using "00" as the year 1900 rather than the year 2000. This
could cause significant software failures or miscalculations and is generally
referred to as the "Year 2000" problem.
The Company recognizes that the impact of the Year 2000 problem extends
beyond its computer hardware and software and may affect utility and
telecommunication services, as well as the systems of customers and suppliers.
In response to the Year 2000 problem, the Company has developed a
compliance program to evaluate and address date related problems with the
Company's internal systems, services, products, and the systems and products of
the Company's vendors and suppliers. The compliance program is managed by the
Vice President of Corporate Information Systems and Services, and is patterned
after the United States General Accounting Office (GAO) and Office of Management
and Budget project management model.
The Company's Year 2000 compliance program includes five major phases:
Awareness Phase. The Year 2000 problem is defined and managers at the
executive level are educated about potential date related problems and the
potential impact to the Company and its customers from Year 2000 date handling
errors. A Year 2000 program team is established and an overall strategy is
developed.
Assessment Phase. The Year 2000 program team assesses the Year 2000
impact on the Company by: (i) identifying core business areas and processes;
(ii) performing an inventory and analysis of systems supporting the core
business areas; (iii)contacting third party service providers, and software and
hardware vendors to determine Year 2000 issues and their plans for becoming Year
2000 compliant; and (iv) prioritizing conversion or replacement of systems.
Renovation Phase. The Year 2000 program team corrects Year 2000
problems identified in the Assessment Phase by modifying program software,
updating databases, replacing systems or utilizing other appropriate methods.
Implementation Phase. The Year 2000 program team tests, verifies, and
validates converted or replaced systems, applications, databases and utilities
within a limited operational environment.
Validation Phase. The Year 2000 program team fully implements converted
or replaced systems, applications, databases and utilities. The Year 2000
program team also performs extensive testing of all system changes.
As part of the awareness phase the Company has reviewed
- Mission Essential Software Systems
- Mission Essential Computational Systems (hardware)
- Mission Essential Facilities Systems, including elevators, heating
and air conditioning systems, photocopying machines and utility services
- Mission Essential Network Systems
- Customer Software Services,provided by the Company's business units
- Mission Essential Vendor-Supplied Software and Services
The Company considers a system "mission essential" if a failure in that
system would materially disrupt the ability of the Company to perform
contractual services or to process business information in a timely manner. The
Company monitors the status of its Year 2000 compliance program and routinely
updates its Intranet to provide compliance data to its managers and employees.
The Company provides services and products to the U.S. Government pursuant
to specific contractual terms and exact specifications. The Company believes
that it will be responsible for upgrading only those services or products that
specify Year 2000 compliance and do not yet meet this requirement. The Company
is not currently aware of any such services or products.
Status and Timetable for Year 2000 Compliance
Nichols Research has developed a master timetable for its Year
2000 compliance program. The status of each major category of mission essential
systems is as follows:
SYSTEM CATEGORY PHASE ESTIMATED DATE
FOR COMPLIANCE
- --------------------------------------------------------------------------------
Mission Essential Software Systems Renovation December 1998
Mission Essential Computational Systems Renovation December 1998
Mission Essential Network Systems Renovation December 1998
Mission Essential Facilities Systems Assessment Unknown
Mission Essential Customer Systems Renovation December 1998
Mission Essential Vendor-Supplied Software
& Services Assessment Unknown
The phases listed above represent the status of the majority of
products within each category. There may be, within each "system," components at
a lower or higher phase in the Year 2000 assessment. For example, although
Mission Essential Vendor-Supplied Software and Services is rated in the
Assessment Phase, many of the Company's vendors have already been contacted and
have supplied letters or referenced web pages certifying their Year 2000
compliance. The Vice-President of Corporate Information Systems and Services
maintains compliance letters and referenced web page addresses.
While the Company estimates that its internal systems will be Year 2000
compliant by the end of calendar year 1998, there can be no assurance that the
third-party supplied software, hardware and services included in the Essential
Facilities and Vendor-Supplied Services categories will be Year 2000 compliant,
or that these third-parties will not suffer a Year 2000 business disruption that
may adversely affect the Company's business, financial condition or results of
operations.
Contingency Plans
Because the Company's Year 2000 conversions are expected to be
completed prior to any potential disruption to the Company's business, the
Company has not yet completed the development of a comprehensive Year 2000
contingency plan. However, the Company has minimized its exposure to Year 2000
failures of vendor supplied products by adding Year 2000 compliance as a
standard condition to its purchase orders. These contracts also reference
Federal Acquisition Regulation 39.106, which addresses Year 2000 compliance
issues. The Company is currently negotiating a Risk Management Insurance Policy
designed to protect the Company in the event that it is involved in litigation
arising from errors and omissions relating to Year 2000 issues. If the Company
determines that its business is at material risk of disruption due to the Year
2000 problem, or anticipates that its Year 2000 conversions will not be
completed in a timely fashion, the Company will work to develop a detailed
contingency plan.
Cost for Year 2000 Compliance
The Company believes that the total cost of its Year 2000 compliance
activity will not be material to the Company's operation, liquidity and capital
resources. The Company estimates that the total cost for its Year 2000
compliance will be $688,500 which represents 11,475 hours of analysis,
modification and testing, and $34,500 for new equipment purchases. To date, the
Company has completed 6,850 hours of Year 2000 compliance work, and purchased
new equipment valued at $27,000, for a total cost of $438,000.
Year 2000 Risks Faced by the Company
Although the Company believes that its Year 2000 compliance program is
comprehensive, the Company may not be able to identify, successfully remedy or
assess all date-handling problems in its business systems or operations or those
of its customers and suppliers. As a result, the Year 2000 problem could have a
materially adverse affect on the Company's business financial condition or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
August 31, August 31, August 31,
1998 1997 1996
----------------------------------------------------
ASSETS (amounts in thousands)
<S> <C> <C> <C>
Current assets:
Cash and temporary cash investments (Note 1)......... $ 11,275 $ 23,964 $ 22,151
Accounts receivable (net of allowance of $534,
$181, and $29) (Note 2)......................... 113,392 96,303 92,403
Deferred income taxes (Notes 1 and 5)................ 2,488 2,102 1,519
Other................................................ 3,939 3,162 2,438
----------------------------------------------------
Total current assets............................. 131,094 125,531 118,511
Long-term investments (Notes 1 and 3).................... 1,519 3,738 4,483
Property and equipment (Note 1):
Computers and related equipment...................... 29,465 22,409 17,455
Furniture, equipment and improvements................ 12,210 10,192 7,237
Equipment - contracts................................ 5,771 5,771 5,771
----------------------------------------------------
47,446 38,372 30,463
Less accumulated depreciation........................ 25,011 19,101 14,974
----------------------------------------------------
Net property and equipment....................... 22,435 19,271 15,489
Goodwill and other intangibles (net of accumulated
amortization of $5,857, $2,946, and $1,246) 54,214 48,130 21,004
(Notes 1, 4, and 11)...............................
Software development costs (net of accumulated
amortization of $840, $314, and $113) (Notes 1 and 4) 3,701 4,271 1,138
Investment in affiliates (Note 12)....................... 9,607 8,363 4,099
Other assets.............................................. 1,491 828 597
----------------------------------------------------
Total assets.............................................. $ 224,061 $ 210,132 $ 165,321
====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
August 31, August 31, August 31,
1998 1997 1996
-----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (amounts in thousands)
<S> <C> <C> <C>
Current liabilities:
Accounts payable..................................... $ 24,278 $ 28,679 $ 31,147
Accrued compensation and benefits (Note 9) ......... 18,317 11,854 9,382
Income taxes payable (Note 5)....................... 1,681 246 692
Current maturities of long-term debt (Note 6)....... 997 761 764
Borrowing on line of credit (Note 6)................ 5,000 10,500 __
Deferred revenue..................................... 1,797 3,114 230
Other................................................ 1,040 1,616 1,609
-----------------------------------------------------
Total current liabilities........................ 53,110 56,770 43,824
Deferred income taxes (Notes 1 and 5).................... 354 2,062 1,661
Long-term debt (Note 6):
Industrial development bonds......................... 1,335 1,558 1,777
Long-term notes...................................... 1,613 2,467 3,007
-----------------------------------------------------
Total long-term debt............................. 2,948 4,025 4,784
Minority interest in consolidated subsidiaries............ 1,177 307 __
Stockholders' equity (Notes 1 and 10):
Common stock, par value $.01 per share
Authorized - 30,000,000, 20,000,000 and
20,000,000 shares, respectively
Issued - 13,997,455, 13,553,346 and
12,076,463 shares, respectively.................. 140 135 121
Additional paid-in capital........................... 95,631 90,076 59,129
Retained earnings.................................... 71,989 58,045 57,090
Less cost of treasury stock - 168,500 shares......... (1,288) (1,288) (1,288)
-----------------------------------------------------
Total stockholders' equity....................... 166,472 146,968 115,052
-----------------------------------------------------
Total liabilities and stockholders' equity................ $ 224,061 $ 210,132 $ 165,321
=====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended August 31,
1998 1997 1996
----------------------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C>
Revenues (Note 1) ...................................... $ 427,043 $ 398,142 $ 256,605
Costs and expenses:
Direct and allocable costs......................... 355,750 351,367 218,367
General and administrative expenses................ 39,099 24,913 21,408
Amortization of intangibles........................ 4,707 2,127 1,390
Special charges (Notes 4 and 11)................... 4,126 12,000 __
----------------------------------------------------
Total costs and expenses....................... 403,682 390,407 241,165
----------------------------------------------------
Operating profit........................................ 23,361 7,735 15,440
Other income (expense):
Interest expense (Note 6)......................... (467) (512) (629)
Other income, principally interest................. 1,176 1,095 1,044
Equity in earnings of unconsolidated
affiliates......................................... 524 656 __
Minority interest in consolidated
subsidiaries....................................... (870) (129) __
----------------------------------------------------
Income before income taxes.............................. 23,724 8,845 15,855
Income taxes (Note 5).................................. 9,301 7,646 5,792
----------------------------------------------------
Net income.............................................. $ 14,423 $ 1,199 $ 10,063
====================================================
Earnings per common share (Note 7)..................... $ 1.06 $ .10 $ 1.00
====================================================
Earnings per common share assuming
dilution (Note 7)................................ $ 1.02 $ .09 $ .94
====================================================
Weighted average common shares (Note 7)............... 13,607,145 12,090,377 10,090,684
====================================================
Weighted average common shares and
common equivalent shares (Note 7)................ 14,124,978 12,712,687 10,681,280
====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
------ ------ ------- -------- ----- ------
(in thousands except share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1995........ 10,084,296 $101 $24,274 $47,125 $(2,143) $ 69,357
Sale of common stock............ 1,678,050 17 30,663 __ __ 30,680
Exercise of stock options....... 256,146 2 1,655 __ __ 1,657
Employee stock purchases........ 64,703 1 1,016 __ __ 1,017
Reissue of 108,066 shares of
treasury stock............... __ __ 1,523 __ 855 2,378
Repurchase of shares for retirement (6,732) __ (2) (98) __ (100)
Net income...................... __ __ __ 10,063 __ 10,063
----------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1996........ 12,076,463 121 59,129 57,090 (1,288) 115,052
Exercise of stock options....... 326,656 3 3,047 __ __ 3,050
Employee stock purchases........ 79,816 __ 1,590 __ __ 1,590
Repurchase of shares for retirement (13,737) __ (4) (244) __ (248)
Issue of stock for acquisition.. 1,084,148 11 26,314 __ __ 26,325
Net income...................... __ __ __ 1,199 __ 1,199
----------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1997........ 13,553,346 135 90,076 58,045 (1,288) 146,968
Exercise of stock options....... 332,312 4 3,351 __ __ 3,355
Employee stock purchases........ 111,797 1 2,204 __ __ 2,205
Net income...................... __ __ __ 14,423 __ 14,423
Adjustments for Welkin Associates,
Ltd. pooling of interests
(Note 11).................... __ __ __ (479) __ (479)
----------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1998........ 13,997,455 $140 $95,631 $71,989 $(1,288) $166,472
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended August 31,
1998 1997 1996
---- ---- ----
(amounts in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 14,423 $ 1,199 $ 10,063
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for doubtful accounts..................................... 353 27 23
Depreciation........................................................ 5,989 4,160 3,382
Amortization........................................................ 4,737 1,926 1,301
Equity in earnings of unconsolidated affiliates..................... (524) (656) __
Minority interest................................................... 870 307 __
Deferred income taxes............................................... (1,923) (389) (135)
Special charges..................................................... 3,977 12,000 __
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable.............................................. (17,919) 608 (30,554)
Other assets..................................................... (1,254) (307) (325)
Accounts payable................................................. (4,410) (3,776) 12,146
Accrued compensation and benefits................................ 6,331 2,151 1,118
Income taxes payable............................................. 944 (858) (335)
Other current liabilities........................................ (1,540) 487 (186)
-------------------------------------------
Total adjustments................................................ (4,369) 15,680 (13,565)
-------------------------------------------
Net cash provided (used) by operating
activities.................................................... 10,054 16,879 (3,502)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................................... (9,273) (4,827) (5,339)
Purchase of long-term investments...................................... (100) (75) __
Purchase of capitalized software....................................... (722) (834) (935)
Payments for acquisitions, net of cash acquired........................ (13,178) (18,180) (15,503)
Payments for investment in affiliates.................................. (1,028) (6,054) (2,504)
Proceeds from long-term investments (Note 3)........................... 2,299 775 __
-------------------------------------------
Net cash used by investing activities......................... (22,002) (29,195) (24,281)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................. 5,560 4,640 33,354
Payments for retired shares............................................ __ (248) (100)
Payments of long-term debt............................................. (1,301) (763) (1,005)
Proceeds from borrowings on line of credit............................. 5,000 25,500 14,500
Payments on line of credit borrowings.................................. (10,000) (15,000) (14,500)
-------------------------------------------
Net cash provided (used) by financing activities....................... (741) 14,129 32,249
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended August 31,
1998 1997 1996
---- ---- ----
(amounts in thousands)
Net increase (decrease) in cash and temporary cash investments......... (12,689) 1,813 4,466
Cash and temporary cash investments at beginning of year............... 23,964 22,151 17,685
-------------------------------------------
Cash and temporary cash investments at end of year..................... $ 11,275 $ 23,964 $ 22,151
===========================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Issuance of stock as consideration in acquisitions..................... $ __ $ 26,325 $ 2,378
Adjustment to purchase price allocation................................ __ 200 __
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. Nichols Research Corporation (Nichols) provides
information systems and technology services to agencies of the Department of
Defense (DOD), non-defense federal agencies, state governments and commercial
entities.
The consolidated financial statements include the accounts of Nichols
Research Corporation and its majority-owned subsidiaries and joint ventures (the
Company). Wholly-owned subsidiaries as of August 31, 1998 are Communications &
Systems Specialists, Inc. (CSSi), NRC Technical Services Corporation (NRCTSC),
Advanced Marine Enterprises, Inc. (AME), Nichols InfoTec Corporation, Nichols
TXEN Corporation, Mnemonic Systems, Incorporated. (MSI), and Welkin Associates,
Ltd. (Welkin). The majority-owned joint venture as of August 31, 1998 is Nichols
ENTEC. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company's earnings in unconsolidated affiliates
and joint ventures are accounted for using the equity method.
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. Software license
fees are recognized upon delivery of the software product, unless the Company
has significant obligations remaining. If significant obligations remain
following delivery of the software, revenue is deferred and recognized as the
obligations are fulfilled. 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 adopted Statement No. 121 in the first quarter of fiscal year 1997.
Income Taxes. Deferred income taxes are provided for temporary
differences between financial and taxable income, primarily related to accrued
liabilities, intangible assets and use of accelerated depreciation methods for
income tax purposes.
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, 1998, 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. 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 twenty 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. The Company assesses long-lived assets,
of which goodwill associated with assets acquired in a purchase business
combination is included, for impairment evaluations under Statement No. 121. As
discussed in Note 11 the Company is presently engaged in discussions with the
staff of the Securities and Exchange Commission concerning the basis for the
twenty year useful life being used to amortize certain of the Company's
goodwill.
Capitalized Software Development Costs. Certain costs of internally
developed software are capitalized and amortized over the estimated economic
useful life of the related software product. Amortization expense was $526,000,
$201,000 and $89,000 for years ended August 31, 1998, 1997, and 1996
respectively.
Stock Options. The Company grants stock options 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 option grant. The Company accounts for stock option grants
in accordance with the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and intends to continue to do so;
accordingly, the Company recognizes no compensation expense for stock option
grants in the financial statements.
Reclassification. Certain prior period amounts have been reclassified to
conform with the current year's presentation.
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 as of August 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- -------------
(in thousands)
<S> <C> <C> <C>
Billed................................................................. $ 85,919 $ 50,901 $ 40,283
Unbilled............................................................... 27,473 45,402 52,120
------------- --------------- -------------
$ 113,392 $ 96,303 $ 92,403
============= =============== =============
</TABLE>
Accounts receivable include $87,914,000, $82,702,000, and $74,357,000 due
from the U.S. Government at August 31, 1998, 1997, and 1996, respectively.
Unbilled accounts receivable include retainages of $1,652,000,
$4,094,000, and $3,534,000 at August 31, 1998, 1997 and 1996, 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 the dates
stated:
<TABLE>
<CAPTION>
Gross Gross Estimated Fair
Cost Unrealized Gains Unrealized Value
Losses
-------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
August 31, 1998 Held-to-maturity:
Municipal obligations..................... $ 1,019 $ 3 $ __ $ 1,022
Preferred stocks.......................... 500 1 __ 501
---------------- ----------------- --------------- ----------------
$ 1,519 $ 4 $ __ $ 1,523
August 31, 1997 Held-to-maturity:
Municipal obligations..................... $ 2,734 $ __ $ __ $ 2,734
Preferred stocks.......................... 1,004 9 __ 1,013
---------------- ----------------- --------------- ----------------
$ 3,738 $ 9 $ __ $ 3,747
August 31, 1996 Held-to-maturity:
Municipal obligations..................... $ 3,479 $ __ $ (20) $ 3,459
Preferred stocks.......................... 1,004 __ (26) 978
---------------- ----------------- --------------- ----------------
$ 4,483 $ __ $ (46) $ 4,437
================ ================= =============== ================
</TABLE>
Contractual maturities of debt securities held to maturity occur ratably over
the next two years.
NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of fiscal 1998, the Company reviewed the
insurance line of business. During the evaluation process it was determined that
expected future cash flows from this business would not be sufficient to recover
the recorded goodwill and capitalized software development costs related to this
business. The goodwill and capitalized software development costs were written
down to zero book value during the fourth quarter resulting in a pretax charge
of $1.9 million included in Special Charges on the Consolidated Statement of
Income for the year ended August 31, 1998.
NOTE 5 - INCOME TAXES
The provisions for income taxes for the years ended August 31, consist
of the following:
1998 1997 1996
---- ---- ----
(in thousands)
Current:
Federal....................... $ 9,766 $ 7,082 $ 5,203
State......................... 1,405 953 725
-----------------------------------
$ 11,171 $ 8,035 $ 5,928
Deferred:
Federal...................... $ (1,553) $ (343) $ (120)
State........................ (317) (46) (16)
-----------------------------------
$ (1,870) $ (389) $ (136)
-----------------------------------
$ 9,301 $ 7,646 $ 5,792
====================================
The significant components of deferred tax assets and liabilities as of
August 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current deferred tax assets:
Accrued liabilities not currently deductible................... $ 2,488 $ 2,102 $ 1,519
Non-current deferred tax liabilities:
Basis difference for property and equipment................... (354) (2,062) (1,661)
----------------------------------------------
$ 2,134 $ 40 $ (142)
==============================================
</TABLE>
Income tax expense as a percentage of income before income taxes for
the years ended August 31, varies from the federal statutory rate due to the
following:
1998 1997 1996
---- ---- ----
Statutory federal income
tax rate.................. 35.0% 35.0% 34.0%
State income taxes, net of
federal benefit........... 3.2 6.9 2.9
Non-deductible expenses
from acquisitions.......... 2.3 47.5 __
Equity earnings in
affiliates................. (0.8) (2.6) __
Other....................... (0.5) (0.4) (0.4)
------------------------------------------
39.2% 86.4% 36.5%
==========================================
The Company made income tax payments of approximately $9,189,000,
$8,480,000, and $6,262,000 in the years ended August 31,
1998, 1997, and 1996, respectively.
NOTE 6 - LINE OF CREDIT AND LONG-TERM DEBT
The Company has a bank line of credit which provides for unsecured
borrowings up to $100,000,000. The credit agreement provides for interest at
London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to
0.450% and a facility fee, payable quarterly, of approximately 0.125% on the
unused portion of the line of credit. The short-term commitment agreement
($50,000,000) expires November 1998 and is renewable annually and the long-term
commitment agreement ($50,000,000) is renewable in November, 2000. At August 31,
1998, there was $5,000,000 outstanding on this line of credit at an effective
interest rate of 6.0 percent.
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 $132,000, $138,000, and $144,000, were made in
the years ended 1998, 1997, and 1996.
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 $64,537 until September 2001.
The loan bears interest at LIBOR plus 0.75% and is secured by the computer
hardware which has a carrying value of $2,388,000. Interest payments of
$182,000, $210,000, and $278,000 were made in the years ended August 31, 1998,
1997, and 1996, respectively. Interest expense is included in the consolidated
statements of income as a direct and allocable cost.
NOTE 7 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with earnings per common share and earnings per common share assuming dilution.
Unlike primary earnings per common share, earnings per common share excludes any
dilutive effects of options, warrants, and convertible securities. Earnings per
common share assuming dilution is very similar to the previously reported fully
diluted earnings per share. The Company adopted Statement 128 in the second
quarter of fiscal 1998. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of earnings per common
share and earnings per common share assuming dilution for the years ended August
31,:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Net income and income available to
common stockholders and income
available to common stockholders $ 14,423,000 $ 1,199,000 $ 10,063,000
after assumed conversions...............
=================================================
Denominator:
Denominator for earnings per common
share - weighted average common
shares.................................. 13,607,145 12,090,377 10,090,684
Effect of dilutive securities:
Employee stock options....................... 517,833 622,310 590,596
-------------------------------------------------
Denominator for earnings per common
share assuming dilution - adjusted
weighted average common shares
and assumed conversions...................... 14,124,978 12,712,687 10,681,280
=================================================
Earnings per common share.......................... $ 1.06 $ 0.10 $ 1.00
=================================================
Earnings per common share assuming
dilution...................................... $ 1.02 $ 0.09 $ 0.94
=================================================
</TABLE>
NOTE 8 - 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 for the years ended August 31, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Total rent expense................................................ $ 8,520 $ 7,853 $ 5,047
Amounts to related parties........................................ 983 983 980
</TABLE>
Future minimum lease payments under operating leases with remaining
terms of one year or more for the years ended August 31, are:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 thereafter
---- ---- ---- ---- ---- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total.......................... $ 9,296 $ 8,391 $ 5,555 $ 3,626 $ 3,320 $ 10,275
Amounts to related parties..... 983 894 429 215 __ __
</TABLE>
NOTE 9 - 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
$8,112,000, $6,968,000, and $5,633,000 for the years ended August 31, 1998, 1997
and 1996, respectively.
NOTE 10 - 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. Options are nontransferable and exercisable only
during employment, with certain exceptions. Options are fully vested 48 months
from the date of grant. Options expire five or ten years from the date of grant.
At August 31, 1998, 1,629,955 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. Options are exercisable immediately and expire five
years from the date of grant. At August 31, 1998, 57,490 shares were available
for grant under this plan.
A summary of activity relating to stock options, including
reclassification of prior year share presentation, is as follows:
<TABLE>
<CAPTION>
Employee Non-Employee
Stock Stock
Option Option Total
Plans Plans
----------------------------------------------------------
<S> <C> <C> <C>
Outstanding at August 31, 1995
($8.58 per share)............................... 1,350,760 29,508 1,380,268
Granted ($14.20 per share)................ 299,468 9,000 308,468
Exercised ($6.47 per share).............. (250,644) (5,502) (256,146)
Canceled/Expired ($9.80 per share)........ (69,926) __ (69,926)
----------------------------------------------------------
Outstanding at August 31, 1996
($10.18 per share).............................. 1,329,658 33,006 1,362,664
Granted ($22.80 per share)................ 243,077 6,000 249,077
Exercised ($9.36 per share)............... (316,150) (10,506) (326,656)
Canceled/Expired ($12.45 per share)....... (36,474) (1,000) (37,474)
----------------------------------------------------------
Outstanding at August 31, 1997
($12.85 per share).............................. 1,220,111 27,500 1,247,611
Granted ($23.86 per share)................ 453,540 5,000 458,540
Exercised ($10.09 per share).............. (323,312) (9,000) (332,312)
Canceled/Expired ($17.09 per share)....... (106,676) __ (106,676)
----------------------------------------------------------
Outstanding at August 31, 1998.................. 1,243,663 23,500 1,267,163
Exercisable at August 31, 1998.................. 364,376 23,500 387,876
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted
Range of Contractual Average Average
Exercise Number Remaining Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 0.72 - $ 8.14 235,807 3.5 years $ 7.11 216,988 $ 7.13
8.15 - 13.56 269,199 1.8 years 11.09 126,167 10.94
13.57 - 21.70 124,949 3.0 years 16.72 32,221 15.97
21.71 - 27.13 637,208 3.9 years 23.56 12,500 23.27
- -------------------------------------------------------------------------------------------------------------------
$ 0.72 - $ 27.13 1,267,163 3.3 years $17.51 387,876 $ 9.63
</TABLE>
The Company has an employee stock purchase plan that allows eligible
employees to purchase common stock at less than fair market value. The purchase
price is 85% of fair market value on each quarterly purchase date. Purchases are
limited to the lesser of 10% of an employee's annual compensation or $25,000.
Shares of common stock issued under this plan were 111,797, 79,816, and 64,703
in the years ended August 31, 1998, 1997, and 1996, respectively.
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. As allowed under the provisions of Statement
No. 123, the Company has elected to apply APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in accounting for its
stock based plans. Accordingly, no compensation cost has been recognized for its
qualified stock option plans and its employee stock purchase plans. The effects
of applying Statement No. 123 on a pro forma basis are not likely to be
representative of the effects on reported pro forma net income (loss) for future
years as the estimated compensation cost reflects only options granted
subsequent to August 31, 1995. Had compensation cost for these programs been
determined based on the fair value at the grant dates for awards under these
programs consistent with the method prescribed under Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below for the years ended August 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands except share data)
<S> <C> <C> <C>
NET INCOME (LOSS):
As reported......................................................... $ 14,423 $ 1,199 $ 10,063
Pro forma........................................................... 12,179 (160) 9,525
EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION:
As reported......................................................... $ 1.06 $ 0.10 $ 1.00
Pro forma........................................................... 0.86 (0.01) 0.89
Weighted-average fair value of options granted
during the period...................................................... $ 9.52 $ 9.05 $ 6.38
</TABLE>
The fair value of each option grant is estimated on the date of grant
using a type of Black-Scholes option-pricing model with the following
weighted-average assumptions used for option grants in fiscal 1998, 1997 and
1996, respectively: dividend yield of 0% for all years; expected volatility
factors of 0.391, 0.378 and 0.312; risk-free interest rates of 6.37%, 6.64% and
6.23%; and expected lives of 4 years for all years.
NOTE 11 - BUSINESS COMBINATIONS
On July 28, 1998, the Company exchanged 415,689 shares of its common
stock for all of the outstanding shares of Welkin. Welkin is a provider of
engineering and acquisition management services to the National Intelligence
community. The business combination was accounted for as a pooling of interests.
As a result of conforming Welkin's previous March 31 fiscal year end to the
Company's August 31 fiscal year end, seven months of operations are included in
both fiscal year ended August 31, 1998 and 1997. Revenue of $11,208,000 and net
income of $479,000 are included in both fiscal years. All periods presented have
been restated to include the accounts and operations of Welkin with those of the
Company as previously reported.
<TABLE>
<CAPTION>
For the Years Ended August 31,
1997 1996
----------------------------------
(amounts in thousands)
<S> <C> <C>
Revenue:
Previously reported............................................. $ 379,695 $ 242,308
Welkin.......................................................... 18,447 14,297
-----------------------------------
Combined........................................................ $ 398,142 $ 256,605
Net Income:
Previously reported............................................. $ 474 $ 9,392
Welkin.......................................................... 725 671
-----------------------------------
Combined........................................................ $ 1,199 $ 10,063
</TABLE>
Operations of the companies acquired which were accounted for as
purchases 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 April 15, 1998 the Company acquired 100% of the outstanding stock of
MSI. MSI is a systems integration company serving clients primarily within the
U.S. Department of Justice. Aggregate consideration of approximately $12.5
million was paid at closing. Additional consideration of up to $6.0 million is
contingent upon achieving specified operating results during the twelve months
following acquisition as defined in the purchase agreement. The acquisition was
accounted for using the purchase method of accounting. The allocation of the
excess purchase price to intangible assets includes $2.0 million to in-process
research and development and $10.0 million to goodwill. The purchased in-process
research and development was expensed in the third quarter and is included in
the consolidated statements of income for the year ended August 31, 1998. The
goodwill amount is being amortized using the straight-line method over an
estimated useful life of fifteen years.
On August 29, 1997 the Company exercised its option to acquire the
remaining 80.1% of TXEN, Inc., an information systems and services company in
the managed care industry. Aggregate consideration of approximately $43.8
million was paid at closing, $17.5 million in cash and 1,084,148 shares of
stock, valued at approximately $26.3 million. Allocation of the excess purchase
price to intangible assets includes; $12.0 million to in-process research and
development which was expensed in the fourth quarter and is included in the
consolidated statement of income for the year ended August 31, 1997, $15.6
million to goodwill, $12.7 million to other intangibles and $1.8 million to
capitalized software development costs. Goodwill and other intangibles totaling
$27.6 million are being amortized using the straight-line method over an
estimated useful life of twenty years. The remaining $0.7 million of intangibles
is being amortized using the straight-line method over an estimated useful life
of seven years. The $1.8 million of capitalized software development costs is
being amortized using the straight-line method over an estimated useful life of
five years.
In connection with the Company's filing of a Form S-3 registration
statement, the Company is engaged in discussions with the staff of the
Securities and Exchange Commission regarding the purchase price allocation
related to its August 1997 acquisition of TXEN. These discussions principally
relate to the amount allocated to in-process research and development and the
useful life of twenty years assigned to goodwill. The Company and its
independent auditors, Ernst & Young LLP believe the purchase price allocation
recorded in connection with the TXEN acquisition, and related amortization
charges, are in accordance with widely recognized appraisal practices and
generally accepted accounting principles. However, the staff of the Securities
and Exchange Commission has recently expressed views concerning valuation of
in-process research and development in business combinations which, if
determined to be applicable, would probably result in a reduction in the amount
allocated to in-process research and development. If there are any significant
changes as a result of these discussions to the amounts allocated to purchased
in-process research and development or other intangible assets, or changes in
the lives over which such amounts are amortized, these could result in a
material reduction in the amount of the charge for in-process research and
development reflected in the Company's financial results for the year ended
August 31, 1997 and increased amortization expense in 1998 and subsequent
periods which could be material.
On May 31, 1996 the Company acquired all of the outstanding capital
stock of AME. AME provides naval architectural and marine engineering services
to primarily U.S. Government clients. The 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 pretax charge of $14 million related to the write-off of
purchased in-process research and development has been included in the pro forma
results for the year ended August 31, 1997. 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.
1998 1997
--------------------------------
(in thousands except share data)
Revenues...................................... $ 440,886 $ 435,949
Net income.................................... 16,341 1,608
Earnings per share assuming dilution.......... $ 1.16 $ 0.12
NOTE 12 - INVESTMENT IN AFFILIATES
The Company owns a 50% interest in a joint venture, NCCIM. NCCIM was
formed to perform work under a five year contract awarded in August 1997. The
Company's aggregate capital investment is $1,345,000 at August 31, 1998.
Undistributed equity earnings of $524,000 are included in the August 31, 1998
Retained Earnings balance reported in the Consolidated Balance Sheet.
In February 1997, the Company acquired approximately 30% of the
outstanding capital stock of Intertech Management Group, Inc. (Intertech).
Subsequently, the Company purchased an additional 4% interest. As of August 31,
1998, the Company holds approximately 34% of the outstanding capital stock at an
aggregate cost of approximately $5,663,000. Intertech provides software and data
processing services to the telecommunications industry.
In October 1995, the Company acquired the equivalent of approximately a
20% interest in HealthGate at an aggregate cost of approximately $2,069,000.
HealthGate provides a biomedical and health information system on the World Wide
Web.
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Earnings
(Loss)
Operating Per Share
Revenues Profit Net Income Assuming
(Loss) (Loss) Dilution
-------------------------------------------------------------------------------
(in thousands except share data)
<S> <C> <C> <C> <C>
Year ended August 31, 1998
First Quarter.................. $ 88,540 $ 5,682 $ 3,504 $ 0.25
Second Quarter.................. 92,509 5,963 3,819 0.27
Third Quarter................... 118,478 5,589 3,427 0.24
Fourth Quarter.................. 127,516 6,127 3,673 0.26
Year ended August 31, 1997
First Quarter................... $ 87,240 $ 4,776 $ 3,214 $ 0.25
Second Quarter.................. 96,379 4,615 3,154 0.25
Third Quarter................... 98,702 4,989 3,402 0.27
Fourth Quarter.................. 115,821 (6,645) (8,571) (0.67)
</TABLE>
NOTE: All prior periods have been restated to reflect the merger with Welkin,
which was consummated on July 28, 1998 and accounted for as a pooling of
interests.
<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, 1998, 1997 and 1996, 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 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, 1998, 1997 and 1996, 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 7, 1998
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 6 of the Nichols Research Corporation Proxy Statement relative to the
Annual Meeting of Shareholders to be held January 14, 1999, 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 14, 1999, is
incorporated by reference in this Form 10-K Annual Report. Information relating
to the executive officers is set forth under "Executive Officers of the
Registrant" on page 12 of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Executive Compensation" on pages 7
through 14 of the Nichols Research Corporation Proxy Statement relative to the
Annual Meeting of Shareholders to be held January 14, 1999, 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 14,
1999, 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 14, 1999, is
incorporated by reference in this Form 10-K Annual Report.
<PAGE>
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 24 through 37 of this Form 10-K
Annual Report:
Consolidated Balance Sheets at August 31, 1998, 1997, and 1996
Consolidated Statements of Income for the three years ended August 31, 1998
Consolidated Statements of Stockholders' Equity for the three years ended August
31, 1998
Consolidated Statements of Cash Flows for the three years ended August 31, 1998
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:
<TABLE>
<CAPTION>
Exhibit Number
and Method of
Filing Reference Description
<S> <C> <C>
2.1 L Stock Purchase Agreement dated May 31, 1996, between Registrant and the shareholders of Advanced Marine
Enterprises, Inc.
2.2 T Agreement of Merger dated August 27, 1997, between Registrant, Nichols SELECT Corporation, TXEN, Inc.,
and the shareholders of TXEN, Inc.
2.3 O Stock Purchase Agreement dated April 15, 1998, between Registrant and Artis G. Isaac, the sole shareholder of
Mnemonic Systems, Incorporated.
2.4 A Agreement and Plan of Merger dated June 26, 1998, between Registrant, WAL Acquisition Company, Inc. and Welkin
Associates, Ltd.
3.1 M&C Certificate of Incorporation and Amendments thereto.
3.2 K By-laws and Amendments thereto.
4 D Specimen Stock Certificate.
10.1 B Performance Bonus Plan of Registrant dated July 1, 1986.*
10.2 D&F Non-Employee Officer and Director Stock Option Plan of Registrant.*
10.3 D&I 1988 Employees' Stock Purchase Plan of Registrant and Amendments Number One and Two thereto.*
10.4 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.
10.5 N 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.
10.6 E&Q Nichols Research Corporation 1989 Incentive Stock Option Plan.*
10.7 A Credit Agreement dated November 25, 1997 between the Registrant and Corestates Bank, N.A.relating to a $100
million revolving credit facility.
10.8 G&R Nichols Research Corporation 1991 Stock Option Plan.*
10.9 H Amendments Three and Four to the 1988 Employees' Stock Purchase Plan of Registrant.*
10.10 H Amendment to the Non-Employee Officer and Director Stock Option Plan of Registrant.*
10.11 H Amendment to the 1989 Incentive Stock Option Plan of Registrant.*
10.12 J Amendment Number Five to the 1988 Employees' Stock Purchase Plan of Registrant.*
10.13 J Amendment Number Two to the Non-Employee Officer and Director Stock Option Plan of Registrant.*
10.14 J Amendment Number One to the 1991 Stock Option Plan of Registrant.*
10.15 K Amendments Two and Three to the 1991 Stock Option Plan of Registrant.*
10.16 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.
10.17 K Restricted Stock Purchase Agreement dated September 1, 1994 between Registrant and Michael J. Mruz.*
10.18 P Amendment Six to the Nichols Research Corporation 1988 Employees' Stock Purchase Plan.*
10.19 Q Amendment Three to the Nichols Research Corporation 1989 Incentive Stock Option Plan.*
10.20 R Amendment Five to the Nichols Research Corporation 1991 Stock Option Plan.*
10.21 S Amendment Four to the Nichols Research Corporation Non-Employee Officer and Director Stock Option Plan.*
10.22 U Amendment Two to Employment Agreement dated September 1, 1997 between Nichols Research Corporation and
Michael J. Mruz.*
10.23 T Employment Agreement with Thomas L. Patterson, and Amendment to such Employment Agreement.*
10.24 C Nichols Research Corporation 1997 Stock Option Plan. *
10.25 C Nichols Research Corporation 1997 Stock Bonus Plan.*
10.26 C Nichols Research Corporation Supplemental Retirement Benefit Plan between Registrant and Michael J. Mruz.*
10.27 C Nichols Research Corporation Supplemental Retirement Benefit Plan between Registrant and Chris H. Horgen.*
10.28 A Employment Agreement dated July 28, 1998, between Welkin Associates, Ltd., the Registrant and Carl W.
Monk, Jr.*
10.29 A mendment Two dated June 1, 1998 to Employment Agreement between Nichols TXEN Corporation and Thomas L.
Patterson.*
10.30 A Employment Agreement dated December 16, 1994 between Nichols SELECT Corporation and Paul D. Reaves, and
amendment to such Employment Agreement.*
10.31 A Employment Agreement dated August 29, 1997 between Nichols SELECT Corporation and H. Grey Wood.*
21 A Subsidiaries of Registrant.
23 A Consent of Ernst & Young LLP, Independent Auditors.
24 A Power of Attorney. Reference is made to page 42 of this Form 10-K.
27 A Financial Data Schedule.
99 A Consent of Charles A. Leader.
</TABLE>
- ----------------------
A Filed herewith.
B Incorporated by reference to exhibits filed with the Commission on November
21, 1986 with the Company'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 Commission on April 13,
1998 with the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended February 28, 1998, under the Securities Exchange Act of 1934.
D Incorporated by reference to exhibits filed with the Commission on November
28, 1989 with the Company'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 Commission on November
16, 1990 with the Company'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 Commission on January 18,
1991 with the Company'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 Commission on November
20, 1992 with the Company'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 Commission on November
26, 1993 with the Company'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 Commission on February 7,
1989 with the Company's registration statement on Form S-8 under the Securities
Act of 1933, File No. 33-13464.
J Incorporated by reference to exhibits filed with the Commission on November
28, 1994 with the Company'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 Commission on November
29, 1995 with the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1995, under the Securities Exchange Act of 1934.
L Incorporated by reference to exhibits filed with the Commission on June 17,
1996 with the Company'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 Commission on July 25,
1996 with the Company's registration statement on Form S-3 under the Securities
Act of 1933, File No. 333-08787.
N Incorporated by reference to exhibits filed with the Commission on November
25, 1996 with the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1996, under the Securities Exchange Act of 1934.
O Incorporated by reference to exhibits filed with the Commission on July 14,
1998 with the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 31, 1998, under the Securities Exchange Act of 1934.
P Incorporated by reference to exhibits filed with the Commission on June 13,
1997 with the Company's registration statement on Form S-8 under the Securities
Act of 1933, File No. 333-07164.
Q Incorporated by reference to exhibits filed on December 10, 1991 with the
Company's registration statement on Form S-8 under the Securities Act of 1933,
File No. 33-44409, as amended by Form S-8 filed with the Commission on June 13,
1997 (File No.
333-07160).
R Incorporated by reference to exhibits filed with the Commission on December 7,
1992 with the Company's registration statement on Form S-8 under the Securities
Act of 1933, File No. 33-55454, as amended by Form S-8 filed with the Commission
on June 13, 1997 (File No. 333-07162).
S Incorporated by reference to exhibits filed with the Commission on June 23,
1997 with the Company's registration statement on Form S-8 under the Securities
Act of 1933, File No. 333-29791.
T Incorporated by reference to exhibits filed with the Commission on September
11, 1997 with the Company's Current Report on Form 8-K dated August 31, 1997, as
amended under the Securities Exchange Act of 1934.
U Incorporated by reference to exhibits filed with the Commission on November
28, 1997, with the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1997, under the Securities Exchange Act of 1934.
* Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended August 31, 1998.
(c) Exhibits. The response to this portion of Item 14 is submitted 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 on
its behalf by the undersigned, thereunto duly authorized.
NICHOLS RESEARCH CORPORATION
November 24, 1998 By Chris H. Horgen
----------------- ---------------
Chris H. Horgen
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below, hereby constitutes and appoints Michael J. Mruz and Allen E.
Dillard, and each or either of them, with full power of substitution, as
attorneys-in-fact in their names, place and stead to execute any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
documents in connection therewith, and hereby ratify and confirm all that said
attorneys-in-fact and each of them or his substitutes may do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chris H. Horgen Chairman of the Board (Principal November 24, 1998
--------------- Executive Officer)
Chris H. Horgen
Michael J. Mruz Chief Exective Officer and Director November 24, 1998
---------------
Michael J. Mruz
Patsy L. Hattox Corporate Vice President, Chief Administrative November 25, 1998
--------------- Officer, Secretary and Director
Patsy L. Hattox
Roy J. Nichols Vice Chairman and Senior Vice President November 24, 1998
--------------
Roy J. Nichols
Roger P. Heinisch Director November 18, 1998
-----------------
Roger P. Heinisch
John R. Wynn Director November 25, 1998
------------
John R. Wynn
William E. Odom Director November 20, 1998
---------------
William E. Odom
James R. Thompson, Jr. Director November 20, 1998
----------------------
James R. Thompson, Jr.
Phil E. Depoy Director November 24, 1998
-------------
Phil E. Depoy
------------------- Chairman of Nichols TXEN Corporation and November ___, 1998
Thomas L. Patterson Director
Daniel W. McGlaughlin Director November 23, 1998
---------------------
Daniel W. McGlaughlin
David Friend Director November 18, 1998
------------
David Friend
Allen E. Dillard Corporate Vice President, Chief Financial Officer, November 25, 1998
---------------- and Corporate Treasurer (Principal Financial
Allen E. Dillard and Accounting Officer)
</TABLE>
AGREEMENT AND PLAN OF MERGER
By and Among
Nichols Research Corporation,
WAL Acquisition Company, Inc.
and
Welkin Associates, Ltd.
Dated: June 26, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June
26, 1998, by and among NICHOLS RESEARCH CORPORATION, a Delaware corporation
("Nichols"), WAL ACQUISITION COMPANY, INC., a Virginia corporation and a
subsidiary of Nichols ("Merger Sub"), and WELKIN ASSOCIATES, LTD., a Virginia
corporation ("Welkin").
R E C I T A L S
Welkin is engaged in providing engineering and management services to
national intelligence organizations with emphasis on systems engineering,
processing and analysis, mission utility assessment, systems acquisition, and
tactical operations and support (the 'Welkin Business'). This Agreement provides
for the acquisition of Welkin by Nichols pursuant to the merger of Merger Sub
into and with Welkin. At the effective time of such merger, the outstanding
shares of the common stock of Welkin shall be converted into the right to
receive shares of the common stock of Nichols (except as provided in Section 1.6
of this Agreement). As a result, shareholders of Welkin shall become
shareholders of Nichols. The Board of Directors of Nichols, Merger Sub, and
Welkin have adopted resolutions approving this Agreement and the consummation of
the transactions contemplated hereby. The transactions described in this
Agreement are subject to the approval of the shareholders of Welkin and the
satisfaction of certain other conditions described in this Agreement. It is the
intention of the parties to this Agreement that the merger for federal income
tax purposes shall qualify as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code, and for accounting purposes shall qualify
for treatment as a pooling of interests.
AGREEMENT AND PLAN
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto adopt and make this Agreement and Plan
and prescribe the terms and conditions hereof and the manner and basis of
carrying the merger into effect, which shall be as follows:
ARTICLE I
THE MERGER
<PAGE>
Section 1.1 The Merger. Upon performance of all covenants and
obligations of the parties contained herein and upon fulfillment or waiver of
all conditions to the obligations of the parties contained herein, on the Merger
Date, as hereinafter defined, and pursuant to the Virginia Stock Corporation Act
(the "VSCA"), Merger Sub will be merged with and into Welkin (the "Merger"),
which will be the surviving corporation, and as a result thereof shall become a
wholly-owned subsidiary of Nichols. The purposes of the surviving corporation
shall be those stated in the Articles of Incorporation of Welkin. As soon as
practicable after the terms and conditions of this Agreement have been
satisfied, Articles and Plan of Merger, substantially in the form attached as
Exhibit "A" hereto, properly completed and executed in accordance with the VSCA
(the "Articles of Merger"), will be filed with the State Corporation Commission
of Commonwealth of Virginia. The merger shall become effective at the time and
on the date the filing of the Articles of Merger with the State Corporation
Commission of the Commonwealth of Virginia shall have been completed. The date
and time when the merger becomes effective is referred to in this Agreement as
the 'Merger Date.'
Section 1.2 Conversion of Shares. Upon consummation of the Merger and
without any action on the part of Nichols, Merger Sub, Welkin or the
shareholders thereof, each share of Welkin's common stock, $1.00 par value
("Welkin Stock"), outstanding immediately prior to the Merger, except shares
held by shareholders who have properly exercised their dissenters' rights under
Sections 13.1-729 through 13.1-741 of the VSCA ("Dissenting Shares") or shares
then owned by Nichols or by a Nichols' subsidiary, shall be converted into the
right to receive that number of shares of Nichols' common stock, $0.01 par value
("Nichols Stock") determined in accordance with the formula set forth on
Schedule 1.2, Conversion of Shares, hereto (the "Conversion Ratio"). The
outstanding shares of Merger Sub immediately prior to the Merger shall, upon
consummation of the Merger, be converted into an equal number of shares of
Welkin Stock, and shall thereafter constitute the outstanding capital stock of
the surviving corporation. The authorized capital stock of Welkin as set forth
in its Articles of Incorporation shall continue to be the authorized capital
stock for the surviving corporation.
Section 1.3 Stock Options.
(a) At the Merger Date, each option to purchase shares of
Welkin Stock pursuant to stock options ("Welkin Options") granted by Welkin
under the Incentive Stock Option Plan of 1988 of Welkin Associates, Ltd. (the
'Welkin Stock Option Plan'), which are outstanding at the Merger Date, whether
<PAGE>
or not exercisable, shall be converted into and become rights with respect to
Nichols Stock, and Nichols shall assume each Welkin Option in accordance with
the terms of the Welkin Stock Option Plan and stock option or other agreement by
which it is evidenced, except that from and after the Merger Date, (i) Nichols
and its stock option committee shall be substituted for Welkin and Welkin's
Board of Directors administering such Welkin Stock Option Plan, (ii) each Welkin
Option assumed by Nichols may be exercised solely for shares of Nichols Stock,
(iii) the number of shares of Nichols Stock subject to such Welkin Options shall
be equal to the number of shares of Welkin Stock subject to such Welkin Options
immediately prior to the Merger Date multiplied by the Conversion Ratio, and
(iv) the per share exercise price under each such Welkin Option shall be
adjusted by dividing the per share exercise price under each such Welkin Option
by the Conversion Ratio and rounding up to the nearest cent. Notwithstanding the
provisions of clause (iii) of the preceding sentence, Nichols shall not be
obligated to issue any fraction of a share of Nichols Stock upon exercise of
Welkin Options and any fraction of a share of Nichols Stock that otherwise would
be subject to a converted Welkin Option shall represent the right to receive a
cash payment upon exercise of such converted Welkin Option equal to the product
of such fraction and the difference between the market value of one share of
Nichols Stock at the time of exercise of such Welkin Option and the per share
exercise price of such Welkin Option. The market value of one share of Nichols
Stock at the time of exercise of a Welkin Option shall be the Weighted Average
Share Price of Nichols Stock as set forth on Schedule 1.3(a), Weighted Average
Share Price, hereto. Nichols and Welkin agree to take all necessary steps to
effectuate the foregoing provisions of this Section.
(b) As soon as practicable after the Merger Date and in any
event no later than thirty (30) days after the Merger Date, Nichols shall
deliver to the participants of the Welkin Stock Option Plan an appropriate
notice setting forth such participant's rights pursuant thereto and the grants
subject to the Welkin Stock Option Plan shall continue in effect on the same
terms and conditions (subject to the adjustments required by Section 1.3(a)
after giving effect to the Merger). Within fifteen (15) days after the Merger
Date, Nichols shall file a registration statement on Form S-8 (the "S-8
Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the shares of Nichols Stock subject to such
options. Nichols shall use its best efforts to maintain the effectiveness of the
S-8 Registration Statement (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain outstanding.
The S-8 Registration Statement and all amendments and supplements thereto will
conform in all respects with the requirements of the Securities Act and all
rules and regulations thereunder.
(c) All contractual restrictions or limitations on transfer
with respect to Welkin Stock awarded under the Welkin Stock Option Plan to the
extent that such restrictions or limitations shall not have already lapsed
(whether as a result of the Merger or otherwise), and except as otherwise
expressly provided in such plan, shall remain in full force and effect with
respect to shares of Nichols Stock into which such restricted stock is converted
pursuant to Section 1.3(a) of this Agreement.
Section 1.4 No Fractional Shares. Only whole shares of Nichols Stock
shall be issued in the Merger. In lieu of fractional shares, each holder of
Welkin Stock who otherwise would be entitled to a fractional share of Nichols
Stock shall, upon surrender of such holder's stock certificate, be entitled to
receive a cash payment (without interest) equal to the product of such
fractional share and the value per share of Nichols Stock as determined above in
Section 1.2.
<PAGE>
Section 1.5 Exchange of Certificates; Deposits. On the Merger Date,
Welkin shall deliver to Nichols a list of the names, addresses, and Social
Security numbers of the Welkin shareholders (the "Welkin Shareholders"), and the
number of shares of Welkin Stock owned by each Welkin Shareholder. Except as set
forth above, from and after the Merger Date, each holder of a certificate which
prior thereto represented shares of Welkin Stock shall be entitled to receive in
exchange therefor, upon surrender thereof to Nichols, a certificate or
certificates representing the number of whole shares of Nichols Stock into which
the Welkin Stock shall have been converted, and, in respect of any fractional
share, a cash payment in accordance with Section 1.4 above, except that 10% of
the Nichols Stock to which each Welkin Shareholder is entitled to receive (the
"Escrow Shares") shall be evidenced by a separate Nichols Stock certificate in
the name of the SouthTrust Bank (the "Escrow Agent") as Escrow Agent, and at the
Merger Date shall be deposited with the Escrow Agent to hold pursuant to the
terms and conditions of the Escrow Agreement attached hereto as Exhibit "B" (the
"Escrow Agreement"). For purposes of determining the number of shares of Nichols
Stock to be deposited with the Escrow Agent and Carl W. Monk, Jr., on behalf of
each Welkin Shareholder, a fractional share shall be rounded down to the nearest
whole number of shares. Until so surrendered to Nichols, each certificate
formerly representing shares of Welkin Stock, except Dissenting Shares, shall be
deemed for all corporate purposes to evidence only the right to receive the
number of shares of Nichols Stock and/or the cash payment determined in
accordance with Sections 1.2 and 1.4. All shares of Nichols Stock to be
delivered hereunder shall be delivered to the Representative (as defined below)
for further distribution to the Welkin Shareholders in accordance with the
Shareholders' Letter Agreement.
Section 1.6 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained herein,
Dissenting Shares shall not be converted into or be exchangeable for the right
to receive shares of Nichols Stock and cash in lieu of fractional shares, unless
and until the holder thereof shall have effectively withdrawn or lost his right
to dissent from the Merger.
(b) Welkin shall give Nichols (i) prompt notice of any written
objection, notice, withdrawal of objections or notices, and any other instrument
served pursuant to Sections 13.1-729 or 13.1-741 of the VSCA and received by
Welkin, and (ii) the opportunity to direct all negotiations and proceedings with
respect to holders of Dissenting Shares. Welkin shall not voluntarily make any
payment with respect to any demands for payment for shares under any of Sections
13.1-729 through 13.1-741 of the VSCA and will not, except with the prior
written consent of Nichols, settle or offer to settle any such demands.
Section 1.7 Shareholder Approval. The Board of Directors of Welkin
shall cause a special meeting of shareholders of Welkin to be duly held as soon
as practicable after the execution hereof (the "Welkin Shareholders' Meeting").
This Agreement shall be submitted to such shareholders meeting for the purpose
of considering its approval. The Board of Directors of Welkin shall recommend to
its shareholders approval of this Agreement and the transactions contemplated
herein.
<PAGE>
Section 1.8 Stock Transfer Books. At the Merger Date, the stock
transfer books of Welkin shall be closed and no transfer of Welkin Stock shall
thereafter be made.
Section 1.9 Welkin Shareholder Representative.
(a) The proxy submitted to the Welkin Shareholders in
connection with the Welkin Shareholders' Meeting shall include a proposal to
constitute and appoint Carl W. Monk, Jr. (the 'Representative') to act as the
respective agent, representative, and attorney-in-fact of the Welkin
Shareholders (other than holders of Welkin Dissenting Shares) for all purposes
and with respect to all matters arising under this Agreement. The powers and
authority of the Representative shall include, but not be limited to, the power
and authority to give and accept notices as provided hereunder, execute on
behalf of the Welkin Shareholders the Escrow Agreement, exercise all of the
rights, powers, and duties of the Representative set forth in the Escrow
Agreement and the Shareholders' Letter Agreement, and carry out the purposes and
intent of this Agreement.
(b) The Representative shall be entitled to rely on any
communication or document that he believes to be genuine. Neither the
Representative nor any of his employees, attorneys, and other agents shall be
liable to any Welkin Shareholder for any action or omission on their respective
parts except for gross negligence or willful misconduct. In his capacity as the
Representative, Carl W. Monk, Jr. will be acting for the convenience of the
non-dissenting Welkin Shareholders, without compensation, and, in such capacity,
he shall have no duties or liabilities beyond those expressly assumed by him in
this Agreement and the Escrow Agreement. As the Representative, Carl W. Monk,
Jr. shall not be required to make any inquiry or investigation concerning any
matter other than those expressly contemplated hereunder, nor shall he, in such
capacity, be deemed to have made any representation or warranty of any kind to
any person. The Representative shall be indemnified against any liabilities
resulting from his role as Representative by the Welkin Shareholders, except to
the extent caused by or arising out of the Representative's gross negligence or
willful misconduct. In the event of death, resignation, or incapacity of Carl W.
Monk, Jr., a majority of the Welkin Shareholders shall elect a successor
Representative who shall have all of the rights, powers, and duties of the
Representative set out herein and in the Escrow Agreement.
Section 1.10 Closing. The closing (the 'Closing') of the Merger shall
take place at the offices of Epstein Becker & Green in Washington, D.C. at 10:00
a.m. local time on the Merger Date which shall occur as promptly as possible
after the date the conditions specified in Articles VI and VII hereof are
satisfied or at such other time and place as Welkin, Merger Sub, and Nichols
shall agree in writing. The obligations of Welkin, Merger Sub, and Nichols shall
be subject to satisfaction, unless waived, of the applicable conditions set
forth in this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF WELKIN
Welkin represents and warrants to Nichols as follows:
<PAGE>
Section 2.1 Authorized and Outstanding Common Stock. As of the date
hereof and as of the Closing, the issued and outstanding capital stock of Welkin
and the number of shares of authorized capital stock of Welkin are and will be
as follows:
Designation Number of Shares Number of Shares Number of Shares
Authorized Issued and Subject to Options
Outstanding
- --------------------------------------------------------------------------------
Common Stock 50,000__________ 36,603_________ 2,508
- --------------------------------------------------------------------------------
All of the issued and outstanding shares of Welkin Stock are validly issued,
fully paid and non-assessable. Set forth on Schedule 2.1, Welkin Shareholders
and Number of Shares on Merger Date, on the date hereof and as of the Closing
are the number of Shares held by each Welkin Shareholder and the number of
shares of Welkin Stock subject to Welkin Options held by each Welkin Option
holder. Welkin has and at Closing will have no other authorized, issued or
outstanding shares of capital stock nor any outstanding securities, bonds,
convertible securities, subscription agreements, warrants, options, buy-sell
agreements, or other liens, agreements or commitments relating to Welkin's
capital stock. Identified on Schedule 2.1, Welkin Shareholders and Number of
Shares on Merger Date, are those Welkin Shareholders who are 'affiliates' of
Welkin under Rule 145(c) as defined in Rule 405 of the Rules and Regulations of
the Securities and Exchange Commission under the Securities Act of 1933.
Section 2.2 Organization and Standing. Welkin is and will be at Closing
a corporation duly organized, validly existing and in good standing under the
laws of the State of Virginia, and will be at Closing duly qualified to do
business in and in good standing as a foreign corporation in all other states
where the nature of its business or operations or the ownership of its property
requires such qualification, except where the lack of such qualification would
not have a material adverse effect on the financial condition of Welkin taken as
a whole. No jurisdiction where it is not presently qualified as a foreign
corporation has made any assertion to Welkin that its business or operations or
ownership of property makes qualification as a foreign corporation in such
jurisdiction necessary. Welkin has all requisite corporate power and authority
to own, lease and operate its properties and carry on its business as and where
it is now being conducted. A copy of Welkin's Articles of Incorporation and all
amendments thereto as of the date hereof and a copy of its Bylaws, as amended to
the date hereof (both certified by the Secretary), have been furnished to
Nichols and are true, accurate and complete as of the date hereof. Welkin owns
no stock or securities of any other corporation or entity, except as shown on
Schedule 2.9(a), Affiliates of Welkin.
<PAGE>
Section 2.3 No Violation. Except as disclosed in Schedule 2.3,
Violations, the execution, delivery and performance of this Agreement by Welkin
and the consummation of the transactions contemplated hereunder will not, with
or without the giving of notice or the passage of time or both, (i) violate,
conflict with, or constitute a default (or cause an acceleration) under Welkin's
Articles of Incorporation or Bylaws or any material contract, note, lien,
security agreement, license, permit, or instrument to which Welkin is a party or
by which Welkin or its shareholders are bound or which may affect any of the
assets, business or operations of Welkin, (ii) result in the creation or
imposition of any lien, claim, charge or encumbrance upon any of Welkin's
properties or assets, or (iii) constitute a violation of any statute, ordinance,
judgment, order, decree, regulation, rule or law of any court, government,
authority or arbitrator applicable to or relating to Welkin or any of the
assets, business or operations of Welkin. This Agreement and all other
agreements and obligations entered into and undertaken in connection with the
transactions contemplated hereby to which Welkin is a party constitutes the
valid and legally binding obligations of Welkin enforceable against it in
accordance with their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors' rights generally, and equitable principles. Except
as disclosed on Schedule 2.3, Violations and Schedule 2.20, Governmental
Approvals, and except for the approval of this Agreement by the Welkin
Shareholders and the filing of the Articles of Merger with the State Corporation
Commission of the Commonwealth of Virginia, there are no consents, waivers or
approvals of persons or authorities required in connection with the consummation
of the transactions contemplated by this Agreement and the other agreements
referenced herein.
Section 2.4 Financial Statements.
(a) Annexed hereto as Schedule 2.4(a), Financial Statements,
are financial statements of Welkin (the "Financial Statements") consisting of:
(i) the unaudited balance sheet of Welkin at May 31, 1998 (the 'Interim Balance
Sheet'), together with the related statements of income and stockholders' equity
for the two (2) month period ended May 31, 1998, and (ii) the audited balance
sheets of Welkin at March 31, 1996, 1997, and 1998, together with the audited
and related statements of income, stockholders' equity and cash flows of Welkin
for such periods.
(b) Except as disclosed in Schedule 2.4(b), Exceptions to
Financial Statements, all of the foregoing Financial Statements, in each case,
have been prepared in conformity with generally accepted accounting principles
('GAAP') applied on a consistent basis throughout the periods involved and with
prior periods except as otherwise expressly stated therein and fairly present
the assets, liabilities and financial condition and results of operations of
Welkin at, or for the periods ended at, the dates thereof; provided, however,
that the Interim Balance Sheet and the related statements of income,
stockholders' equity and cash flows are subject to normal year-end adjustments
and lack footnotes and other presentation items.
<PAGE>
Section 2.5 Liabilities. There are no material debts, liens, security
interests, claims, liabilities or obligations of Welkin, whether accrued,
contingent, absolute, direct or indirect, or matured or unmatured, including,
but not limited to, liabilities for taxes, interest and penalties, except (i) as
and to the extent reflected or reserved against in the Interim Balance Sheet;
(ii) incurred in the ordinary course of business and not material in amount; and
(iii) those disclosed on Schedule 2.5, Liabilities.
Section 2.6 Accounts Receivable. All of the accounts receivable of
Welkin are actual bona fide receivables representing obligations for the total
dollar amount thereof as shown on the Financial Statements and books of Welkin
which resulted from the ordinary course of business of Welkin, and are stated on
the Financial Statements net of an appropriate reserve for bad debt and
noncollectible accounts.
Section 2.7 Fixed Assets and Inventory.
(a) The dollar amount of the fixed assets owned by Welkin as
shown on the Interim Balance Sheet and as acquired thereafter and treated on the
books of Welkin as an asset does not exceed the cost of same, less depreciation
determined in accordance with GAAP consistently applied, and Welkin has not
written up the value of any such fixed assets. The fixed assets and inventory of
Welkin as of the date of the Interim Balance Sheet include those items set forth
in Schedule 2.7(a), Assets and Inventory, hereto, and, at Closing, such fixed
assets and inventory shall be in existence, except for fixed assets and
inventory sold or otherwise disposed of in the ordinary course of business. The
fixed assets of Welkin are in good working order, reasonable wear and tear
excepted.
(b) Welkin is not under any liability or obligation with
respect to the return of payments and, for the twelve month period immediately
prior to the Closing, Welkin has not experienced any claims with respect to
defective or unsatisfactory services or products except as specifically set
forth on Schedule 2.7(b), Defective or Unsatisfactory Services or Products
Claims. The inventory of Welkin existing on the Closing shall have been acquired
in the ordinary course of Welkin's business.
Section 2.8 Contracts.
(a) Except as provided in 2.8(d) below, Schedule 2.8,
Contracts, contains a list of all material verbal or written (i) leases, (ii)
contracts (including employment and independent contractor and professional
contracts), (iii) agencies, (iv) purchase orders, (v) marketing or referral
agreements, (vi) software agreements (including software license agreements),
(vii) maintenance or support agreements, (viii) training agreements, (ix)
royalty agreements, (x) employee benefit, bonus or compensation agreements, (xi)
bids, (xii) government contracts, (xiii) computer software agreements, (xiv)
contracts for the furnishing of all services, (xv) all contracts for referrals,
(xvi) all contracts to obtain supplies or services, (xvii) subcontracts, (xviii)
teaming agreements, and (xix) all other agreements or understandings between
Welkin and any other party or person (collectively, "Contracts"), which are not
otherwise attached to any other Schedules of this Agreement. Such list includes
completed Contracts where the services have been performed but the obligor has
not paid. True, correct and complete copies of all of the written Contracts
listed on Schedule 2.8, Contracts, have been made available for inspection by
Nichols.
<PAGE>
(b) Welkin's standard agreements identified on Schedule
2.8(b), Welkin's Standard Agreements, have been made available to Nichols for
inspection.
(c) Since the Interim Balance Sheet, Welkin has not entered
into any Contracts not in the ordinary course of business except as listed in
Schedule 2.8(c), Contracts Not in the Ordinary Course of Business. Except for
the contracts disclosed on Schedule 2.8(c), Contracts Not in the Ordinary Course
of Business, none of the Contracts to which Welkin is a party or to which it is
subject or by which it is bound requires the consent of any other person for the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby. Each of the Contracts to which Welkin is a party or to
which it is subject or by which it is bound, to the extent not otherwise already
fully performed by Welkin, is a valid and existing contract of Welkin in full
force and effect without modification, enforceable against Welkin in accordance
with its terms, and Welkin does not have any knowledge that any Contract is not
a valid and existing contract of the other parties thereto in full force and
effect without modification and there are no pending or, to Welkin's knowledge,
threatened disputes thereunder, and all will continue to be binding (except as
to which the enforceability is limited by bankruptcy laws and equitable
principles) in accordance with their terms after consummation of the
transactions contemplated hereby and each is with unrelated and unaffiliated
third parties and was entered into on an arms-length basis in the ordinary
course of business, except as to agreements with Welkin Shareholders listed in
Schedule 2.8, Contracts. Except as disclosed in Schedule 2.8, Contracts, Welkin
has timely performed all material obligations required to be performed by it and
is not in material default under any verbal or written Contract to which it is a
party or to which it is subject or by which it is bound and no event has
occurred which, with or without the lapse of time or the giving of notice, or
both, or action by a third party, could result in a material default under any
of the forgoing. To Welkin's knowledge, no other party is in default under any
such Contract. None of the contracts provide for a scope of work substantially
greater than the scope of work of any contracts that Welkin has completely
performed.
Section 2.9 Corporate Actions. The minute books of Welkin contain
appropriate corporate minutes and authorizations for all material corporate
actions taken by Welkin's Board of Directors, its officers, and shareholders.
Welkin does not own any stock or otherwise possess ownership rights in any other
corporation or organization and has no affiliates (other than Welkin
Shareholders), except as disclosed in Schedule 2.9(a), Affiliates of Welkin.
Attached hereto as Schedule 2.9(b), Directors and Officers of Welkin, is a list
of directors and officers of Welkin.
<PAGE>
Section 2.10 Intellectual Property Rights. Schedule 2.10, Intellectual
Property Rights, hereto sets forth a true and materially complete list of all
trademarks, service marks, trade name, patents, patent applications, copyrights,
and copyright applications heretofore or presently used or required to be used
by Welkin in connection with its business (collectively "Intellectual Property
Rights"). All Intellectual Property Rights are owned solely and exclusively by
Welkin, except for those rights identified on Schedule 2.10, Intellectual
Property Rights, as licensed by Welkin from third parties and are not subject to
any license, lien, royalty arrangement or pending or, to Welkin's knowledge,
threatened dispute, except as disclosed on Schedule 2.10, Intellectual Property
Rights. Except as disclosed in Schedule 2.10, Intellectual Property Rights, to
Welkin's knowledge, no product or service marketed, manufactured, sold or
licensed, and no marketing, service or process used by Welkin infringes any
Intellectual Property Rights of others and no product or service marketed, or
process used by any other person, firm, corporation or other entity infringes
any Intellectual Property Rights heretofore or presently used or required to be
used by Welkin. Except as set forth on Schedule 2.10, Intellectual Property
Rights, Welkin has not received notification of infringement by Welkin of any
Intellectual Property Right of others. No trademark, service mark or trade name
used by Welkin infringes any trademark, service mark or trade name of others in
the United States of America or any foreign country. None of the Intellectual
Property Rights is subject to any outstanding order, decree, judgment,
stipulation or charge. No other material intellectual property rights are
necessary for the conduct of the Welkin Business. Except as disclosed on
Schedule 2.10, Intellectual Property Rights, all rights of Welkin in and to its
Intellectual Property Rights will not be adversely affected by the Merger.
Section 2.11 Insurance Policies. Schedule 2.11, Insurance Policies and
Claims, hereto, sets forth a list of all business insurance policies held or
owned by Welkin or which name Welkin as beneficiary, and true and correct copies
of all such policies have heretofore been made available to Nichols. All
premiums due thereon prior to the Closing have been paid. All the insurance
policies listed in Schedule 2.11, Insurance Policies and Claims, will remain in
full force and effect during the period immediately following the Closing. There
are no pending material claims under such insurance policies. Schedule 2.11,
Insurance Policies and Claims, also sets forth all claims filed during the past
twelve (12) months with respect to insurance policies maintained by Welkin.
Section 2.12 Backlog. The backlog of orders, sales and service
commitments of Welkin is set forth on Schedule 2.12, Backlog, and such backlog,
together with all Contracts to which Welkin is a party, consist of contracts for
services of Welkin which are typical of the types of services heretofore
marketed, sold or rendered by Welkin and which do not require the development or
application of any materially new or materially more advanced technology or
service than that utilized by Welkin in the past. No purchase or expansion of
property (other than purchases of inventory consistent with Welkin's past
ordinary course of business), plant, equipment or capacity is needed to timely
fill the current backlog and current Contracts.
<PAGE>
Section 2.13 Compensation. Set forth on Schedule 2.13, Employee
Compensation and Bonuses, is a list of the names, age, title, total annual
compensation, date of last salary or hourly rate adjustment and amount thereof,
and length of time in current position of all employees of Welkin, including a
list of paid leave as of May 31, 1998. Welkin has not entered into any
commitments or understandings with any employee concerning future compensation,
bonuses and benefits of a material nature to be paid after May 31, 1998, except
as set forth on Schedule 2.13, Employee Compensation and Bonuses, and there are
no employment agreements, written or verbal, except as set forth on Schedules
2.8, Contracts and/or 2.16(a), Written and Oral Employee Contracts with Welkin
and except for the employment contracts delivered with this Agreement. All
employees of Welkin are "at will" and may be terminated at any time by Welkin,
except as set forth on Schedule 2.16(a), Written and Oral Employee Contracts
with Welkin.
Section 2.14 Employee Benefits.
(a) Set forth on Schedule 2.14(a), Employee Benefit Plans, is
a materially accurate and complete list of all material employee benefit plans
("Plans") within the meaning of Section 3(3) of the Employee Retirement Income
Security Act ("ERISA"), whether or not any such Plans are otherwise exempt from
all or part of the provisions of ERISA, established, maintained or contributed
to for the benefit of Welkin's employees, and a list of Pension Plans terminated
prior to the date hereof.
(b) Except as set forth in Schedule 2.14(b), Plans Not In
Compliance with ERISA, Welkin does not maintain, cause to be maintained or
contribute to any Plan subject to ERISA which is not, or in the past has not
been in substantial compliance with ERISA or the Internal Revenue Code of 1986
(the "Code"), or which has incurred any accumulated funding deficiency within
the meaning of Section 412 or 418(b) of the Code, or which has applied for or
obtained a waiver from the Internal Revenue Service of any minimum funding
requirement under Section 412 of the Code. Except as set forth on Schedule
2.14(b), Plans Not In Compliance with ERISA, Welkin has not incurred any
liability to the Pension Benefit Guaranty Corporation ("PBGC") in connection
with any Plan covering any employees of Welkin.
(c) Welkin has caused the "group health plan," as such term is
defined in Section 162(i)(3) of the Code, to be maintained, administered and
operated in all material respects in compliance with the applicable requirements
of Section 601 of ERISA and Section 162(k) of the Code, and Welkin has no
liability, including, but not limited to, additional contributions, fines,
penalties or loss of tax deduction as a result of such administration and
operation. Welkin does not maintain any Plan (whether qualified or nonqualified
within the meaning of Section 401(a) of the Code) providing for retiree health
and/or life benefits.
(d) Except as disclosed on Schedule 2.14(d), Employee Benefit
Plan Amendments, none of the Plans have been amended subsequent to the date as
of which copies thereof have been provided to Nichols except as required by law.
(e) Each Plan intended to be qualified under Section 401(a) of
the Code has been determined to be so qualified by the Internal Revenue Service
and nothing has occurred since the date of the last such determination which
resulted or is likely to result in the revocation of such determination.
<PAGE>
(f) The execution of, and consummation of the transactions
contemplated by this Agreement, do not constitute a triggering event under any
Plan, policy, arrangement, statement, commitment or agreement, which will or may
result in any payment (whether of severance pay or otherwise), acceleration,
vesting or increase in benefits to any employee or former employee or director
of Welkin.
(g) Welkin has made available for inspection and copying by
Nichols true and complete copies of (i) all Plans as now in effect, together
with all amendments thereto which will become effective at a later date, and
(ii) Form 5500 for the most recent completed fiscal year for each Plan required
to file such form.
(h) Nichols has requested that after the Merger Welkin change
its fiscal year to a fiscal year ending August 31. As a result of this change in
Welkin's fiscal year, all of the current fiscal year for the Plans will be a
"stub" year ending August 31, 1988. To the extent that the foregoing causes a
breach of any of the warranties in this Agreement or an economic loss to any
person, the parties hereto acknowledge and agree that the Welkin Shareholders
will not be responsible for any such breach or loss.
(i) Nichols acknowledges that the employee benefits currently
offered by Welkin are substantially greater than the employee benefits currently
offered by Nichols, which benefits will be offered to the current Welkin
employees after the Closing. To the extent that the decrease in employee
benefits offered to the current Welkin employees after the Closing results in
any loss, harm or damage to Nichols or Welkin after the Closing, including,
without limitation, the loss of the services of any employee, the parties hereto
acknowledge and agree that the Welkin Shareholders will not be responsible for
any such loss, harm or damage.
Section 2.15 Environmental Matters.
(a) Welkin holds and is in substantial compliance with all
material environmental permits, certificates, licenses, approvals, registrations
and authorizations ("Permits") required under all applicable environmental laws,
rules and regulations in connection with its business as currently operated, and
all of such Permits are in full force and effect. To Welkin's knowledge, without
independent investigation, Welkin has complied with in all material respects,
and is not in violation of any, material applicable environmental statutes,
rules, regulations, ordinances and orders of any authority, including, those
relating to Hazardous Substances (as defined below).
<PAGE>
(b) To Welkin's knowledge, without independent investigation,
no notice, citation, summons or order has been issued, no complaint has been
filed, no penalty has been assessed and no investigation or review is pending
or, to Welkin's knowledge, threatened by any authority with respect to (i) any
alleged violation by Welkin of any environmental statute, ordinance, rule,
regulation or order of any authority; or (ii) any alleged failure by Welkin to
have any environmental Permit, certificate, license approval, registration or
authorization required in connection with its business; or (iii) any use,
generation, treatment, storage, recycling, transportation or disposal
(collectively, "Management Activities" with respect to Hazardous Substances) of
any hazardous substance, hazardous waste, hazardous materials, toxic substance,
pollutants or contaminants as defined in federal, state or local laws,
ordinances or regulations and including petroleum products and radioactive
materials generated or used (collectively, "Hazardous Substances") by Welkin.
Hazardous Substances shall not include office products, equipment, supplies and
cleaning fluids customarily found in a commercial office setting.
(c) Welkin has not received any request for information,
notice of claim, demand or notification that it is or may be potentially
responsible with respect to any investigation or clean-up of any threatened or
actual release of any Hazardous Substance.
(d) Except as set forth on Schedule 2.15(d), Management
Activities Regarding Hazardous Substances, Welkin has not conducted any
Management Activities, whatsoever, with respect to any Hazardous Substances on
its properties, identified on Schedule 2.17, Assets, Liens and Encumbrances of
Welkin, or the properties of another.
(e) Except as set forth on Schedule 2.15(e), PCBs or Asbestos
Insulation Present at Welkin Facilities, hereto, to Welkin's knowledge, without
independent investigation, no polychlorinated biphenyls ("PCBs") or asbestos
insulation is or has been present at the facilities leased by Welkin.
(f) Hazardous Substances, if any, for which Welkin performs
Management Activities (if any) are listed on Schedule 2.15(f), Hazardous
Substances Generated by Welkin, and any Hazardous Substances listed on Schedule
2.15(f), Hazardous Substances Generated by Welkin, to Welkin's knowledge,
without independent investigation,, have been generated by Welkin in regulated
quantities and have been recycled, treated, stored, disposed of or transported,
as applicable, in substantial compliance with all applicable laws.
(g) Except as set forth on Schedule 2.15(g), Hazardous
Substances Transported, Welkin has not transported any Hazardous Substances or
arranged for the transportation of such substances to any location which is
listed or proposed for listing under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. " 9601-9657 ("CERCLA"), or on
any similar state list.
(h) No Hazardous Substance has been released, spilled, leaked,
discharged, disposed of, pumped, poured, emitted, emptied, injected, leached,
dumped or allowed to escape ("Releases") by Welkin from, at, on or under the
properties leased by Welkin. To Welkin's knowledge, no employee of Welkin in the
course of his or her employment has been exposed to any chemical or other
Hazardous Substance or material produced by Welkin which could give rise to a
claim against Welkin.
<PAGE>
(i) No oral or written notification of a Release or threat of
Release of a Hazardous Substance has been filed by or on behalf of Welkin or, to
Welkin's knowledge, without independent investigation, any other person in
relation to any properties now or previously owned, operated or leased by
Welkin. No such properties are listed or proposed for listing on the National
Priority List promulgated pursuant to CERCLA, or on any similar state list of
sites requiring investigation or clean-up.
(j) To Welkin's knowledge, without independent investigation,
there are no environmental liens on the properties of Welkin, and no government
actions have been taken or are in process or pending which could subject
Welkin's properties to such liens. To Welkin's knowledge, without independent
investigation, Welkin or any other person (solely as a result of the acts or
omissions of Welkin) would not be required to place any notice or restriction
relating to the presence of Hazardous Substance in the deed to any properties
leased to Welkin.
(k) In respect of environmental matters, no consent, approval
or authorization of, or registration or filing, with any person or authority is
required in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
(l) There have been no environmental inspections,
investigations, studies, audits, tests, reviews or other analyses conducted by
or on behalf of Welkin in relation to Welkin's properties or operations.
(m) To Welkin's knowledge, without independent investigation,
there are no facts or circumstances related to environmental matters concerning
the properties or businesses of Welkin that could lead to any future material
environmental claims, liabilities or responsibilities of Nichols or Welkin.
Section 2.16 Labor and Employment Matters.
(a) Schedule 2.16(a), Written and Oral Employee Contracts With
Welkin, hereto contains a complete and correct list of all written and oral
contracts with employees of Welkin (inclusive of officers and directors)
together with all bonus, stock option, and other incentive arrangements, pension
and retirement plans, profit sharing plans, group or individual medical, health,
dental, accident, life and other employee benefit insurance and other employee
compensation or benefit plans, arrangements, understandings or policies (whether
written or oral), except as otherwise disclosed pursuant to Sections 2.8, 2.13
or 2.14 hereto, affecting employees of Welkin, Welkin is not in default under
any of the foregoing. There have been no claims of default under any of the
foregoing and there are no facts or conditions which, with or without the
passage of time or the giving of notice or both, would constitute or result in a
default under any of the foregoing. True and complete copies of all the
foregoing have heretofore been delivered by Welkin to Nichols.
<PAGE>
(b) Schedule 2.16(b), Written and Unwritten Employee Policies
and Practices, identifies all written and material unwritten policies and
practices describing termination payments and benefits to terminated employees
of Welkin.
(c) Except as set forth on Schedule 2.16(c), Noncompliance
With Federal, State, Local or Other Applicable Laws, Welkin is in compliance in
all material respects with all federal, state, local or other applicable laws or
requirements of any governmental, regulatory or administrative authority or
court respecting preemployment and employment practices, terms and conditions of
employment and wages and hours and occupational safety and health, including,
but not limited to, the National Labor Relations Act, the Fair Labor Standards
Act (including the Equal Pay Act), Title VII of the Civil Rights Act of 1964,
the Occupational Safety and Health Act of 1970, the Service Contract Act, the
Contract for Work Hours and Safety Standards Act, the Rehabilitation Act of
1973, the Vietnam ERA Veterans Readjustment Assistance Act of 1974, Executive
Order 11246, the Employees Retirement Income Security Act of 1974, and state and
local employment, unemployment and worker's compensation statutes, and Welkin is
not engaged in any unfair labor practice within the meaning of Section 8 of the
National Labor Relations Act. Welkin is not party to any collective bargaining
agreement and, to Welkin's knowledge, no union organizational efforts are
currently in progress.
(d) Except as disclosed in Schedule 2.16(d), Threatened or
Pending Employment Practices Litigation and Schedule 2.24, Litigation and
Compliance, there is no administrative or private claim, charge, complaint,
dispute, action, grievance, suit, administrative, arbitration or other
proceeding or investigation, pending or, to Welkin's knowledge, threatened
against Welkin relating to any of the items or matters referenced in
subparagraph (c) directly above, or with regard to any allegedly accrued or
vested employee benefits or any other common or statutory law claim involving
tort, contract, or equity.
(e) There is no labor strike, dispute, slowdown or stoppage
actually pending or, to Welkin's knowledge, threatened against Welkin, and no
such strike, dispute, slowdown, or stoppage has been experienced by Welkin since
the date of Welkin's incorporation.
(f) Except as disclosed on Schedule 2.16(f), Threatened or
Pending Discrimination Litigation, there are no charges, administrative
proceedings, investigations or formal complaints of discrimination pending or,
to Welkin's knowledge, threatened before the Equal Employment Opportunity
Commission ("EEOC") or any federal, state or local agency or court. There are no
pending or, to Welkin's knowledge, threatened audits of the equal employment
opportunity practices of Welkin.
Section 2.17 Title to Assets, Liens and Encumbrances.
<PAGE>
(a) Welkin is the owner of, and has good and marketable title
to, free and clear of all security interests, mortgages, pledges, liens, claims,
restrictions, equities, easements, rights-of-way, rights of first refusal and
any other encumbrances and charges whatsoever, or is the lessee of, all of its
respective property and assets, except for the Permitted Liens (as hereinafter
defined) and except as set forth on Schedule 2.17(a), Assets, Liens and
Encumbrances of Welkin hereto. Welkin owns or leases all of the assets used by
it in the operation and conduct of its business or required by Welkin for the
normal conduct of its business.
"Permitted Liens" shall mean:
(i) carriers', warehousemen's, mechanics',
materialmen's, repairmen's, or other like liens arising in the ordinary course
of business;
(ii) easements, rights-of-way, restrictions,
license rights, leases and other sim ilar encumbrances incurred in the
ordinary course of business which do not in any case materially detract from
the value of the property subject thereto or interfere with the ordinary
conduct of the business of Welkin;
(iii) pledges or deposits in connection with
workers' compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers under
self-insurance arrangements;
(iv) deposits to secure the performance of bids,
trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in theordinary course of business; and
(v) purchase money security interests in
respect of new equipment in an aggregate amount not in excess of $25,000
at any time.
(b) Schedule 2.17(b), Real Property Leases, sets forth a true
and complete list and description of all real property, land, buildings and
improvements leased by Welkin as of the Closing. True and correct copies of all
leases with respect to the property listed on Schedule 2.17(b), Real Property
Leases, have heretofore been made available to Nichols for inspection and
copying. Except as disclosed in Schedule 2.17(b), Real Property Leases, all such
real property, land and buildings used or leased by Welkin as of the Closing are
used by or useful to Welkin in the ordinary course of business, and the use and
occupancy by Welkin conforms in all material respects with all applicable laws,
and, to Welkin's knowledge, the same are in good operating condition. Welkin
owns no real property, land, buildings or improvements.
<PAGE>
(c) Except as set forth on Schedule 2.17(c), Noncompliance
with Respect to Real Property, Welkin has not received any notices of violations
of law, governmental orders, ordinances or requirements issued by any national,
federal, state, municipal or other governmental, department or authority or
corresponding foreign governmental instrumentality or any fire department or
insurance carrier, that would have a material adverse effect or purport to have
a material adverse effect on the use and occupancy of the real property used or
leased by Welkin. Copies of all real property leases to which Welkin is a party
have been made available for inspection by Nichols.
(d) The leases described in Schedules 2.8, Contracts Delivered
to Nichols or 2.17(b), Real Property Leases, are in full force and effect on the
Closing without any material default or breach by Welkin or, to Welkin's
knowledge, any lessor.
(e) Welkin has not received any notice of any requirements or
recommendations by any insurance company which has issued a policy covering any
part of the real property used or leased by Welkin or by any board of fire
underwriters or other body or authority exercising similar functions, requiring
or recommending any repairs or work to be done on any part of said real
property.
(f) Schedule 2.17(f), Personal Property Leases, lists
all personal property leased by Welkin.
Section 2.18 Customer Claims and Complaints. Except as disclosed on
Schedule 2.18, Customer Claims and Complaints, and the Financial Statements,
Welkin has no liability or obligation with respect to the return of any funds
because of products or services provided by it and has not experienced any
material claims with respect to its products or services other than in the
ordinary course during the thirty-six (36) months immediately preceding the
execution of this Agreement. No customer, client, or contracting party has
requested that performance under any contract or other agreement be canceled or
delayed for any period of time. No customer liability claim is presently pending
or, to Welkin's knowledge, threatened against Welkin. Welkin has not experienced
any warranty claims for products or services in the past three (3) years, except
as disclosed on Schedule 2.18, Customer Claims and Complaints.
Section 2.19 Secrecy and Non-Competition Agreements. Welkin has not
entered into any secrecy or non-competition agreements with any person with
respect to the Welkin Business except as disclosed on Schedule 2.19, Secrecy and
Non-Competition Agreements.
Section 2.20 Governmental Approvals. Except as disclosed on Schedule
2.20, Governmental Approvals, no authorization, novation, approval, order,
license, permit, franchise, or consent and no registration, declaration or
filing by Welkin with any governmental authority is required in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
<PAGE>
Section 2.21 Orders, Decrees, Etc. Except as set out in Schedule 2.21,
Orders, Decrees, Etc., there are no orders, writs, decrees, injunctions, or
rulings of any court, authority, arbitration tribunal, or any governmental
department, commission, board, agency or instrumentality, domestic or foreign,
issued, or pending or, to Welkin's knowledge, threatened against, nor consents
binding on, Welkin, and any officer, director or employee of Welkin, which do or
may affect, limit or control Welkin or any of its assets or Welkin's method or
manner of doing business.
Section 2.22 Compliance with the Law. Except as otherwise disclosed in
the Schedules hereto, Welkin is in material compliance with all foreign,
federal, state and local laws, rules, orders and regulations, including, but not
limited to those relating to the Code, antitrust, occupational safety and
health, environmental protection, water or air pollution, ERISA, toxic and
hazardous waste and controlled substances, consumer product safety, product
liability, employment and employment practices, term and conditions of
employment, bidding and contracting procedures, dealings with federal, state,
governmental, municipal or local authorities, hiring, wages, hours, employee
benefit plans and programs, collective bargaining and withholding and social
security taxes, and it has received no notices of alleged violations thereof. No
governmental authorities are presently conducting proceedings against Welkin,
and, to Welkin's knowledge, no such investigation or proceeding is threatened.
Except as disclosed on Schedule 2.22, Compliance with the Law, Welkin has
obtained all material permits, licenses and authorizations required for the
conduct of its affairs as currently conducted, and all of such permits, licenses
and authorizations will remain in full force and effect following such
consummation. True, complete and correct copies of the foregoing permits,
licenses and authorizations, if any, have been made available for inspection by
Nichols.
Section 2.23 Actions Not in Ordinary Course and No Material Change.
Except as set forth on Schedule 2.13, Employee Compensation and Bonuses, since
the date of the Interim Balance Sheet, Welkin has conducted its business in a
manner consistent with past practice. Since the Interim Balance Sheet, the
business of Welkin has been operated only in the regular and ordinary course and
there has been no materially adverse change in the financial condition or
business of Welkin. Except as set forth in Schedule 2.23, Actions Not in the
Ordinary Course and as otherwise required by the terms and provisions of this
Agreement, since the date of the Interim Balance Sheet, Welkin has not:
(a) Except in the usual and ordinary course of its businesses,
consistent with past practice, incurred any indebtedness or other liabilities
(whether accrued, absolute, contingent or otherwise), guaranteed any
indebtedness or sold any of its assets;
(b) Suffered any damage, destruction or loss, whether or
not covered by insurance;
(c) Except as disclosed pursuant to Section 2.13, and except
for the award of employee bonuses consistent with past Welkin compensation
practices, increased the regular rate of compensation payable by it to any
employee, or increased such compensation by bonus, percentage, compensation
service award or similar or other arrangement theretofore or thereafter in
effect for the benefit of any of its employees, and no such increase is
required;
<PAGE>
(d) Established or agreed to establish any pension, retirement
or welfare plan for the benefit of its employees not heretofore in effect;
(e) Suffered any change in its financial condition, assets,
liabilities or business or suffered any other event or condition of any
character which individually or in the aggregate has had a material adverse
effect on Welkin;
(f) Experienced any labor organizational efforts or complaints
or entered into any collective bargaining agreements with any union;
(g) Made any single capital expenditure which exceeded $25,000
or made any capital expenditures in the aggregate which exceed $100,000;
(h) Permitted or allowed any of the assets (real, personal or
mixed, tangible or intangible) of Welkin to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge of any kind
other than Permitted Liens;
(i) Written down the value of any assets or written off as
uncollectible any notes or accounts receivable or contracts, except for
write-downs and write-offs in the ordinary course of business and consistent
with past practice;
(j) Paid, discharged or satisfied any claims, liabilities or
obligations other than in the usual and ordinary course of business;
(k) Canceled any debts or claims or waived any claims or
rights, except in the usual and ordinary course of business and except as
required by the Agreement;
(l) Paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement with
any of the Welkin Shareholders or their affiliates, or any of the officers or
directors of Welkin or their affiliates, except for reimbursement of ordinary
and reasonable business expenses related to the business of Welkin;
(m) Amended or terminated any contract, agreement or
license of significant value, to which Welkin is a party, except in the
ordinary course of business;
(n) Made any change in any method of accounting or
accounting practice;
(o) Canceled or failed to continue insurance coverage, other
than key man life insurance;
(p) Acquired, whether by merger, purchase of stock or purchase
of assets, all or substantially all of the business or assets of any other
business or entity, or engaged in negotiations of any sort concerning such
acquisition or acquired assets;
<PAGE>
(q) Issued any stock, any option to acquire stock or other
securities, or taken any action with respect thereto, or declared or paid any
dividends, or made or authorized any other distributions to the Welkin
Shareholders with respect to their Welkin Stock;
(r) Amended or repealed its Articles of Incorporation or
Bylaws;
(s) Agreed, whether in writing or otherwise, to take
any action described in this Section 2.23.
Section 2.24 Litigation. Except as set forth on Schedule 2.24,
Litigation and Compliance hereto, there is no litigation, proceeding,
arbitration, governmental claim or investigation instituted, pending or, to
Welkin's knowledge, threatened, against or affecting Welkin or the assets of
Welkin or which questions or challenges the validity of this Agreement or any
action taken or to be taken pursuant to this Agreement.
Section 2.25 Taxes and Tax Returns.
(a) Welkin's federal and state income, franchise, share and ad
valorem tax returns for the fiscal years ended March 31, 1995, 1996, 1997, and
1998, have been made available for inspection by Nichols. Welkin does not
currently owe any taxes not reflected on the Interim Balance Sheet or incurred
thereafter in the ordinary course of business.
(b) Except as set forth on Schedule 2.25, Taxes attached
hereto:
(i) Within the times and in the manner
prescribed by law Welkin has filed all federal, state and local tax returns
and extensions and all tax returns for other governing bodies having
jurisdiction to levy taxes which are required to be filed;
(ii) Welkin has paid all taxes, interest, penal-
ties, assessments and deficiencies which have been shown on such returns to be
due, or which have been claimed to be due or which were due prior to Closing
unless Welkin is contesting in good faith such tax, interest, penalty,
assessment or deficiency and such contested amounts are reserved against on the
Interim Balance Sheet;
(iii) To Welkin's knowledge, all tax returns or
extensions, if any, filed by Welkin constitute complete and accurate
representations of the tax liabilities of Welkin for the periods covered
thereunder and accurately set forth all items (to the extent required to be
included or reflected in such returns) relevant to Welkin's past tax
liabilities;
(iv) Welkin has not waived or extended any
applicable statute of limitations relating to the assessment of federal,
state, local or foreign taxes;
<PAGE>
(v) No examinations of the federal, state,
local or foreign tax returns of Welkin are currently in progress or, to
Welkin's knowledge, threatened and no deficiencies have been asserted
or assessed as a result of any audit by the Internal Revenue Service or
any state or local taxing authority and no deficiency has been proposed
or threatened;
(vi) The charges, accruals and reserves for
taxes due by Welkin or accrued but not yet due from Welkin, relating to the
income, properties or operations of Welkin for any periods ending on or
before the Closing or the portion of any period that ends on and includes
the Closing as reflected on Welkin's Interim Balance Sheet are adequate to
cover any such taxes payable by Welkin;
(vii) There is no action, suit, proceeding,audit
or claim pending or, to Welkin's knowledge, threatened regarding any taxes of
Welkin;
(viii) All taxes which Welkin are required by
law to withhold and collect with respect to Welkin's employees have been
duly withheld and collected, and have been timely paid over to the proper
authorities to the extent due and payable; and
(ix) There are no liens for any tax on Welkin or
the assets of Welkin, except for ad valorem taxes accrued but not yet due or
payable.
(c) All federal, state and local income, franchise, property
and other tax returns filed by Welkin are in all material respects complete and
correct representations of the tax liabilities of Welkin for the periods covered
by such returns.
Section 2.26 Bank Accounts. Schedule 2.26, Bank Accounts, is a true and
complete list as of the date hereof of all banking institutions in which Welkin
has accounts or safety deposit boxes, plus the numbers thereof and the name of
the persons authorized to make withdrawals therefrom or have access thereto.
Section 2.27 Disclosure. No representations and warranties by Welkin in
this Agreement or any document or certificate furnished to Nichols pursuant
hereto contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which they were made, not
misleading.
<PAGE>
Section 2.28 Proprietary Rights. The term "Proprietary Rights" includes
all material inventions, trade secrets, processes, proprietary rights, product
specifications, blueprints, drawings, technical data, engineering information,
other proprietary knowledge and know-how, patents, trademarks, service marks,
trade name, copyrights, marks, symbols, logos, and all material documentation
related thereto, and all licenses and agreements in respect thereof and
applications therefor used or related to the Welkin Business, except for
software and information systems as defined in Section 2.29. Welkin has all
Proprietary Rights necessary for the operation of the Welkin Business as
currently operated. Except as set forth on Schedule 2.28, Proprietary Rights,
which includes a listing of material contracts or material licenses pursuant to
which Welkin uses the intellectual property of third parties, with respect to
the Proprietary Rights, (a) Welkin is either the sole and exclusive owner of or
a licensee of its Proprietary Rights; (b) no action, suit, arbitration, or other
proceeding or investigation is pending or to Welkin's knowledge threatened which
involves any Proprietary Rights, (c) none of the Proprietary Rights infringes
upon, conflicts with, or otherwise violates the rights of others or is being
infringed upon by others, (d) none of the Proprietary Rights is subject to any
outstanding order, decree, judgment, stipulation, or charge, (e) there are no
royalty, commission, or similar arrangements and no licenses, sublicenses, or
agreements relating to any of the Proprietary Rights, (f) Welkin has not
received any notice of interference or infringement of or by the Proprietary
Rights, (g) Welkin has not agreed to indemnify any person or entity for or
against any infringement of or by the Proprietary Rights, (h) no other material
Proprietary Rights not owned by Welkin are necessary for the conduct of the
Welkin Business, and (i) to Welkin's knowledge no other party is operating a
business or otherwise acting in violation or infringement of, Welkin's
Proprietary Rights. Except as set forth on Schedule 2.28, Proprietary Rights,
Welkin has good and marketable title to, or a valid license for the Proprietary
Rights free and clear of all security interests, liens, pledges, encumbrances
and restrictions.
Section 2.29 Software and Information Systems.
(a) Welkin does not own, have a license to, or have any use,
possessory or proprietary rights to any information systems, programs and
software, other than non-exclusive commercial software.
(b) Welkin's use of the non-exclusive commercial software does
not infringe on any patents, trademarks, copyrights or other rights or
intellectual property rights of any third persons. Welkin has taken reasonable
measures necessary to maintain and protect the non-exclusive commercial software
used by or licensed to Welkin and no claims have been asserted by any person or
entity to Welkin's use of the same or challenging or questioning the validity or
effectiveness of the same, and there is no valid basis to any such claim.
(c) Schedule 2.29, Software, also contains a list of the
current software development and consulting activities and projects of Welkin.
Welkin has described such projects and developments to Nichols. Welkin knows of
no impediments to fully developing and exploiting the information systems,
programs and software currently under development or to performing its currently
pending consulting contracts.
<PAGE>
Section 2.30 Material Commitments. As used in this Section 2.30, the
term "Material Commitments" means each Contract of Welkin which obligates Welkin
to sell, license, distribute, deliver or provide products or services
(including, without limitation, consulting services) for a consideration in
excess of $100,000 and over a period of more than one (1) month. Schedule 2.30,
Project List, sets forth a "Project List" with respect to each Material
Commitment. The Project List sets forth Welkin's production schedule or
performance schedule, and budget, with regard to each Material Commitment.
Except as described in the Project List, the performance of Welkin or any other
party involved with each Material Commitment is on schedule and within budget,
and no practical or technological problems have been encountered that might
reasonably be expected to impede completion or materially increase the cost of
Welkin's performance with a corresponding detriment to profit. Each Material
Commitment was made on a basis calculated to produce a profit under the
circumstances prevailing when it was made, and, except as disclosed on Schedule
2.30, Project List, and except for changes to the Material Commitments that may
result from the transactions contemplated hereby, Welkin is not aware of any
circumstances that might reasonably be expected to prevent the realization of a
profit. To Welkin's knowledge, except as set forth on the Project List, no
Material Commitment involves the development of any product or technology that
would infringe on the proprietary rights of any other party. Welkin is not bound
by any Material Commitments for the performance of services or delivery of
services or products in excess of its current ability to provide such services
or deliver such products during the time available to satisfy such commitments;
and all outstanding Material Commitments for the performance or delivery of
services or products were made on a basis calculated to produce a profit under
the circumstances prevailing when such commitments were made. Copies of
outstanding commitments have been previously made available to Nichols and in
all material respects contain the complete and correct terms and conditions of
same, except for deletions required to comply with government security
restrictions.
Section 2.31 Estoppel Provisions. Immediately after the Closing, except
as provided under Virginia law or applicable federal law, the Welkin
Shareholders will have no right, title, claim, demand, interest, action or cause
of action in, to or against Welkin in any capacity whatsoever (whether as a
shareholder, officer, director or creditor), except (i) with respect to holders
of Dissenting Shares, and (ii) in respect of their status as employees, officers
or directors of Welkin, and then only to the extent of accrued and unpaid
salary, benefits and reimbursable expenses under Welkin policy up to the date of
Closing. Upon the Closing, the Welkin Shareholders shall have no option, warrant
or other right to acquire any of the capital stock of Welkin.
Section 2.32 Accounting and Tax Matters. There are no facts or
circumstances relating to Welkin other than as disclosed in a certain
representation letter delivered by the Representative to Ernst & Young, LLP,
independent auditors, that may prevent the merger from qualifying for
pooling-of-interests accounting treatment or as a reorganization within the
meaning of Section 368(a) of the Code.
Section 2.33 Transactions With Affiliates and Related Parties. Except
as disclosed on Schedule 2.33, Transactions With Affiliates and Related Parties
hereto, neither the Welkin Shareholders, nor any officer, director, employee,
family members (whether related by blood or marriage) or any affiliates or
relatives of any Welkin Shareholder, has
<PAGE>
(a) Borrowed money from or loaned money to Welkin which remains outstanding;
(b) Had any contractual or other claim, express or implied, of any kind
whatsoever against Welkin;
(c) Had any interest in any property or assets used by Welkin in its business;
or
(d) Engaged in an other transaction with Welkin (other than employment
relationships).
Section 2.34 Brokers and Finders. No broker or finder has been involved
in this transaction on behalf of the Welkin Shareholders or Welkin, and neither
Welkin, Nichols nor the Welkin Shareholders will be obligated to pay any
brokers' or finders' fees as a consequence of any brokerage agreement entered
into by the Welkin Shareholders or Welkin.
Section 2.35 Year 2000 Compliance. To Welkin's knowledge, Software,
when used in accordance with its associated documentation, is capable of
correctly processing, providing and/or receiving date-related or date-dependent
data within and between the twentieth (20th) and twenty-first (21st) centuries,
provided that all products (including hardware, software and firmware) used with
the software utilized by Welkin in the conduct of its business properly exchange
accurate date data with such software.
Section 2.36 Incurred Cost Submission. The Incurred Cost Submission of
Welkin for the fiscal year ended March 31, 1997 has been submitted to the United
States Government and is a true and accurate representation of costs
reimbursable under Welkin's government contracts.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF NICHOLS AND MERGER SUB
Nichols and Merger Sub, jointly and severally, represent and warrant to
Welkin as follows:
Section 3.1 Organization; Standing; Corporate Power. Nichols and Merger
Sub are each a corporation duly organized, validly existing, and in good
standing under the laws of the states of their incorporation. Merger Sub is a
wholly-owned subsidiary of Nichols. Nichols and Merger Sub each have all
requisite power and authority, corporate and otherwise, to carry on and conduct
their respective businesses as they are now being conducted and to own and lease
their properties and assets.
<PAGE>
Section 3.2 Authority. Nichols and Merger Sub each has full legal
right, powers, and authority to execute and deliver this Agreement and to carry
out the transactions contemplated hereby. All corporate and other acts or
proceedings required to be taken by Nichols and Merger Sub to authorize the
execution, delivery, and performance of this Agreement and all transactions
contemplated hereby have been duly and properly taken.
Section 3.3 Approvals and Consents. No approval, authorization,
consent, order, or action of, or filing with, any person, entity, court,
administrative agency, or other governmental authority is required for the
execution and delivery by Nichols and Merger Sub of this Agreement or the
documents to be delivered at Closing.
Section 3.4 Validity. This Agreement has been, and the documents to be
delivered by Nichols and Merger Sub at Closing will be, duly executed and
delivered and constitute lawful, valid, and binding obligations of Nichols and
Merger Sub enforceable in accordance with their terms, subject to bankruptcy,
insolvency, reorganization, moratorium, and other laws affecting the rights of
creditors generally and to the discretion of a court in granting equitable
relief. The approval of the shareholders of Nichols is not required for the
authorization or issuance of the Nichols Stock or for any of the other
transactions contemplated by this Agreement.
Section 3.5 No Breach. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby are not prohibited by,
will not violate or conflict with any provision of, and will not constitute a
default under or a breach of (a) the charter or bylaws of Nichols or Merger Sub,
(b) any contract, agreement, or other instrument to which Nichols or Merger Sub
is a party, (c) any order, writ, injunction, decree, or judgment of any court or
governmental agency, or (d) any law, rule, or regulation applicable to Nichols
or Merger Sub.
Section 3.6 Finders. No finder or broker has acted or is acting on
behalf of Nichols or Merger Sub in connection with the transactions contemplated
by this Agreement.
<PAGE>
Section 3.7 Periodic Reports. The information in the Nichols Form 10-Q
Reports for the first and second quarters of 1998, Nichols Annual Report to its
Shareholders for 1997, Nichols Proxy Statement for the 1998 Annual Shareholders
Meeting, and Nichols Form 10-K for 1997 and any Current Reports on Form 8-K
filed for any period since December 31, 1997 (collectively the 'Nichols
Disclosure Documents') do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Nichols Disclosure Documents include the consolidated
balance sheet of Nichols as of August 31, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the fiscal year
ended August 31, 1997, accompanied by the related report thereon by Ernst &
Young, LLP, independent auditors. Such financial statements have been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
involved and with prior periods except as otherwise expressly stated therein and
fairly present the assets, liabilities and financial condition and results of
operations of Nichols at, or for, the periods ended at, the dates thereof. Since
August 31, 1997, there has been no material adverse change in the condition,
financial or otherwise, of Nichols. Nichols has made, and shall use its best
efforts to continue to make, all filings with the Securities and Exchange
Commission which it is required to make.
Section 3.8 Nichols Stock. All shares of Nichols Stock which may be
delivered to the Welkin Shareholders pursuant to Article I hereof will be duly
authorized, validly issued, fully paid, and nonassessable. The authorized
capital stock of Nichols as of the date hereof consists of 30,000,000 shares of
Common Stock. At May 31, 1998, there were 13,440,212 shares of Common Stock
issued, including 168,500 shares held in the treasury.
Section 3.9 Ownership of Welkin Stock. Neither Nichols nor Merger
Sub owns any Welkin Stock.
Section 3.10 Litigation. There are no legal actions, suits,
arbitrations, or other legal or administrative proceedings or governmental
investigations pending or threatened against Nichols or Merger Sub which would
impair the ability of Nichols or Merger Sub to consummate the transactions
contemplated in this Agreement.
Section 3.11 Governmental Approval and Filings. No approval,
authorization, consent, license, clearance, or order of, declaration or
notification to, or filing registration or compliance with, any governmental
regulatory authority, including nongovernmental self-regulatory agencies, is
required in order to permit Nichols and Merger Sub to perform their obligations
under this Agreement, except for the filing and recording of appropriate merger
documents as required by the VSCA.
Section 3.12 Disposition of Assets. Nichols has no present intention to
cause Welkin to dispose of more than an insubstantial part of Welkin's assets
during the two-year period following the Merger Date.
Section 3.13 Financial Capability. Nichols has the financial capacity
to perform all of its obligations under this Agreement and has no contemplation
of insolvency. Nichols, immediately after the Closing: (i) will be solvent; (ii)
will be able to meet its obligations and debts as they become due; (iii) the
value of Nichols' assets at such time will exceed Nichols' liabilities; and (iv)
Nichols will have adequate capital for the conduct of its business.
ARTICLE IV
COVENANTS OF WELKIN
From the date of this Agreement until the Closing, Welkin will act in
good faith and use its best efforts to cause the conditions to the obligations
of Nichols and Merger Sub set forth in Article VI to be satisfied on or before
the Closing and will:
<PAGE>
Section 4.1 Operate in Ordinary Course. Operate its business in the
usual and ordinary manner as heretofore conducted; perform in all material
respects all of its obligations; not materially modify, amend, supplement, or
waive any obligation under any material lease, contract, agreement, or
commitment without the prior written consent of Nichols which will not be
unreasonably withheld; and not take, or permit to be taken, any of the actions
described in subparagraphs (a) through (s) of Section 2.23.
Section 4.2 Preserve Business Organization. Use all reasonable efforts
to preserve intact its present business organization; keep available the
services of the current Employees; preserve its relationships with suppliers,
distributors, customers, and others having business relationships with it; and
refrain from changing in any material way any of its material policies
(including, without limitation, advertising, marketing, pricing, purchasing,
personnel, sales, or budget policies) without the prior written consent of
Nichols which will not be unreasonably withheld.
Section 4.3 Maintain Properties. Retain and maintain all of Welkin's
assets in customary repair, order, and condition, except for reasonable wear,
the disposal of worn-out or obsolete equipment, the sale of inventory in the
ordinary course of business, and damage due to unavoidable casualty.
Section 4.4 Maintain Books of Account. Maintain Welkin's
books of account and records in theusual and ordinary manner and in accordance
with GAAP.
Section 4.5 Comply with Law. Comply in all material respects with all
laws applicable to Welkin in connection with the transactions contemplated
hereby, or contest or settle in good faith, upon the advice of counsel, any
alleged failure to comply with any such laws.
Section 4.6 Maintain Insurance. Maintain the insurance policies listed
on Schedule 2.11, Insurance Policies and Claims, in full force and effect, with
policy limits and scope of coverage not less than is now provided.
Section 4.7 Advise Nichols of Adverse Change. Promptly advise Nichols
of the occurrence of any material adverse change in the financial condition or
results of the operations of Welkin; the occurrence of any other event or
condition that materially and adversely affects Welkin's assets or the conduct
of Welkin's business; or the imposition of any lien, pledge, or encumbrance on
any of Welkin's assets other than Permitted Liens.
<PAGE>
Section 4.8 Access for Nichols. Provide Nichols's employees, agents,
and authorized representatives with reasonable access, during normal business
hours and consistent with the normal operation of Welkin's business, to the
locations owned or leased by Welkin and to the books and records relating to
Welkin, to the extent necessary to enable Nichols to make a thorough
investigation of Welkin, and to examine Welkin's books and records. Nichols's
employees, agents, and authorized representatives shall hold all such
information and materials in strict confidence, shall not use the same for any
purpose other than to evaluate this transaction and, treat all such information
in a manner consistent with Nichols's policies and procedures concerning its own
confidential and proprietary information. If the transactions contemplated
hereby are not consummated for any reason, Nichols shall (a) upon the request of
Welkin, return all originals, copies, and summaries of such information to
Welkin and (b) continue to treat all such information as strictly confidential
in a manner consistent with Nichols's policies and procedures concerning its own
confidential and proprietary information.
Section 4.9 Third-Party Consents. Use its best efforts to obtain
all consents and approvals of third parties, if any.
Section 4.10 Welkin Shareholders' Approval of Merger. Call the Welkin
Shareholders= Meeting to be held on or before July 27, 1998, and submit this
Agreement at the Welkin Shareholders' Meeting for approval and adoption at the
meeting, all as provided by law and its Articles of Incorporation and Bylaws.
The notice of the Welkin Shareholders' Meeting, proxy, and accompanying proxy
statement shall be prepared by Welkin and shall be subject to the reasonable
approval of Nichols prior to delivery to the Welkin Shareholders. The materials
submitted to the Welkin Shareholders shall include (i) this Agreement, (ii) the
Nichols Disclosure Documents, (iii) a description of the transaction, (iv)
appropriate securities law disclosures regarding the fact that the Nichols Stock
delivered at Closing will be unregistered, and therefore, the certificates
evidencing such stock will bear a restrictive legend to the effect the shares
may not be sold unless registered or exempt from registration, and (v) proposed
resolutions to be adopted by the Welkin Shareholders which shall include (1)
approval of the Agreement and Plan of Merger, and (2) appointment of Carl W.
Monk, Jr., as the Representative with full authority to sign the Escrow
Agreement and to act for the Welkin Shareholders in regard to any claim for
indemnity or other matter arising in regard to this Agreement or the Escrow
Agreement.
Section 4.11 Board of Director Resignations. Obtain the
resignation of each of the members of the Board of Directors of Welkin other
than Carl W. Monk, Jr. and Alan A. Ross, each such resignation to be effective
upon the Closing.
Section 4.12 Articles of Merger. Exert its best efforts to obtain
assurance from the Secretary of State of the State of Virginia that the Articles
of Merger attached as Exhibit 'A' comply with the VSCA.
Section 4.13 Shareholders' Letter Agreement. Cause each of
Carl W. Monk, Jr., Alan A. Ross, Frederick W. Raymond and Zeta Associates,
Inc. to deliver to Nichols not later than 10 days prior to the Merger Date a
written agreement, substantially in the form of Exhibit 'C.'
<PAGE>
ARTICLE V
COVENANTS OF NICHOLS
Section 5.1 Compliance with Conditions. Prior to the Closing, Nichols
will act in good faith and use its best efforts to cause the conditions set
forth in Article VII to be satisfied on or prior to the Closing.
Section 5.2 Articles of Merger. Prior to the Closing, Nichols will
exert its best efforts to obtain assurance from the Corporation Commission of
the Commonwealth of Virginia that the Articles of Merger attached as Exhibit 'A'
comply with the VSCA.
Section 5.3 Advise Welkin of Adverse Change. Promptly advise Welkin of
the occurrence of any material adverse change in the financial condition or
results of operations of Nichols; the occurrence of any other event or condition
that materially and adversely affects Nichols' assets or the conduct of Nichols'
business.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF NICHOLS AND MERGER SUB
The obligations of Nichols and Merger Sub under this Agreement are
subject to the satisfaction on or before the Closing of the following
conditions, unless such conditions are waived by Nichols or Merger Sub, as
appropriate:
Section 6.1 Representations and Warranties True as of Closing. Welkin's
representations and warranties made in this Agreement are true in all material
respects on and as of the Closing as though such representations and warranties
were made on and as of the Merger Date.
Section 6.2 Compliance with Agreement. Welkin has performed and
complied in all material respects with all of its obligations and covenants
under this Agreement that are to be performed or complied with by it on or
before the Closing, and Welkin is not otherwise in default in any material
respect under any of the provisions of this Agreement.
Section 6.3 No Litigation. No litigation, proceeding, investigation, or
inquiry is pending or threatened which, if sustained, would enjoin or prevent
the consummation of the transactions contemplated by this Agreement or would
materially and adversely affect Nichols's or Welkin's ability to carry on the
Welkin Business presently and ordinarily conducted following the Closing.
Section 6.4 Third-Party Consents and Approvals. Welkin has obtained all
third-party consents and approvals, if any, all in form and substance reasonably
satisfactory to Nichols, Merger Sub and their counsel. At or before the Closing,
Welkin will deliver to Nichols and Merger Sub all such third party consents or
approvals.
<PAGE>
Section 6.5 No Material Change. Nichols has made a good faith
determination, with the assistance and advice of counsel, that there has been no
material adverse change in the financial condition, assets, liabilities, net
capital, business, or affairs of Welkin.
Section 6.6 Shareholders' Equity. On the last business day prior to the
Merger Date, the shareholders' equity of Welkin, as determined in accordance
with GAAP, shall be no less than $2,750,000.
Section 6.7 Non-Competition Agreements.Each of Carl W. Monk, Jr.,Alan A.
Ross and Frederick W. Raymond shall have executed and delivered the
non-competition agreements with Welkin attached hereto as Exhibits 'D-1,' 'D-2,'
and 'D-3.'
Section 6.8 Employment Agreements. Each of Carl W. Monk, Jr. and Jose
S. Jimenez shall have executed and delivered the employment agreements attached
as Exhibits 'E-1' and 'E-2.'
Section 6.9 Certificates of Fulfillment of Conditions. Welkin shall
have delivered to Nichols and Merger Sub certificates, dated as of the Closing
and signed by the President of Welkin, stating that the conditions set forth in
Sections 6.1, 6.2, 6.3, 6.4, 6.6 and 6.10 have been fulfilled. Welkin shall have
delivered to Nichols copies of resolutions adopted by its Board of Directors and
the Welkin Shareholders, certified as of the Closing by its Secretary or an
Assistant Secretary, approving the execution and delivery of this Agreement and
the performance of its obligations under this Agreement.
Section 6.10 Shareholder Approval. The Welkin Shareholders
shall have approved the consummation of the transactions contemplated by this
Agreement.
Section 6.11 Welkin Dissenting Shares. The number of shares of Welkin
Stock held by a holder who has demanded and/or perfected the right, if any, to
dissent from this Agreement in accordance with the VSCA shall be less than five
percent of the total number of shares of Welkin Stock outstanding as of the date
hereof.
Section 6.12 Pooling Letter. Nichols shall have received a letter,
dated as of the Merger Date, from Ernst and Young, LLP, confirming that the
Merger, as closed and consummated in accordance with this Agreement, will
qualify for pooling-of-interests accounting treatment under Accounting
Principles Board Opinion No. 16.
Section 6.13 Opinion of Counsel. Welkin shall have delivered to Nichols
an opinion of its counsel, Epstein Becker & Green, P.C., dated as of the Merger
Date, in the form of Exhibit 'F' hereto.
Section 6.14 Number of Welkin Shareholders. On the Merger Date,
the number of Welkin Shareholders shall not exceed thirty-five.
<PAGE>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF WELKIN
The obligations of Welkin under this Agreement are subject to the
satisfaction on or prior to the Closing of the following conditions, unless such
conditions are waived by Welkin:
Section 7.1 Representations and Warranties True on Closing. Each of
Nichols's and Merger Sub's representations and warranties made in this Agreement
are true in all material respects on and as of the Closing as though such
representations and warranties were made on and as of the Merger Date.
Section 7.2 Compliance with Agreement. Nichols has performed and
complied in all material respects with all of its obligations and covenants
under this Agreement that are to be performed or complied with by it on or
before the Closing, and Nichols is not other-wise in default in any material
respect under any of the provisions of this Agreement.
Section 7.3 No Litigation. No litigation, proceeding, investigation, or
inquiry is pending or threatened which, if sustained, would enjoin or prevent
the consummation of the transactions contemplated by this Agreement.
Section 7.4 Certified Resolutions. Each of Nichols and Merger Sub has
delivered to Welkin copies of resolutions adopted by its respective Board of
Directors, certified as of the Closing by its Secretary or an Assistant
Secretary, approving the execution and delivery of this Agreement and the
performance of its respective obligations under this Agreement. Nichols or
Merger Sub, as the case may be, has delivered to Welkin evidence satisfactory to
Welkin of the approval by the sole shareholder of Merger Sub of this Agreement
and the transactions contemplated hereby.
Section 7.5 Certificate of Fulfillment of Conditions. Nichols, on
behalf of itself and Merger Sub, shall have delivered to Welkin a certificate,
dated as of the Closing and signed by an officer of Nichols stating that the
conditions set forth in Sections 7.1 and 7.2 and 7.3 have been fulfilled.
Section 7.6 Shareholder Approval. The Welkin Shareholders shall
have approved the consummation of the transactions contemplated by this
Agreement.
Section 7.7 Opinion of Counsel. Nichols shall have delivered an opinion
of its counsel, Lanier Ford Shaver & Payne, P.C., dated as of the Merger Date in
the form of Exhibit 'G' hereto.
<PAGE>
ARTICLE VIII
POST CLOSING COVENANTS
Section 8.1 Merger of 401(k) Plans. Nichols and Welkin will determine
whether or not to merge the Welkin Associates Limited Savings Plan listed in
Schedule 2.14(a), Employee Benefit Plans, into the Nichols Retirement Plan after
the Closing. The features and benefits of the Nichols Retirement Plan offered
the employees by Welkin will be determined by Nichols. Welkin will notify all
plan participants and the appropriate government agencies (as required under
ERISA and the Code), if any, of the cessation of further benefit accrual under
the Welkin 401(k) Plan.
Section 8.2 Welkin Benefit Plans. Except for the Welkin 401(k) Plan,
each of the Plans listed on Schedule 2.14(a), Employee Benefit Plans, shall
continue in existence for one year after the Closing, unless Carl W. Monk, Jr.,
agrees to an earlier termination of any such plan or unless continuation
following the Merger of any such plan would violate the nondiscrimination or
other provisions of the Code or ERISA. After the Closing, a three-year plan will
be implemented to consolidate the Welkin employee fringe benefits, including the
employee benefit plans listed on Schedule 2.14(a), Employee Benefit Plans, and
the Welkin employment policies and procedures with the Nichols employee fringe
benefits and the Nichols employment policies and procedures.
Section 8.3 Other Benefits. The employees of Welkin will be entitled to
participate in the benefit plans sponsored by Nichols in accordance with the
terms and provisions of such plans unless comparable benefits are provided under
benefit plans maintained by Welkin after the Closing.
Section 8.4 Employee Stock Options. A total of 40,000 shares of Nichols
Stock will be reserved for issuance of stock options to employees of Welkin
after Closing pursuant to the terms of the Nichols Stock Option Plan. Such
amount includes 35,000 shares of Nichols Stock for options granted to Carl W.
Monk, Jr. and Jose S. Jimenez pursuant to their employment agreements. The
employees selected to receive Nichols' stock options and the number of shares
subject to such options will be determined within thirty (30) days after the
Closing after considering the recommendations of Carl W. Monk, Jr., and Mike
Solley, and such options will be granted within forty-five (45) days after the
Closing.
<PAGE>
Section 8.5 Registration of Nichols Stock. Within fifteen days after
the Merger Date, Nichols shall file with the Securities and Exchange Commission
a registration statement (the "S-3 Registration Statement") on Form S-3 under
the Securities Act with respect to the Nichols Stock delivered in exchange for
the Welkin Stock hereunder, including those shares delivered to the Escrow Agent
in accordance with the Escrow Agreement and those shares delivered to the
Representative as Cost Account Shares (the "Merger Stock"). Nichols shall use
its best efforts to cause the S-3 Registration Statement to become effective as
soon as practicable. Nichols shall maintain the effectiveness of the S-3
Registration Statement for a period of two years after the Merger Date or until
all Nichols Stock delivered in exchange for the Merger Stock is sold, whichever
occurs first. The S-3 Registration Statement and all amendments and supplements
thereto will conform in all material respects with the requirements of the
Securities Act and all rules and regulations thereunder. The Merger Stock (other
than the Escrowed Stock or the Cost Account Stock) will be freely tradeable by
the Welkin Shareholders from and after the effective date of the S-3
Registration Statement, and the Escrowed Stock will be freely tradeable by the
Welkin Shareholders from and after the release of such shares from the escrow
pursuant to the Escrow Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time on or before the Closing, as follows:
(a) By the mutual consent of Nichols and Welkin;
(b) By Nichols if any of the conditions set forth in Article
VI of this Agreement have become incapable of fulfillment or are not fulfilled
on or before August 15, 1998;
(c) By Welkin if any of the conditions set forth in Article
VII of this Agreement have become incapable of fulfillment or are not fulfilled
on or before July 31, 1997; or
(d) By Welkin or by Nichols if any action, suit, or proceeding
before any court or other governmental body or agency has been instituted to
restrain, modify, or prohibit the transactions contemplated hereby.
If this Agreement is terminated in a manner permitted by this Section
9.1, this Agreement will become void and of no further force and effect, neither
of the parties hereto will have any liability to the other party in respect of a
termination of this Agreement.
Section 9.2 Expenses. Whether or not the transactions contemplated
hereby are consummated, except to the extent otherwise expressly provided
herein, each of the parties hereto will pay its respective expenses (including,
without limitation, the fees, disbursements, and expenses of its attorneys,
accountants, and consultants) incurred by it in negotiating, preparing, and
carrying out this Agreement and the transactions contemplated by this Agreement.
<PAGE>
Section 9.3 Notices. Notices hereunder will be effective four business
days after they are deposited in the official mails, postage prepaid, certified
and with return receipt requested, the day after they are delivered to a courier
for overnight delivery, or upon receipt when sent by facsimile or hand delivery,
and addressed:
(a) In the case of Nichols, to:
4040 South Memorial Parkway
Huntsville, Alabama 35802
Attn.: Chris H. Horgen, Chairman
Facsimile No.: (256) 650-2240
with a copy to:
John R. Wynn
Lanier Ford Shaver & Payne P.C.
P.O. Box 2087
Huntsville, Alabama 35304
Facsimile No.: (256) 533-9322
(b) In the case of Merger Sub, to:
c/o Nichols Research Corporation
4040 South Memorial Parkway
Huntsville, Alabama 35802
Attn.: Chris H. Horgen, Chairman
Facsimile No.: (256) 650-2240
with a copy to:
John R. Wynn
Lanier Ford Shaver & Payne P.C.
P.O. Box 2087
Huntsville, Alabama 35304
Facsimile No.: (256) 533-9322
(c) In the case of Welkin, to:
c/o Carl W. Monk, Jr., President
Welkin Associates, Ltd.
4801 Stonecroft Boulevard
Suite 210
Chantilly, Virginia 20151
Facsimile No.: (703) 633-8101
<PAGE>
with a copy to:
Susan E. Pravda
Epstein Becker & Green, P.C.
75 State Street
Boston, MA 02109
Facsimile: (617)342-4001
Any party may change the address to which notices are to be addressed by giving
the other party notice in the manner herein set forth.
Section 9.4 Public Announcements and Releases. No party to this
Agreement will make or cause to be made any public announcement or release
concerning this Agreement or the transactions contemplated hereby without the
prior written consent of the other party to this Agreement.
Section 9.5 Governing Law. The validity, interpretation, and
performance of this Agreement will be determined in accordance with the laws of
the State of Delaware applicable to contracts made and to be performed wholly
within that state.
Section 9.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute but one and the same instrument.
Section 9.7 Headings. The headings, subheadings, and captions in this
Agreement and in any exhibit hereto are for reference purposes only and are not
intended to affect the meaning or interpretation of this Agreement.
Section 9.8 Exhibits; Disclosure Schedule. The exhibits attached
hereto, the Disclosure Schedule, and the other documents and instruments
referenced in this Agreement as having been delivered or executed pursuant
hereto are hereby made a part of this Agreement as if set forth in full herein.
A statement on the Disclosure Schedule that qualifies or limits a representation
or warranty, or that constitutes an exception to a representation and warranty,
shall specifically identify the Section of this Agreement to which the statement
relates. Information, lists, documents, agreements or other matters set forth in
the Disclosure Schedule that are not described in the preceding sentence need
only be set forth once even if another Section calls for similar disclosure.
Section 9.9 Entire Agreement. This Agreement, the exhibits attached
hereto, the Disclosure Schedule, and the other documents and instruments
referenced in this Agreement as having been delivered or executed pursuant
hereto contain the entire agreement between the parties hereto with respect to
their subject matter and supersede all negotiations, prior discussions and
understandings, written or oral, relating to their subject matter.
<PAGE>
Section 9.10 Successors and Assigns. This Agreement will be binding
upon Welkin and Nichols and their respective successors and assigns.
Notwithstanding the immediately preceding sentence, Welkin may assign their
rights and delegate their duties under this Agreement only with the prior
written consent of Nichols.
Section 9.11 Severability. If any provision of this Agreement is held
to be unenforceable, invalid, or void to any extent, that provision shall remain
in force and effect to the maximum extent allowable, and the enforceability and
validity of the remaining provisions of this Agreement shall not be affected
thereby.
ARTICLE X
INDEMNIFICATION
Section 10.1 By the Welkin Shareholders. If the Closing occurs, the
Welkin Shareholders, severally, hereby indemnify and hold harmless Nichols from
and against all claims, damages, losses, liabilities, costs and expenses,
including, without limitation, settlement costs and legal, accounting or other
expenses paid for investigating or defending any actions or threatened actions
(collectively, the "Losses"), in connection with any breach of any
representations, warranties or covenants made by Welkin in this Agreement, the
Schedules hereto or any certificates delivered pursuant to this Agreement.
Section 10.2 By Nichols. If the Closing occurs, Nichols hereby
indemnifies and holds harmless the Welkin Shareholders from and against all
Losses in connection with any breach of any representations, warranties or
covenants made by Nichols in this Agreement, the Schedules hereto or the
certificates delivered pursuant to this Agreement.
<PAGE>
Section 10.3 Claims for Indemnification. Whenever any claim shall arise
for indemnification under this Section 10, Nichols or the Welkin Shareholders,
as the case may be, seeking indemnification (the "Indemnified Party"), shall
promptly notify (the "Claim Notice") the party for whom indemnification is
sought hereunder (the "Indemnifying Party") of the claim and, when known, the
facts constituting the basis for such claim. In the event such Claim Notice is
sent by Nichols, Nichols shall deliver a copy of such Claim Notice to the Escrow
Agent. In the event of any such claim for indemnification hereunder resulting
from or in connection with any claim or legal proceedings by a thirty party, the
notice shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. The Indemnified Party shall not settle or
compromise any claim by a third party for which it is entitled to
indemnification hereunder without the prior written consent, which shall not be
unreasonably withheld or delayed, of the Indemnifying Party; provided, however,
that if suit shall have been instituted against the Indemnified Party and the
Indemnifying Party shall not have taken control of such suit after notification
thereof as provided herein, the Indemnified Party shall have the right to settle
or compromise such claim upon giving notice to the Indemnifying Party as
provided in Section 10.4. In the event that the Welkin Shareholders constitute
the Indemnifying Party, all notices and consents shall be given to, or by, the
Representative, who shall have the power and authority to bind all of the Welkin
Shareholders.
Section 10.4 Defense by the Indemnifying Party. In connection with any
claim which may give rise to indemnity hereunder resulting from or arising out
of any claim or legal proceeding by a person other than the Indemnified Party,
the Indemnifying Party, at its sole cost and expense, may, upon written notice
to the Indemnified Party, assume the defense of any such claim or legal
proceeding if the Indemnifying Party acknowledges to the Indemnified Party in
writing of the obligation of the Indemnifying Party to indemnify the Indemnified
Party with respect to all elements of such claim. If the Indemnifying Party
assumes the defense of any such claim or legal proceeding, the Indemnifying
Party shall, at its sole cost and expense, take all steps necessary in the
defense or settlement thereof. The Indemnifying Party shall not consent to a
settlement of, or the entry of any judgment arising from, any such claim or
legal proceeding, other than the payment of money, unless such settlement
includes a release of the Indemnified Party from any and all claims arising from
or related to such claim or legal proceeding. The Indemnified Party shall be
entitled to participate in (but not control) the defense of any such action,
with its own counsel and at its own expense. If the Indemnifying Party does not
assume the defense of any such claim or litigation resulting therefrom within
thirty (30) days after the date such claim is made: (a) the Indemnified Party
may defend against such claim or litigation in such manner as it may deem
appropriate, including, but not limited to, settling such claim or litigation,
after giving notice of the same to the Indemnifying Party on such terms as the
Indemnified Party may deem appropriate, and (b) the Indemnifying Party shall be
entitled to participate in (but not control) the defense of such action, with
its counsel and at its own expense. If the Indemnifying Party thereafter seeks
to question the manner in which the Indemnified Party defended such third party
claim or the amount or nature of any such settlement, the Indemnifying Party
shall have the burden to provide by a preponderance of the evidence that the
Indemnified Party did not defend or settle such third party claim in a
reasonably prudent manner. In the event that the Welkin Shareholders constitute
the Indemnifying Party, all references herein to the Indemnifying Party shall be
deemed to mean the Representative, who shall have the power and authority to
bind all of the Welkin Shareholders. All costs and expenses to be borne by the
Indemnifying Party, if the Indemnifying Party is the Welkin Shareholders, shall
be borne severally by each of the Welkin Shareholders.
Section 10.5 Survival of Representations; Claims for Indemnification.
If the Closing occurs, all representations and warranties made in this
Agreement, in the Schedules hereto and in all certificates delivered pursuant
hereto shall survive through and until the first anniversary of the Closing Date
(the "Termination Date"). After the Termination Date, all such representations
and warranties shall immediately expire, except with respect to claims, if any,
asserted in writing on or prior to the Termination Date and identified as claims
for indemnification pursuant to Sections 10.1 or 10.2. All claims for actions
for indemnity hereunder shall be asserted and maintained in writing by a party
hereto on or prior to the Termination Date.
<PAGE>
Section 10.6 Exclusion for Certain Indemnity Obligations.
Notwithstanding anything to the contrary in Section 10.1, 10.2 or elsewhere in
this Agreement, if the Closing occurs, neither the Welkin Shareholders, on the
one hand, nor Nichols and Welkin (taken together), on the other hand, shall be
entitled to receive, or shall be obligated to pay, any claims hereunder until
there are first claims hereunder resulting in more than $90,000 in aggregate
amount of indemnity obligations otherwise payable pursuant to Sections 10.1 or
10.2, in which case the party seeking indemnification shall be entitled to
recover commencing with the first dollar amount so payable.
Section 10.7 Maximum Limitation for Indemnity Obligations.
(a) Notwithstanding anything to the contrary in Sections 10.1,
10.2 or elsewhere in this Agreement, if the Closing occurs, the maximum
aggregate amount payable to Nichols and all affiliates thereof by all of the
Welkin Shareholders together as a group, as indemnity pursuant to this
Agreement, or otherwise, shall be the amount of the Escrow Property (as defined
in the Escrow Agreement).
(b) Except for violations of federal and state securities laws
and violations or breaches of post-closing obligations and covenants of Nichols
in this Agreement to which the limitations in this Section 10.7(b) shall not
apply, the maximum amount payable by Nichols to the Welkin Shareholders together
as a group, as indemnity pursuant to this Agreement or otherwise, shall be
limited to $1,200,000.00.
(c) All amounts payable to Nichols and all affiliates thereof
by the Welkin Shareholders shall be paid out of the Escrow Property in
accordance with the Escrow Agreement. Upon exhaustion of the Escrow Property or
termination of the Escrow Agreement, none of the Welkin Shareholders shall have
any obligation whatsoever to indemnify Nichols or any affiliates hereunder.
Section 10.8 General Limitations. After the Closing, no party hereto
shall make any claims against any other party hereto under this Agreement, under
any legal theory or with respect to the transfer of the Merger Stock, except
pursuant to Article X hereof, each party to this Agreement hereby waiving any
and all such claims.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed and delivered as of the day and year first above
written.
NICHOLS RESEARCH CORPORATION, a
Delaware corporation
By: Chris H. Horgen
---------------
Its: Chairman
WAL ACQUISITION COMPANY, INC., a
Virginia corporation
By:Patsy L. Hattox
---------------
Its:Secretary
WELKIN ASSOCIATES, LTD., a Virginia
corporation
By: Carl W. Monk, Jr.
-----------------
Its:President
CREDIT AGREEMENT
AMONG
NICHOLS RESEARCH CORPORATION
("Borrower"),
THE BANKS SET FORTH ON SCHEDULE 1 HERETO
("Banks")
AND
CORESTATES BANK, N.A.,
AS AGENT FOR THE BANKS
("Agent")
November 25, 1997
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Agreement") is made this 25th day
of November, 1997, by and among NICHOLS RESEARCH CORPORATION, a Delaware
corporation ("Borrower"); CORESTATES BANK, N.A., a national banking association
("CoreStates") and the other banks identified on Schedule 1 attached hereto
(each individually a "Bank" and individually and collectively, "Banks"); and
CoreStates as agent for the Banks ("Agent").
In consideration of the agreements hereinafter set forth, and
intending to be legally bound, the parties hereto hereby agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions. When used in this Agreement, the following
terms shall have the respective meanings set forth below.
"Acquisition Price" means, with respect to any Permitted
Acquisition, the aggregate consideration payable by the Companies in connection
therewith, including deferred or contingent obligations accounted for as
liabilities in accordance with GAAP.
"Advance" means a borrowing under the Commitment pursuant to
Paragraph 2.7 hereof.
"Advance Request Form" means the certificate in the form
attached hereto as Exhibit A to be delivered by Borrower to Agent as a condition
of each Advance.
"Affiliate" means as to any party: (i) any person who or
entity which directly or indirectly owns, controls or holds ten percent (10%) or
more of the outstanding beneficial interests in such party; (ii) any entity of
which ten percent (10%) or more of the outstanding beneficial interest is
directly or indirectly owned, controlled, or held by such party; (iii) any
entity which directly or indirectly is under common control with such party;
(iv) any director or general partner of such party or any Affiliate; or (v) any
immediate family member of any person who is an Affiliate. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of an entity,
whether through the ownership of voting securities, by contract, or otherwise.
"Agent" means CoreStates Bank, N.A., in its capacity as agent
for the Banks hereunder and any successor in such capacity appointed pursuant to
Paragraph 9.15 and 9.16 hereof.
<PAGE>
"Agreement" means this Credit Agreement and all exhibits
hereto, as each may be amended, modified, extended, consolidated or restated
from time to time.
"ASIDA Bonds" means the bonds issued by the Alabama State
Industrial Development Authority for the benefit of Borrower, having an
aggregate principal balance of $1,842,300.00 as of the date hereof and a final
maturity of January, 2000.
"Bank" means individually, and "Banks" means individually and
collectively, the institutions identified on Schedule 1 attached hereto and
their respective successors and assigns so long as any such institution retains
any portion of the Commitment or Loan hereunder.
"Base Rate" means the higher of (a) the Federal Funds Rate
plus one half of one percent (1/2%) per annum or (b) the Prime Rate.
"Borrower" means Nichols Research Corporation, a Delaware
corporation.
"Business Day" means any day not a Saturday, Sunday or a day
on which banks are required or permitted to be closed under the laws of the
Commonwealth of Pennsylvania.
"Capital Leases" means capital leases and subleases, as
defined in Statement 13 of the Financial Accounting Standards Board dated
November 1976, as amended and updated from time to time.
"CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, as amended from time to time, and all rules and
regulations promulgated in connection therewith.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and regulations with respect thereto in effect from time to
time.
"Commitment" means either the Short Term Commitment or the
Three Year Commitment, or both of them, as applicable..
"Company" means individually, and "Companies" means
individually and collectively, Borrower and each Guarantor.
"Compliance Certificate" means a certificate in the form of
Exhibit F attached hereto delivered by Borrower to Banks pursuant to Paragraph
5.4 or Paragraph 4.1 hereof.
<PAGE>
"Debt to Capitalization Ratio" means, as of any date of
determination, the ratio of (a) Funded Debt of Borrower and its consolidated
Subsidiaries to (b) total stockholders' equity plus Funded Debt of Borrower and
its consolidated Subsidiaries, determined in accordance with GAAP.
"Default" means an event, condition or circumstance the
occurrence of which would, with the giving of notice or the passage of time or
both, constitute an Event of Default.
"EBITDA" means, for any period, net income for such period as
defined in accordance with GAAP, plus interest expense, taxes, depreciation and
amortization, in each case as defined in accordance with GAAP and to the extent
each has been deducted in determining net income.
"EBITDAR" means, for any period, EBITDA for such period plus
lease and rental expense for such period, as defined in accordance with GAAP and
to the extent deducted in determining net income.
"Environmental Control Statutes" means any federal, state,
county, regional or local laws governing the control, storage, removal, spill,
release or discharge of Hazardous Substances, including without limitation
CERCLA, the Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984,
the Federal Water Pollution Control Act, as amended by the Clean Water Act of
1976, the Hazardous Materials Transportation Act, the Emergency Planning and
Community Right to Know Act of 1986, the National Environmental Policy Act of
1975, the Oil Pollution Act of 1990, any similar or implementing state law, and
in each case including all amendments thereto and all rules and regulations
promulgated thereunder and permits issued in connection therewith.
"EPA" means the United States Environmental Protection Agency,
or any successor thereto.
"ERISA" means the Employee Retirement Income Security Act of
1974, all amendments thereto and all rules and regulations in effect at any time
thereunder.
"ERISA Affiliate" means, when used with respect to any Plan,
ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans,
any person or entity that is a member of any group or organization within the
meaning of Code Sections 414(b), (c), (m) or (o) of which Borrower or any
Guarantor is a member.
"Event of Default" means an event described in Paragraph 8.1
hereof.
"Existing Credit Agreement" means the Credit Agreement dated
August 16, 1995 by and among Borrower and SouthTrust Bank of Alabama, National
Association, First Alabama Bank and CoreStates Bank, N.A., as amended.
<PAGE>
"Federal Funds Rate" means, for any day, the effective rate of
interest for such day, as announced from time to time by the Board of Governors
of the Federal Reserve System as shown in publication H.15 as the "Federal Funds
Rate."
"Fixed Charge Coverage Ratio" means, as of any date of
determination, the ratio of (a) EBITDAR for Borrower and its consolidated
Subsidiaries for the most recent Rolling Period, to (b) the sum of (i) the
current portion of long term debt, and (ii) interest, lease and rental expense
for Borrower and its consolidated Subsidiaries for the most recent Rolling
Period.
"Funded Debt" means, as of the date of determination, the
aggregate outstanding principal amount of all Indebtedness for, without
duplication:
(A) borrowed money (other than trade Indebtedness
incurred in the normal and ordinary course of business for value received),
including without limitation the Loan hereunder;
(B) the purchase price for installment purchases of
real or personal property;
(C) the principal portion of Capital Leases;
(D) guaranties of Funded Debt of others; and
(E) reimbursement obligations under letters of
credit, including the amount of any Letters of Credit outstanding hereunder and
unreimbursed draws under Letters of Credit issued hereunder.
"GAAP" means generally accepted accounting principles set
forth in the Opinions of the Accounting Principles Board of the American
Institute of Certified Public Accountants and in statements of the Financial
Accounting Standards Board and in such other statements by such other entity as
Agent may reasonably approve, which are applicable in the circumstances as of
the date in question, subject to Paragraph 1.2(a) hereof; and such principles
observed in a current period shall be comparable in all material respects to
those applied in a preceding period.
"Guarantor" means individually, and "Guarantors" means
individually and collectively, each Material Subsidiary of Borrower, including
any future Material Subsidiaries of Borrower which may join in the Guaranty
pursuant to Paragraph 5.20 hereof.
"Guaranty" means the Guaranty Agreement executed by Guarantors
in favor of Banks as required to be delivered pursuant to Paragraph 4.1 hereof
and including any joinders thereto pursuant to Paragraph 5.20 hereof, as may be
amended, modified or restated from time to time.
<PAGE>
"Hazardous Substance" means petroleum products and items
defined in the Environmental Control Statutes as "hazardous substances",
"hazardous wastes", "pollutants" or "contaminants" and any other toxic,
reactive, corrosive, carcinogenic, flammable or hazardous substance or other
pollutant.
"Indebtedness" of any person as of any date of determination
means and includes all obligations of such person which, in accordance with
GAAP, shall be classified on a balance sheet of such person as liabilities of
such person and in any event shall include, without duplication, all (i)
obligations of such person for borrowed money or which have been incurred in
connection with acquisition of property or assets, (ii) obligations secured by
any lien upon property or assets owned by such person, notwithstanding that such
person has not assumed or become liable for the payment of such obligations,
(iii) obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such person,
notwithstanding the fact that the rights and remedies of the seller, lender or
lessor under such agreement in the event of default are limited to repossession
or sale of property, (iv) Capital Leases, (v) guarantees and (vi) letters of
credit and letter of credit reimbursement obligations.
"Letter of Credit" means individually, and "Letters of Credit"
means individually and collectively, the letter(s) of credit issued from time to
time by Agent and participated in by Banks pursuant to the terms and conditions
of Section 2A hereof.
"Letter of Credit Request Form" shall mean the certificate in
the form attached as Exhibit B-1 hereto to be delivered by Borrowers to Agent as
a condition of each issuance of a Letter of Credit pursuant to Paragraph 2A.3
hereof.
"Letter of Credit Sublimit" shall mean the portion of the
Three Year Commitment up to which Banks have agreed to participate in the
issuance by Agent of Letters of Credit pursuant to Section 2A hereof, being
Twenty-Five Million Dollars ($25,000,000).
"Loan" means the aggregate outstanding balance of Indebtedness
under the Short Term Loan and the Three Year Loan, together with all interest,
costs and fees and expenses due hereunder.
"Loan Documents" means the Agreement, the Note, the Guaranty
and the other documents and agreements executed and delivered in connection with
this Agreement.
"Local Authorities" means individually and collectively the
state and local governmental authorities and administrative agencies which
govern the business, commercial activities or facilities owned or operated by
any Company.
"Material Adverse Effect" means a material adverse effect on
the business, financial condition or prospects of the Borrower and its
consolidated Subsidiaries taken as a whole.
<PAGE>
"Material Subsidiary" means any direct or indirect Subsidiary
of Borrower which either: (i) comprises 5% or more of the assets of Borrower and
its consolidated Subsidiaries as of the last day of the most recently ended
fiscal quarter, or (ii) is responsible for 5% or more of the EBITDA of the
Borrower and its consolidated Subsidiaries for the most recent Rolling Period.
"Maximum Principal Amount" means the maximum principal amount
of the Commitment, or the Short Term Commitment or Three Year Commitment, as
applicable, up to which the applicable Bank has agreed to lend funds and/or
participate in the issuance of Letters of Credit, as set forth in Schedule 1
attached hereto, as such amounts may be reduced or terminated from time to time
pursuant to Paragraph 2.8 hereof.
"Net Cash Proceeds" shall mean, with respect to any Sale of
Material Assets, the cash proceeds received by the seller in such a transaction
less (i) the reasonable costs of the transaction, (ii) reasonable reserves for
retained liabilities, (iii) applicable taxes arising out of the transaction and
(iv) the amount of any such proceeds used to repay indebtedness secured by the
assets sold.
"Note" means individually, and "Notes" means individually and
collectively, the Short Term Notes and the Three Year Notes.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Acquisition" means any acquisition, whether by
merger, consolidation, purchase of equity securities or purchase of operating
assets, in which the acquisition target is operating solely in the United States
of America and is engaged in the same or a substantially similar business as the
Companies.
"Permitted Investments" means (i) investments in commercial
paper maturing in 180 days or less from the date of issuance which is rated A1
or better by Standard & Poor's Corporation or P1 or better by Moody's Investors
Services, Inc.; (ii) investments in direct obligations of the United States of
America or obligations of any agency thereof which are guaranteed by the United
States of America, provided that such obligations mature within twelve (12)
months of the date of acquisition thereof; and (iii) investments in certificates
of deposit maturing within one (1) year from the date of acquisition thereof
issued by a bank or trust company organized under the laws of the United States
or any state thereof, having capital, surplus and undivided profits aggregating
at least $500,000,000 and the long-term deposits of which are rated A1 or better
by Moody's Investors Services, Inc. or equivalent by Standard & Poor's
Corporation.
<PAGE>
"Plan" means any employee pension benefit or employee welfare
benefit plan as defined in Sections 3(1) or (2) of ERISA maintained or sponsored
by, contributed to, or covering employees of, either Borrower or any ERISA
Affiliate.
"Prime Rate" means the rate of interest announced by Agent
from time to time as its prime rate.
"Pro Rata Share" shall mean, as to a Bank, the ratio which the
outstanding principal balance of its portion of the Loan hereunder bears to the
aggregate outstanding principal balance of the Loan at any time; or if no
indebtedness is outstanding hereunder or the context otherwise requires, its
percentage share of the Commitment as set forth in Schedule 1 attached hereto.
"Release" means any spill, leak, emission, discharge or the
pumping, pouring, emptying, disposing, injecting, escaping, leaching or dumping
of a Hazardous Substance.
"Required Banks" shall mean those Banks (which may include
Agent in its capacity as a Bank) holding Pro Rata Shares of the Loan aggregating
fifty-five percent (55%) or more.
"Required Tangible Net Worth" means Seventy-Five Million
Dollars ($75,000,000) as of August 31, 1997, increasing as of the end of each
fiscal quarter ending thereafter by an amount equal to fifty percent (50%) of
positive net income for such quarter (with no decrease for losses for any
quarter).
"Restricted Payments" means redemptions, repurchases, and
distributions of any kind (including redemptions in exchange for real or
tangible personal property held by a Company) in respect of the capital stock of
Borrower.
"Rolling Period" means a period of four consecutive fiscal
quarters for which a Compliance Certificate has been (or is required to have
been) delivered hereunder.
"Sale of Material Assets" means the sale or other disposition
(including damage, destruction or condemnation of assets) by any Borrower, in a
single transaction or in the aggregate as to all transactions within any twelve
(12) consecutive months, of assets (including stock or other investments or
interests in a Person) which, valued at the greater of book value or fair market
value, have a value of Five Million Dollars ($5,000,000) or more; excluding
dispositions of equipment and other assets in the ordinary course of business,
and the sale of Permitted Investments for cash or the conversion into cash of
Permitted Investments.
"Short Term Commitment" means at any time the maximum
aggregate principal amount which Banks have agreed to make available at such
time under Paragraph 2.1(a) hereof, being Fifty Million Dollars ($50,000,000) in
the aggregate on the date hereof.
<PAGE>
"Short Term Commitment Termination Date" means the earlier of
(i) November __, 1998, or (ii) the date on which the Short Term Commitment is
terminated pursuant to Paragraph 2.8 hereof.
"Short Term Loan" means the aggregate principal balance of
Indebtedness advanced under the Short Term Commitment together with interest
accrued thereon and fees and expenses incurred in connection with any of the
foregoing.
"Short Term Note" means individually, and "Short Term Notes"
means individually and collectively, the promissory notes in the form of Exhibit
C-1 attached hereto delivered by Borrower to each Bank, as may be amended,
modified, consolidated or restated from time to time.
"SouthTrust Term Loan" means the indebtedness of the Borrower
pursuant to that certain Term Note dated February 9, 1994 between Borrower and
SouthTrust Bank of Alabama, National Association, having an outstanding
principal balance of $2,870,232.70 as of the date hereof and a final maturity of
February, 2003.
"Subsidiary" means any corporation or partnership of which any
Company, directly or indirectly (including as beneficiary of a business trust),
owns more than fifty percent (50%) of any class or classes of securities or
partnership interests. Unless otherwise specified, references to "Subsidiaries"
herein shall mean direct and indirect Subsidiaries of Borrower.
"Tangible Net Worth", means, as of any date of determination,
total stockholders' equity, less any intangible assets, determined in accordance
with GAAP.
"Three Year Commitment" means at any time the maximum
aggregate principal amount which Banks have agreed to make Advances under
Paragraph 2.1(b) hereof and/or issue Letters of Credit under Section 2A hereof,
being Fifty Million Dollars ($50,000,000) in the aggregate on the date hereof.
"Three Year Commitment Termination Date" means the earlier of
(i) November __, 2000 or (ii) the date on which the Three Year Commitment is
terminated pursuant to Paragraph 2.8 hereof.
"Three Year Loan" means the outstanding principal balance of
indebtedness advanced, and the face amount of Letters of Credit issued, under
the Three Year Commitment, and without duplication the amount of all
unreimbursed draws under Letters of Credit, together with interest accrued on
and fees and expenses incurred in connection with any of the foregoing.
<PAGE>
"Three Year Note" mans individually, and "Three Year Notes"
means individually and collectively, the promissory notes in the form of Exhibit
C-2 attached hereto delivered by Borrower to each Bank, as may be amended,
modified, consolidated or restated from time to time.
1.2 Rules of Construction
(a) GAAP. Except as otherwise provided herein,
financial and accounting terms used in the foregoing definitions or elsewhere
in this Agreement, shall be defined in accordance with GAAP. If Borrower or
Required Banks determine that a change in GAAP from that in effect on the date
hereof has altered the treatment of certain financial data to its detriment
under this Agreement, such party may, by written notice to the other within ten
(10) days after the effective date of such change in GAAP, request renegotiation
of the financial covenants affected by such change. If Borrower and
Required Banks have not agreed on revised covenants within thirty (30) days
after the delivery of such notice, then, for purposes of this Agreement,
GAAP will mean generally accepted accounting principles on the date just
prior to the date on which the change occurred that gave rise to the notice.
(b) Use of term "consolidated". Any term defined in
Paragraph 1.1 hereof, when
modified by the word "consolidated," shall have the meaning given to such term
herein as to Borrower and all entities whose accounts, financial results or
position, for financial accounting purposes, are consolidated with those of
Borrower in accordance with GAAP.
SECTION 2
CREDIT FACILITY
2.1 The Facilities
(a) Short Term Commitment. From time to time
prior to the Short Term Commitment Termination Date, subject to the provisions
below, each Bank severally agrees to make Advances to Borrower under the Short
Term Commitment up to its respective Maximum Principal Amount with respect
to the Short Term Commitment, which Borrower may repay and reborrow prior to
the Short Term Commitment Termination Date, for purposes specified in Paragraph
2.4 hereof; provided, however, that the aggregate outstanding principal
amount of such Advances shall not exceed at any time the amount of the Short
Term Commitment.
<PAGE>
(b) Three Year Commitment. From time to time
prior to the Three Year Commitment
Termination Date, subject to the provisions below, each Bank severally agrees to
make Advances to Borrower under the Three Year Commitment up to its respective
Maximum Principal Amount with respect to the Three Year Commitment, which
Borrower may repay and reborrow prior to the Three Year Commitment Termination
Date, for purposes specified in Paragraph 2.4 hereof; provided, however, that
the aggregate outstanding principal amount of such Advances, together with the
amount available to be drawn under Letters of Credit and any unreimbursed draws
under Letters of Credit, shall not exceed at any time the amount of the Three
Year Commitment.
2.2 Promissory Notes
(a) Short Term Notes. The Indebtedness of the
Borrower to each Bank under the Short Term Loan will be evidenced by a Short
Term Note executed by Borrower in favor of such Bank. The original principal
amount of each Bank's Short Term Note will be in the amount identified in
Schedule 1 attached hereto as its Maximum Principal Amount with respect to the
Short Term Loan; provided, however, that notwithstanding the face amount
of each such Short Term Note, Borrower's liability thereunder shall be
limited at all times to the actual indebtedness, principal, interest, fees
and expenses then outstanding to such Bank under the Loan.
(b) Three Year Note. The Indebtedness of the
Borrower to each Bank under the Three Year Loan will be evidenced by a Three
Year Note executed by Borrower in favor of such Bank. The original principal
amount of each Bank's Three Year Note will be in the amount identified in
Schedule 1 attached hereto as its Maximum Principal Amount with respect to the
Three Year Note; provided, however, that
notwithstanding the face amount of each such Three Year Note, Borrower's
liability thereunder shall be limited at all times to the actual indebtedness,
principal, interest, fees and expenses then outstanding to such Bank under the
Three Year Loan.
2.3 Banks' Participation. Banks shall be lenders in the Short
Term Loan and the Three Year Loan in the Maximum Principal Amounts and Pro
Rata Shares set forth in Schedule 1 attached hereto.
2.4 Use of Proceeds. Funds advanced under the Loan shall be
used solely (i) for the working capital needs and general corporate purposes of
the Companies, including the refinancing of existing indebtedness under the
Existing Credit Agreement and the purchase of equipment for sale to customers,
(ii) for reimbursement of draws under Letters of Credit in accordance with
Paragraph 2A.4(b) hereof, and (iii) to finance the purchase price and related
expenses in connection with Permitted Acquisitions.
2.5 Repayment
(a) Short Term Loan. The aggregate outstanding
principal balance under the Short Term Loan on the Short Term Commitment
Termination Date, together with all outstanding interest, fees and costs due
hereunder with respect to the Short Term Loan, shall be due and payable in full
on November __, 1998. Notwithstanding the immediately preceding sentence, the
aggregate outstanding balance of the Loan shall be due and payable immediately
upon acceleration of the Short Term Loan in accordance with Paragraph 8.2
hereof.
<PAGE>
(b) Three Year Loan. The aggregate outstanding
principal balance under the Three Year Loan on the Three Year Commitment
Termination Date, together with all outstanding interest, fees and costs
due hereunder, shall be due and payable in full on November __, 2000.
Notwithstanding the immediately preceding sentence, the aggregate
outstanding balance of the Three Year Loan shall be due and payable
immediately upon acceleration of the Three Year Loan in accordance with
Paragraph 8.2 hereof.
2.6 Interest. Portions of the Loan shall bear interest on
the outstanding principal amount thereof in accordance with the following
provisions:
(a) Definitions. As used in this Paragraph 2.6
and elsewhere in this Agreement, the following words and terms shall have
the meanings specified below:
"Adjusted Libor Rate" shall mean, for any Interest Period, as
applied to a Portion, the rate per annum (rounded upwards, if necessary to the
next 1/100 of 1%) determined pursuant to the following formula:
Adjusted Libor Rate = Libor Rate
----------
[1 - Reserve Percentage]
For purposes hereof, "Libor Rate" shall mean, as applied to a Portion, the rate
which appears on the Telerate Page 3750 at approximately 9:00 a.m. Philadelphia
time two London Business Days prior to the commencement of such Interest Period
for the offering to leading banks in the London Interbank Market of deposits in
United States dollars ("Eurodollars") or, if such rate does not appear on the
Telerate page 3750, the rate which appears (or, if two or more such rates
appear, the average rounded up to the nearest 1/100 of 1% of the rates which
appear) on the Reuters Screen LIBO Page as of 9:00 a.m. Philadelphia time two
London Business Days prior to the commencement of the Interest Period, in either
case for an amount substantially equal to such Portion as to which Borrower may
elect the Adjusted Libor Rate to be applicable with a maturity of comparable
duration to the Interest Period selected by Borrower for such Portion, as may be
adjusted from time to time in accordance with Paragraph 2.6(f) hereof.
"Applicable Margin" means the percentage per annum set forth
in the appropriate column below that corresponds to the ratio for Borrower and
its consolidated Subsidiaries of Funded Debt as of the end of the most recent
Rolling Period to EBITDA for the most recent Rolling Period (the Applicable
Margin being the lowest applicable percentage per annum as to which the ratio
requirement has been attained):
<PAGE>
<TABLE>
<CAPTION>
Applicable Margin
-----------------
Short Term Loan Long Term Loan
--------------- --------------
Level Ratio of Funded Base Rate Libor Base Rate Libor
Debt to EBITDA Portions Portions Portions Portions
------ -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
I Less than or equal to 1.25 to 1 0.00% 0.350% 0.00% 0.325%
II Less than or equal to 2.25 to 0.00% 0.400% 0.00% 0.375%
1 but greater than 1.25 to 1
III Greater than 2.25 to 1 0.00% 0.450% 0.00% 0.425%
</TABLE>
The initial Applicable Margin shall be based on a closing Compliance Certificate
delivered pursuant to Paragraph 4.1 hereof; thereafter the Applicable Margin
shall adjust automatically, as appropriate, on the day following delivery of a
quarterly Compliance Certificate in accordance with Paragraph 5.4 hereof,
provided, that in the event that a quarterly compliance certificate has not been
delivered on the date required by Paragraph 5.4 then the Applicable Margin shall
adjust to Level III as of the date of required delivery; provided further,
however, that the Applicable Margin shall readjust on the day after delivery of
such delinquent Compliance Certificate based on the ratio set forth in such
Compliance Certificate.
"Interest Period" shall mean, with respect to the Adjusted
Libor Rate, a period of one (1), two (2), three (3) or six (6) months' duration,
as Borrower may elect, during which the Adjusted Libor Rate is applicable;
provided, however, that (a) if any Interest Period would otherwise end on a day
which shall not be a London Business Day, such Interest Period shall be extended
to the next succeeding London Business Day, unless such London Business Day
falls in another calendar month, in which case such Interest Period shall end on
the next preceding London Business Day, subject to clause (c) below; (b)
interest shall accrue from and including the first day of each Interest Period
to, but excluding, the day on which any Interest Period expires; (c) with
respect to an Interest Period which begins on the last London Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period), the Interest Period
shall end on the last London Business Day of a calendar month; and (d) Borrower
may not elect an Interest Period that would extend past the Termination Date.
"London Business Day" shall mean any Business Day on which
banks in London, England are open for business.
"Portion" shall mean a portion of the Loan as to which a
specific interest rate and, in the case of a Portion bearing interest based upon
the Adjusted Libor Rate, an Interest Period, has been elected by Borrower.
<PAGE>
"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System, comprising Part 204 of Title 12 Code of
Federal Regulations, as amended, and any successor thereto.
"Reserve" shall mean, for any day, that reserve (expressed as
a decimal) which is in effect (whether or not actually incurred) with respect to
a Bank (or any bank Affiliate of such Bank) on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor or any other
banking authority to which a Bank (or any bank Affiliate of such Bank) is
subject including any board or governmental or administrative agency of the
United States or any other jurisdiction to which a Bank (or any bank Affiliate
of such Bank) is subject for determining the maximum reserve requirement
(including without limitation any basic, supplemental, marginal or emergency
reserves) for Eurocurrency liabilities as defined in Regulation D.
"Reserve Percentage" shall mean, for a Bank (or any bank
Affiliate of such Bank) on any day, that percentage (expressed as a decimal)
prescribed by the Board of Governors of the Federal Reserve System (or any
successor or any other banking authority to which a Bank (or any bank Affiliate
of such Bank) is subject, including any board or governmental or administrative
agency of the United States or any other jurisdiction to which a Bank is
subject), for determining the reserve requirement (including without limitation
any basic, supplemental, marginal or emergency reserves) for (i) deposits of
United States Dollars or (ii) Eurocurrency liabilities as defined in Regulation
D, in each case used to fund a Portion subject to an Adjusted Libor Rate or any
Loan made with the proceeds of such deposit. The Adjusted Libor Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
(b) Interest on Loan.
(i) At the Borrower's election in
accordance with the provisions of Paragraph 2.6(c) below, in the absence of
an Event of Default hereunder and prior to maturity or judgment, and
subject to clause (ii) below, any Portion of the Loan shall bear interest
at either of the following rates:
(A) Base Rate. The Base Rate
plus the Applicable Margin.
(B) Adjusted Libor Rate. The
Adjusted Libor Rate plus the Applicable Margin.
<PAGE>
(ii) Notwithstanding the foregoing, upon the
occurrence and during the continuance of an Event of Default hereunder,
including after maturity and upon judgment, Borrower hereby agrees to pay
to Banks interest (A) on any outstanding Portion bearing interest based on
the Adjusted Libor Rate, at the rate which is two percent (2%) per annum in
excess of the Adjusted Libor Rate plus the Applicable Margin for each such
Portion through the end of the applicable Interest Period, and thereafter,
at the rate of two percent (2%) per annum in excess of the Base Rate plus
the Applicable Margin, and (B) on any Portion bearing interest based on the
Base Rate, at the rate of two percent (2%) per annum in excess of the Base
Rate plus the Applicable Margin.
(iii) In the event that any interest rate
applicable hereto is in excess of the highest rate allowable under
applicable law, then the rate of such interest shall be reduced to the
highest rate not in excess of such maximum allowable interest and any
excess previously paid by Borrower shall be deemed to have been applied
against principal.
(c) Procedure for Determining Interest Periods
and Rates of Interest.
(i) If Borrower elects the rate based oN
the Base Rate to be applicable to a Portion, Borrower must notify Agent of
such election in writing prior to eleven o'clock (11:00) a.m. Philadelphia
time one (1) Business Day prior to the proposed application of such rate.
If Borrower elects the rate based on the Adjusted Libor Rate to be
applicable to a Portion, Borrower must notify Agent of such election and
the Interest Period selected prior to eleven o'clock (11:00) a.m.
Philadelphia time at least three (3) London Business Days prior to the
commencement of the proposed Interest Period. If Borrower does not provide
notice for the rate based on the Adjusted Libor Rate, then Borrower shall
be deemed to have requested that the rate based on the Base Rate shall
apply to any Portion as to which the Interest Period is expiring and to any
new Advance of the Loan until Borrower shall have given proper notice of a
change in or determination of the rate of interest in accordance with this
Paragraph 2.6(c).
(ii) Borrower shall not elect more than six
(6) different Portions bearing interest based on the Adjusted Libor Rate to
be applicable to the Loan at one time, and any Portion shall be in an
amount equal to Three Million Dollars ($3,000,000) or an even multiple of
Five Hundred Thousand Dollars ($500,000) in excess thereof.
(d) Payment and Calculation of Interest. With
respect to Portions which bear interest at the rate based on the Adjusted
Libor Rate, interest shall be due and payable on the last day of each
Interest Period for each such Portion, and, in the case of a Portion with
an Interest Period of six (6) months, on the ninetieth (90) day after the
commencement of such Interest Period and on the last day of the Interest
Period. With respect to Portions which bear interest at the rate based on
the Base Rate, interest shall be due and payable on the last Business Day
of each month commencing on the first such date after the first Advance
which bears interest at the rate based on the Base Rate. Interest shall be
calculated in accordance with the provisions of Paragraph 2.6(b) hereof;
all interest shall be calculated on the basis of the actual number of days
elapsed over a year of three hundred sixty (360) days.
<PAGE>
(e) Reserves. If at any time when a Portion is
subject to the rate based on the Adjusted Libor Rate, a Bank (or a bank
Affiliate of such Bank) is subject to and incurs a Reserve, other than a
Reserve Percentage provided in the calculation of the applicable Adjusted
Libor Rate, Borrower hereby agrees to pay within five (5) Business Days of
demand thereof from time to time, as billed by Agent on behalf of itself or
any other Bank, such additional amount as is necessary to reimburse such
Bank (or such Bank's bank Affiliate) for its costs in maintaining such
Reserve. Such amount shall be computed by taking into account the cost
incurred by such Bank (or such Bank's bank Affiliate) in maintaining such
Reserve in an amount equal to such Bank's ratable share of the Portion on
which such Reserve is incurred, which computation shall be set forth in any
such demand by Agent on behalf of itself or any other Bank. The
determination by Agent or any Bank of such costs incurred and the
allocation of such costs among Borrower and other customers which have
similar arrangements with such Bank (or such Bank's bank Affiliate) shall
be prima facie evidence of the correctness of the fact and the amount of
such additional costs, if calculated in a manner consistent with similar
charges made by such Bank (or such Bank's Affiliates) to its other
customers having similar arrangements with such Bank. Upon notification to
Borrower of any payment required pursuant to this Paragraph 2.6(e),
Borrower (A) shall make such payment in accordance with the provisions
hereof and (B) may repay the Portion of the Loan with respect to which such
payment is required, subject to the requirements of Paragraph 2.9 and
2.6(g) hereof.
(f) Special Provisions Applicable to Adjusted
Libor Rate. The following special provisions shall apply to the Adjusted
Libor Rate:
(i) Change of Adjusted Libor Rate. The
Adjusted Libor Rate may be automatically adjusted by Agent on a prospective
basis to take into account the additional or increased cost of maintaining
any necessary reserves for Eurodollar deposits or increased costs due to
changes in applicable law or regulation or the interpretation thereof
occurring subsequent to the commencement of the then applicable Interest
Period, including but not limited to changes in tax laws (except changes of
general applicability in corporate income tax laws) and changes in the
reserve requirements imposed by the Board of Governors of the Federal
Reserve System (or any successor), excluding the Reserve Percentage and any
Reserve which has resulted in a payment pursuant to subparagraph (e) above,
that increase the cost to Banks of funding the Loan or a portion thereof
bearing interest based on the Adjusted Libor Rate. Agent shall give
Borrower notice of such a determination and adjustment, which determination
shall be prima facie evidence of the correctness of the fact and the amount
of such adjustment. Borrower may, by notice to Agent, (A) request Agent to
furnish to Borrower a statement setting forth the basis for adjusting such
Adjusted Libor Rate and the method for determining the amount of such
adjustment; and/or (B) repay the Portion of the Loan with respect to which
such adjustment is made, subject to the requirements of Paragraph 2.9 and
2.6(g) hereof.
<PAGE>
(ii) Unavailability of Eurodollar Funds.
In the event that Borrower shall have requested the rate based on the
Adjusted Libor Rate in accordance with Paragraph 2.6(c) and any Bank (or
such Bank's bank Affiliate) shall have reasonably determined that
Eurodollar deposits equal to the amount of the principal of the Portion and
for the Interest Period specified are unavailable, or that the rate based
on the Adjusted Libor Rate will not adequately and fairly reflect the cost
of making or maintaining the principal amount of the Portion specified by
Borrower during the Interest Period specified, or that by reason of
circumstances affecting Eurodollar markets, adequate and reasonable means
do not exist for ascertaining the rate based on the Adjusted Libor Rate
applicable to the specified Interest Period, such Bank shall give notice to
Agent and Agent shall promptly give notice of such determination to
Borrower that the rate based on the Adjusted Libor Rate is not available. A
determination by such Bank (or such Bank's bank Affiliate) hereunder shall
be prima facie evidence of the correctness of the fact and amount of such
additional costs or unavailability. Upon such a determination, (i) the
obligation to advance or maintain Portions at the rate based on the
Adjusted Libor Rate shall be suspended until Agent shall have notified
Borrower and Banks that such conditions shall have ceased to exist, and
(ii) the rate based on the Base Rate shall be applicable to all such
Portions. In the event of any such determination, Borrower shall be
entitled to replace the Bank that has made such determination with a bank
or banks (which may include one or more of the other Banks hereunder) that
have agreed to take such Bank's place.
(iii) Illegality. In the event that it
becomes unlawful for a Bank (or such Bank's bank Affiliate) to maintain
Eurodollar liabilities sufficient to fund any Portion of the Loan subject
to the rate based on the Adjusted Libor Rate, then such Bank shall
immediately notify Borrower thereof (with a copy to Agent) and such Bank's
obligations hereunder to advance or maintain advances at the rate based on
the Adjusted Libor Rate shall be suspended until such time as such Bank (or
such Bank's bank Affiliate) may again cause the rate based on the Adjusted
Libor Rate to be applicable to any Portion of the outstanding principal
balance of the Loan and any such Bank's share of any Portion shall then be
subject to the rate based on the Base Rate.
(g) Funding Costs and Loss of Earnings. In the
event that Borrower shall have requested the Adjusted Libor Rate to be
applicable to a Portion to be Advanced and Borrower shall revoke the
request for such Advance or shall fail to meet the conditions to such
Advance as set forth in Section Four hereof, and in connection with any
prepayment or repayment of a Portion bearing interest at the rate based on
the Adjusted Libor Rate made on other than the last day of the applicable
Interest Period, whether such prepayment or repayment is voluntary,
mandatory, by demand, acceleration or otherwise, Borrower shall pay to
Banks all reasonable funding costs and loss of earnings which may arise in
connection with such revocation of request for or failure to meet the
conditions to such Advance or such prepayment or repayment, as calculated
by Agent in accordance with Exhibit E hereto.
2.7 Advances
<PAGE>
(a) Advance Request. Borrower shall give Agent
written notice, not later than eleven o'clock (11:00) a.m. Philadelphia
time one (1) Business Day prior to the proposed Advance in the case of an
advance to bear interest based on the Base Rate, and three (3) Business
Days prior to an advance to bear interest based on the Adjusted Libor Rate,
of each requested Advance under the Commitment specifying the date, amount
and purpose thereof. Such notice shall be in the form of the Advance
Request Form attached hereto as Exhibit A, shall be certified by the chief
financial officer or treasurer of Borrower, and shall contain the following
information and representations, which shall be deemed affirmed and true
and correct as of and upon receipt of the date of and upon receipt of the
requested Advance:
(i) whether the Advance is to be drawn
under the Short Term Commitment or the Three Year Commitment;
(ii) the aggregate amount of the requested
Advance, which shall be no less than $3,000,000 and in multiples of
$500,000 in excess thereof, or be the unborrowed balance of the applicable
Commitment;
(iii) confirmation of Borrower's compliance
with Paragraphs 5.14 through 5.17 as of the most recently ended fiscal
quarter for which a Compliance Certificate has been (or is required to have
been) delivered, and taking into account any Advances, including the
requested Advance, and payments since such date; and
(iv) statements that the representations and
warranties set forth herein and in the other Loan Documents are true and
correct as of the date thereof; no Event of Default or Default hereunder
has occurred and is then continuing or will be caused by the requested
Advance; and there has been no Material Adverse Effect since the date of
this Agreement and no event or circumstance (or combination of events or
circumstances) has occurred which is reasonably likely to have a Material
Adverse Effect.
(b) Procedures.
(i) Upon receiving a request for an
Advance in accordance with subparagraph (a) above, Agent shall request by
prompt notice to Banks that each Bank advance funds to Agent so that each
Bank participates in the requested Advance in the same percentage as it
participates in the Commitment. Each Bank shall advance its applicable
percentage of the requested Advance to Agent by delivering federal funds
immediately available at Agent's offices prior to twelve o'clock (12:00)
noon Philadelphia time on the date of the Advance. Subject to the
satisfaction of the terms and conditions hereof, Agent shall make the
requested Advance available to Borrower by crediting such amount to
Borrower's deposit account with Agent not later than two o'clock (2:00)
p.m. on the day of the requested Advance; provided, however, that in the
event Agent does not receive a Bank's share of the requested Advance by
such time as provided above, Agent shall not be obligated to advance such
Bank's share.
<PAGE>
(ii) Unless Agent shall have been notified
by a Bank prior to the date such Bank's share of any such Advance is to be
made by such Bank that such Bank does not intend to make its share of such
requested Advance available to Agent, Agent may assume that such Bank has
made such proceeds available to Agent on such date, and Agent may, in
reliance upon such assumption (but shall not be obligated to), make
available to Borrower a corresponding amount. If such corresponding amount
is not in fact made available to Agent by such Bank on the date the Advance
is made, Agent shall be entitled to recover such amount on demand from such
Bank (or, if such Bank fails to pay such amount forthwith upon such demand,
from Borrower) together with interest thereon in respect of each day during
the period commencing on the date such amount was made available to
Borrower and ending on (but excluding) the date Agent recovers such amount,
from such Bank, at a rate per annum equal to the effective rate for
overnight federal funds in New York as reported by the Federal Reserve Bank
of New York for such day (or, if such day is not a Business Day, for the
next preceding Business Day) and from Borrower, at a rate per annum as
provided in Paragraph 2.6(b)(i)(A) hereof.
(c) Requests Irrevocable. Each request for an
Advance pursuant to this Paragraph 2.7 shall be irrevocable and binding on
Borrower. In the case of any Advance bearing interest at the rate based
upon the Adjusted Libor Rate, Borrower shall indemnify Banks against any
loss, cost or expense incurred by Bank as a result of not borrowing such
funds on the requested Advance date, including as a result of any failure
to fulfill on or before the date specified in such request for an Advance
the applicable conditions set forth in Section Four hereof, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or redeployment of deposits or other funds acquired by Banks to
fund the Advance to be made by Banks when such Advance, as a result of such
failure, is not made on such date, as calculated by Agent in accordance
with Exhibit E attached hereto.
2.8. Reduction and Termination of Commitment
(a) Borrower. Borrower shall have the right at
any time and from time to time, upon three (3) Business Days' prior written
notice to Agent, to reduce the Short Term Commitment and/or the Three Year
Commitment in increments aggregating $3,000,000 or multiples thereof
without penalty or premium, provided that on the effective date of such
reduction Borrower shall make a prepayment of Short Term Loan and/or the
Three Year Loan, as applicable, in an amount, if any, by which the
aggregate outstanding principal balance of such Loan exceeds the amount of
the applicable Commitment as then so reduced, together with accrued
interest on the amount so prepaid and any amounts due pursuant to Paragraph
2.6(g) hereof. Any reduction in the Short Term Commitment or the Three Year
Commitment shall proportionately reduce each Bank's Maximum Principal
Amount with respect thereto.
(b) Banks. Required Banks shall have the right to
terminate the Short Term Commitment and/or the Three Year Commitment at any
time, in their discretion and upon notice to Borrower, upon the occurrence
of any Event of Default hereunder (except if an Event of Default described
in Paragraph 8.1(i) shall occur, in which case termination of the Short
Term Commitment and/or the Three Year Commitment shall occur automatically
without notice).
(c) Restoration Only With Consent. Any termination or reduction of the
Commitment pursuant to subparagraphs 2.8(a) and (b) shall be permanent, and
such Commitment cannot thereafter be restored or increased without the
written consent of Banks.
<PAGE>
2.9 Prepayment
(a) Upon one (1) Business Day's prior written
notice by Borrower to Agent, in the case of Base Rate Portions, and
upon three (3) Business Days prior written notice by Borrower to Agent, in
the case of Libor Portions, Borrower may repay all or any portion of the
outstanding principal balance under the Short Term Loan and/or the Three
Year Loan without premium or penalty, provided that any such payment shall
include all accrued interest on the amount prepaid plus any amounts which
may be due pursuant to Paragraph 2.6(g) hereof. Payments made prior to the
Short Term Commitment Termination Date or Three Year Commitment Termination
Date, as applicable, shall not reduce the Short Term Commitment or Long
Term Commitment, respectively, and may be reborrowed in accordance with
this Agreement.
(b) In addition to the scheduled payments of
principal pursuant to Paragraph 2.5 above, in connection with each
Sale of Material Assets approved by Banks pursuant to Paragraph 6.7 hereof,
the Net Cash Proceeds to the seller of such transaction shall be paid
directly to Agent for the account of Banks and applied to the Loan,
together with any amounts. Payments made pursuant to this subparagraph
2.9(b) shall be applied first to the outstanding principal balance of the
Short Term Loan and then to the outstanding principal balance of the Three
Year Loan, and shall be accompanied by all accrued and unpaid interest and
fees in connection with the amount prepaid (including any amount payable
under Paragraph 2.6(g) hereof). Any such payments shall not reduce the
respective Commitments and may be reborrowed in accordance herewith.
2.10 Payments. All payments of principal, interest, fees and
other amounts due hereunder, including any prepayments thereof, shall
be made by Borrower to Agent for the account of Banks in immediately
available funds before twelve o'clock (12:00) noon, Philadelphia time, on
any Business Day at the office of Agent set forth on Schedule 1 hereto.
Borrower hereby authorizes Agent to charge Borrower's account with Agent
for all payments of principal, interest and fees when due hereunder.
2.11 Facility Fee. Borrower shall pay to Agent, for the benefit
of Banks in accordance with their Pro Rata Shares, a non-refundable
facility fee at the rate of one-tenth of one percent (.10%) per annum on
the aggregate amount of the Short Term Commitment and at the rate of
one-eighth of one percent (.125%) per annum on the aggregate amount of the
Three Year Commitment from the date hereof through the Short Term
Commitment Termination Date and the Three Year Commitment Termination Date,
respectively, which fees shall be payable at the offices of Agent quarterly
in arrears on the first day of each March, June, September, and December
and on the applicable Termination Date. The commitment fee shall be
calculated on the basis of the actual number of days elapsed over a year of
three hundred sixty (360) days.
<PAGE>
Borrower and Banks hereby agree that for purposes of
calculating the commitment fee to be paid from time to time under this
Paragraph 2.11, the unborrowed portion of the Three Year Commitment on
which such fee is calculated shall be reduced by the amount available to be
drawn under outstanding Letters of Credit and the amount of any
unreimbursed draws on any Letters of Credit.
2.12 Fees. Borrower shall pay to Agent, for itself and for
the account of Banks, fees as agreed pursuant to the letter dated
August 22, 1997.
2.13 Regulatory Changes in Capital Requirements. If any
Bank shall have determined that the adoption or the effectiveness
after the date hereof of any law, rule, regulation or guideline
regarding capital adequacy, or any change in any of the foregoing or
in the interpretation or administration of any of the foregoing by any
governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by such
Bank (or any lending office of such Bank) or such Bank's holding
company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Bank's capital or on the capital
of such Bank's holding company, as a consequence of this Agreement,
the Commitment, Advances or the Loan made by such Bank pursuant hereto
to a level below that which such Bank or its holding company could
have achieved but for such adoption, change or compliance (taking into
consideration such Bank's policies and the policies of such Bank's
holding company with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time Borrower shall pay
to such Bank such additional amount or amounts as will compensate such
Bank or its holding company for any such reduction suffered together
with interest on each such amount from the date demanded until payment
in full thereof at the rate provided in Paragraph 2.6(b)(ii) hereof
with respect to amounts not paid when due. Such Bank will notify
Borrower of any event occurring after the date of this Agreement that
will entitle such Bank to compensation pursuant to this Paragraph 2.13
as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation, and such compensation shall
not be charged for any period more than three (3) months prior to the
date of such notice.
A certificate of such Bank setting forth such amount or amounts as
shall be necessary to compensate such Bank or its holding company as
specified above shall be delivered to Borrower and shall be conclusive
absent manifest error, if calculated and charged in a manner consistent
with similar charges made by such Bank to its other customers having
similar arrangements with such Bank. Borrower shall pay such Bank the
amount shown as due on any such certificate delivered by such Bank within
ten (10) days after its receipt of the same.
Failure on the part of any Bank to demand compensation for increased
costs or reduction in amounts received or receivable or reductions in
return on capital with respect to any period shall not constitute a waiver
of such Bank's right to demand compensation with respect to any other
period except as otherwise limited by the terms of this Paragraph 2.13.
<PAGE>
SECTION 2A
LETTERS OF CREDIT
2A.1 Availability of Credits. Subject to the terms and conditions set
forth herein, Banks shall from time to time prior to the Three Year
Commitment Termination Date participate in the issuance by Agent of Letters
of Credit for the account of Borrower on the following terms and
conditions:
(a) at the time of issuance of the Letter of Credit, the sum of the
amount available to be drawn under such Letter of Credit and all other
Letters of Credit then outstanding hereunder plus any unreimbursed draws
under Letters of Credit, plus the outstanding principal balance of the
Three Year Loan, shall not exceed the Three Year Commitment;
(b) at the time of issuance of the Letter of Credit, the amount
available to be drawn under such Letter of Credit and all other Letters of
Credit then outstanding hereunder plus any unreimbursed draws under Letters
of Credit shall not exceed, in the aggregate, the Letter of Credit
Sublimit;
(c) the final expiration date of each Letter of Credit shall be on or
before the earlier of (i) one year, in the case of standby Letters of
Credit, and one hundred eighty (180) days, in the case of documentary
Letters of Credit, from the date of issuance thereof or (ii) the Three Year
Commitment Termination Date;
(d) there shall not exist at the time of issuance of the Letter of
Credit, or as a result thereof, any Default or Event of Default hereunder;
and
(e) each Letter of Credit issued under this Section 2A shall be
utilized by Borrower for legitimate purposes in the ordinary course of its
business.
2A.2 Commitment Availability. The amount available under the Three
Year Commitment as from time to time in effect shall be reduced by the
amount available to be drawn under all outstanding Letters of Credit and
unreimbursed amounts of any draws under Letters of Credit. The amount by
which the Three Year Commitment is so reduced shall not be available for
Advances under Paragraph 2.6 hereof, except Advances thereunder which are
made to reimburse Bank for draws under the Letters of Credit as permitted
pursuant to Paragraph 2A.4(b) hereof.
2A.3. Approval and Issuance
<PAGE>
(a) Borrower shall provide Agent not less than three (3) Business
Days' prior written notice of each request for the issuance of a Letter of
Credit by delivery of a Letter of Credit Request Form in the form attached
as Exhibit B-1 hereto and Agent's Letter of Credit Application in the form
attached as Exhibit B-2 hereto. Each Letter of Credit Request Form
submitted by Borrower to Agent requesting the issuance of a Letter of
Credit shall be certified by the chief financial officer or treasurer of
Borrower and shall, in addition to the matters described in Paragraph
2.7(a) hereof, list all Letters of Credit outstanding for the account of
Borrower at that time and, for each Letter of Credit so listed, its face
amount, outstanding undrawn balance and expiration date. It shall be a
condition to the issuance of any Letter of Credit that Agent shall have
received a Letter of Credit Request Form and Letter of Credit Application
as described above and that the conditions set forth in Paragraph 4.2 shall
be satisfied.
(b) Agent will promptly provide to Lenders written or telephonic
notification of Agent's receipt of the Letter of Credit Request Form and
the Letter of Credit Application which shall state (i) the amount of the
Letter of Credit requested and (ii) the expiration date of the requested
Letter of Credit.
2A.4. Obligations of the Borrower
(a) Borrower agrees to pay to Agent in connection with each Letter of
Credit issued hereunder:
(i) immediately upon the demand of Agent
on behalf of Banks, the amount paid by Banks with respect to such
Letter of Credit;
(ii) immediately upon demand of Agent, the
amount of any draft presented purporting to be drawn under such Letter
of Credit provided that the draft and accompanying documents conform to the
terms of the Letter of Credit but subject to the terms of Paragraph 2A.7
(whether or not Agent has at such time honored such draft) and any other
amounts paid thereunder (it being understood that Agent is not required to
make demand upon or proceed against any Bank or other party or to resort to
any collateral before obtaining payment from Borrowers);
(iii) in advance upon the date of issuance
or extension of any Letter of Credit, a non-refundable fee for the
benefit of Banks in accordance with each Banks percentage share of the
Three Year Commitment as set forth on Schedule 1 attached hereto,
calculated on the face amount of such standby Letter of Credit for the term
of such Letter of Credit at a rate per annum equal to the Applicable Margin
for a Libor Portion under the Three Year Loan as set forth in Paragraph 2.6
hereof;
(iv) on the date of issuance of each Letter
of Credit and on the effective date of any renewal or extension of any
Letter of Credit a fee of one-eighth of one percent (0.00125%) per annum on
the outstanding face amount of such Letter of Credit, payable to Agent for
its own account; and
<PAGE>
(v) interest on any indebtedness
outstanding with respect to such Letter of Credit, whether for funds
paid on drafts on such Letter of Credit or otherwise (but such indebtedness
shall not include undrawn balances of such Letter of Credit issued
hereunder) at the rate set forth in Paragraph 2.5(b)(i)(A) hereof from the
date of payment by Agent (if not reimbursed by Borrower on the same day) to
the date one (1) Business Day after notice to Borrower of such payment, and
thereafter at the rate applicable to Portions bearing interest based on the
Base Rate under Paragraph 2.5(b)(ii) hereof; interest under this clause (v)
shall be paid at the times and in the manner set forth in Paragraph 2.6
hereof, and shall accrue on amounts paid on a Letter of Credit (if not
reimbursed by Borrower on the same day) from the date of payment by Agent,
whether or not demand is made, until such amounts are reimbursed by
Borrower whether before, at or after demand.
(b) On or before the Three Year Commitment
Termination Date, in the absence of a Default or Event of Default at
such time, and subject to the provisions of Paragraph 2.6 hereof, Banks
hereby agree to advance funds to Borrower under the Three Year Loan to make
the payments required under Paragraphs 2A.4(a)(i) and (ii) hereof. If any
payment by Agent of a draft drawn under a Letter of Credit is for any
reason (including without limitation the occurrence or continuation of a
Default or Event of Default hereunder) not reimbursed prior to or on the
date of such payment, the amount of such payment shall thereupon be deemed
for purposes hereof an advance under Paragraph 2.7 hereof. Such
reimbursement obligation shall be repayable, prepayable, and otherwise
subject to all the terms and conditions thereof as if advanced by Bank
pursuant to Paragraph 2.7 hereof (but without duplication).
2A.5. Payment by Banks on Letters of Credit
(a) With respect to each Letter of Credit, each
Bank agrees that it is irrevocably obligated to pay to Agent, for each
such Letter of Credit, such Bank's Pro Rata Share of each and every payment
made or to be made by Agent under such Letter of Credit (each such payment
to be made, a "LOC Contribution"). Each Bank's LOC Contribution shall be
due from such Bank immediately upon, and in any event no later than the
same day as, receipt of written notice (which may be sent by telex or
telecopier) from Agent (except that if such notice is received after 3:00
p.m. on any Business Day, payment may be made on the following Business
Day, together with interest equal to the effective rate for overnight funds
in New York as reported by the Federal Reserve Bank of New York for such
day (or, if such day is not a Business Day, for the next preceding Business
Day)) that (i) it has made a payment or (ii) a draft has been presented
purporting to be drawn on a Letter of Credit issued hereunder. Such payment
shall be made at Agent's offices in immediately available federal funds.
<PAGE>
(b) The obligation of each Bank to make its LOC
Contribution hereunder is absolute, continuing and unconditional, and
Agent shall not be required first to make demand upon or proceed against
Borrowers or any guarantor or surety, or any others liable with respect to
the applicable Letter of Credit and shall not be required first to resort
to any Collateral. LOC Contributions shall be made without regard to
termination of this Agreement or the Commitment, the existence of an Event
of Default or Default hereunder, the acceleration of indebtedness hereunder
or any other event or circumstance.
2A.6. Collateral Security
(a) On the termination of the Three Year
Commitment or the occurrence of an Event of Default, Required
Banks may require (and in the case of an Event of Default
occurring under Paragraph 8.1(i) it shall be required
automatically) that Borrower deliver to Agent, for the benefit of
Banks, cash or U.S. Treasury Bills with maturities of not more
than 90 days from the date of delivery (discounted in accordance
with customary banking practice to present value to determine
amount) in an amount equal at all times to one hundred ten
percent (110%)of the outstanding undrawn amount of all Letters of
Credit, such cash or U.S. Treasury Bills and all interest earned
thereon to constitute cash collateral for all such Letters of
Credit. At such time as such collateral is required to be and has
not been deposited, Agent and any Bank shall be entitled to
liquidate such of the other collateral for the Loan (if any) or
any other assets of Borrower or any Guarantor as may be in the
possession of such Bank, as is necessary or appropriate in its
sole judgment so as to create such cash collateral.
(b) Any cash collateral deposited under
subparagraph (a) above, and all interest earned thereon, shall be
held by Agent and invested and reinvested at the expense and the
written direction of Borrower, in U.S. Treasury Bills with
maturities of no more than ninety (90) days from the date of
investment.
2A.7 General Terms of Credits. The following terms and
conditions apply with respect to each Letter of Credit
notwithstanding anything to the contrary contained herein:
(a) Borrower assumes all risks of the acts or
omissions of the beneficiary of each Letter of Credit with
respect to the use of the Letter of Credit or with respect to the
beneficiary's obligations to Borrower. Neither Agent nor any of
the Banks, nor any of their respective officers or directors,
shall be liable or responsible for, and Borrower hereby agrees to
indemnify and hold Agent and Banks harmless (except for such
party's respective gross negligence or willful misconduct) with
respect to: (i) the use which may be made of the Letter of Credit
or for any acts or omissions of the beneficiary in connection
therewith; (ii) the accuracy, truth, validity, sufficiency or
genuineness of documents, or of any endorsement thereon, even if
such documents should in fact prove to be in any or all respects
false, misleading, inaccurate, invalid, insufficient, fraudulent,
or forged; (iii) any other circumstances whatsoever in making or
failing to make payment under a Letter of Credit; or (iv) any
inaccuracy, interruption, error or delay in transmission or
delivery of correspondence or documents by post, telegraph or
otherwise. In furtherance and not in limitation of the foregoing,
Agent may accept documents that appear on their face to be in
order, without responsibility for further investigation,
regardless of any notice or information to the contrary.
<PAGE>
(b) Notwithstanding the foregoing, with respect
to any Letter of Credit, Borrower shall have a claim against Agent, and Agent
shall be liable to Borrower, to the extent, but only to the extent, of any
direct, as opposed to indirect or consequential, damages suffered by Borrower
caused by the Agent's willful misconduct or gross negligence.
(c) To the extent not inconsistent with this
Agreement, the Uniform Customs and Practices for Documentary Credits (1993
Revision), International Chamber of Commerce Publication No. 500, are hereby
made a part of this Agreement with respect to obligations in connection with
each Letter of Credit.
SECTION 3
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Banks as follows:
3.1 Organization and Good Standing.
Each Company is a corporation or other legal entity as set forth
on Exhibit D attached hereto, duly formed and validly existing under
the laws of the jurisdiction of its formation as set forth in Exhibit
D, and each has the power and authority to carry on its business as
now conducted and, except as to failures to qualify which do not,
either singly or in the aggregate, have a Material Adverse Effect, is
qualified to do business in all other states in which the nature of
its business or the ownership of its properties requires such
qualification.
3.2 Power and Authority: Validity of Agreement.
Each Company has the power and authority under applicable law and
under its organizational documents to enter into and perform the Loan
Documents to the extent that it is a party thereto; and all actions
necessary or appropriate for the execution and performance by each
Company of the Loan Documents have been taken, and, upon their
execution, the same will constitute the valid and binding obligations
of each Company to the extent it is a party thereto, enforceable in
accordance with their terms, except as such enforceability may be
limited by bankruptcy or equitable principles applicable to the
enforcement of creditors' rights generally.
3.3 No Violation of Laws or Agreements.
The making and performance of the Loan Documents by each Company
will not violate any provisions of any law or regulation, federal,
state or local, or its partnership agreement, or result in any breach
or violation of, or constitute a default under, any material agreement
or instruments by which any Company or its property may be bound.
3.4 Material Contracts.
Except as set forth on Exhibit D attached hereto, there exists no
material default under any contracts material to the businesses of the
Companies.
<PAGE>
3.5 Compliance
(a) Each of the Companies is in compliance with all applicable
laws and regulations, federal, state and local (including without
limitation those administered by the Local Authorities), except for
such failure to comply as would not, either singly or in the
aggregate, have a Material Adverse Effect;
(b) The Companies possess all the franchises, permits, licenses,
certificates of compliance and approval and grants of authority,
necessary or required in the conduct of the Companies' respective
businesses as of the date hereof; and except as identified on Exhibit
D attached hereto, as of the date hereof all such franchises, permits,
licenses, certificates and grants are valid, binding, enforceable and
subsisting without any defaults thereunder or enforceable adverse
limitations thereon and are not subject to any proceedings or claims
opposing the issuance, development or use thereof or contesting the
validity thereof, except to the extent that the failure to obtain or
maintain any of the foregoing would not, either singly or in the
aggregate, have a Material Adverse Effect; and
(c) No authorization, consent, approval, waiver, license or
formal exemptions from, nor any filing, declaration or registration
with, any court, governmental agency or regulatory authority (federal,
state or local) or non-governmental entity, under the terms of
contracts or otherwise, is required by the Companies by reason of or
in connection with the Companies' execution and performance of the
Loan Documents, except those which have been obtained.
3.6 Litigation.
Thereare no actions, suits, proceedings or claims which are
pending or, to the best of the Companies' knowledge or information,
threatened against any Company which, if adversely resolved, would
have a Material Adverse Effect.
3.7 Title to Assests.
Each of the Companies has good and marketable title to all of its
properties and assets material to the conduct of its business, free
and clear of any liens and encumbrances except the liens and
encumbrances permitted pursuant to Paragraph 6.4 hereof and the liens
and security interests identified on Exhibit D attached hereto. All
such assets are fully covered by the insurance required under
Paragraph 5.8 hereof.
3.8 Accuracy of Information; Full Disclosure
<PAGE>
(a) All information furnished to Banks concerning the financial
condition of the Companies including Borrower's annual consolidated
financial statement for the period ending August 31, 1996 and
Borrower's interim consolidated financial statements dated May 31,
1997, copies of which have been furnished to Banks, has been prepared
in accordance with GAAP and fairly present in all material respects
the financial condition of the Companies as of the dates and for the
periods covered and discloses all liabilities of the Companies
required to be disclosed in accordance with GAAP, except that interim
statements do not have footnotes and are subject to year-end
adjustments; and there has been no material adverse change in the
financial condition or business of the Companies from the date of such
statements to the date hereof; and
(b) All financial statements and other documents furnished by the
Companies to Banks pursuant to this Agreement and the other Loan
Documents do not and will not contain any untrue statement of material
fact or omit to state a material fact necessary in order to make the
statements contained herein and therein not misleading. The Companies
have disclosed to the Banks in writing any and all facts which
materially and adversely affect the business, properties, operations
or condition, financial or otherwise, of the Companies considered as a
whole, or the Companies' ability to perform their obligations under
this Agreement and the other Loan Documents.
3.9 Taxes and Assessments
(a) Each Company has duly and timely filed all information and tax
returns and reports with any federal, state, or local governmental
taxing authority, body or agency, and all taxes, including without
limitation income, gross receipts, sales, use, excise, withholding and
any other taxes, and any governmental charges, penalties, interest or
fines with respect thereto, due and payable by any Company, have been
paid, withheld or reserved for in accordance with GAAP or, to the
extent they relate to periods on or prior to the date of the financial
statements referenced in Paragraphs 5.2 and 5.3 hereof, are reflected
as a liability on the financial statements in accordance with GAAP.
(b) Each Company has properly withheld all amounts required by
law to be withheld for income taxes and unemployment taxes including
without limitation, all amounts required with respect to social
security and unemployment compensation, relating to its employees, and
has remitted such withheld amounts in a timely manner to the
appropriate taxing authority, agency or body.
3.10 Indebtedness.
The Companies have no presently outstanding Indebtedness or
obligations, including contingent obligations and obligations under
leases of property from others, except the Indebtedness and
obligations described in Exhibit D hereto or in the Companies'
financial statements which have been furnished to Banks prior to the
date hereof pursuant to Paragraph 3.8 hereof, and indebtedness
permitted pursuant to Paragraph 6.1 hereof.
3.11 Management Agreements
No Company is a party to any management or consulting agreements
for the provision of senior executive services to such Company (other
than employment agreements with officers of the Companies) except as
described on Exhibit D hereto.
<PAGE>
3.12 Investments
Borrower and each direct and indirect Subsidiary of Borrower is
identified on Exhibit D attached hereto, which indicates the number of
shares and classes of the capital stock or partnership interests, as
applicable, of Borrower and each such Subsidiary, and the ownership
thereof. No Company has any other Subsidiaries or any investments in
or loans to any other individuals or business entities except for
loans and investments permitted pursuant to Paragraphs 6.3 or 6.8
hereof.
3.13 ERISA
Each of the Companies and each ERISA Affiliate is in compliance
in all material respects with all applicable provisions of ERISA and
the regulations promulgated thereunder; and,
(a) No Company nor any ERISA Affiliate maintains or contributes
to or has maintained or contributed to any multiemployer plan (as
defined in section 4001 of ERISA) under which any Company or any ERISA
affiliate could have any withdrawal liability which is reasonably
likely to have a Material Adverse Effect;
(b) No Company nor any ERISA Affiliate, sponsors or maintains any
Plan under which there is an accumulated funding deficiency within the
meaning of ss.412 of the Code, whether or not waived which is
reasonably likely to have a Material Adverse Effect;
(c) The aggregate liability for accrued benefits and other
ancillary benefits under each defined benefit pension Plan that is
sponsored or maintained by any Company or any ERISA Affiliate
(determined on the basis of the actuarial assumptions prescribed for
valuing benefits under terminating single-employer defined benefit
plans under Title IV of ERISA) does not exceed the aggregate fair
market value of the assets under each such defined benefit pension
Plan by an amount which is reasonably likely to have a Material
Adverse Effect;
(d) The aggregate liability of each Company, and each ERISA
Affiliate arising out of or relating to a failure of any Plan to
comply with the provisions of ERISA or the Code, is not an amount
which is reasonably likely to have a Material Adverse Effect on any
Company; and
(e) There does not exist any unfunded liability (determined on
the basis of actuarial assumptions utilized by the actuary for the
Plan in preparing the most recent Annual Report) of any Company or
ERISA Affiliate under any Plan providing post-retirement life or
health benefits which is reasonably likely to have a Material Adverse
Effect.
3.14 Fees and Commissions
The Companies owe no brokers' or finders' fees or commissions of
any kind, and know of no claim for any brokers' or finders' fees or
commissions, in connection with the Companies' obtaining the
Commitment or the Loan from Banks, except those provided herein.
<PAGE>
3.15 No Extension of Credit for Securities
The Companies are not now, nor at any time have they been
engaged principally, or as one of their respective important activities, in the
business of extending or arranging for the extension of credit, for the purpose
of purchasing or carrying any margin stock or margin securities; nor will the
proceeds of the Loan be used by any Company directly or indirectly, for such
purposes.
3.16 Hazardous Wastes, Substances and Petroleum Products.
Except as otherwise set forth on Exhibit D attached hereto:
(a) Each Company (i) has received all permits and filed all
notifications required by the Environmental Control Statutes to carry
on its respective business(es); and (ii) is in compliance with all
Environmental Control Statutes.
(b) Each Company has given any written or oral notice to the EPA
or any state or local agency with regard to any actual or imminently
threatened Release of Hazardous Substances on properties owned, leased
or operated by such Company or used in connection with the conduct of
its business and operations.
(c) No Company has received notice that it is potentially
responsible for clean-up, remediation, costs of clean-up or
remediation, fines or penalties with respect to any actual or
imminently threatened Release of Hazardous Substances pursuant to any
Environmental Control Statute.
3.17 Solvency
To the best of each Company's knowledge, excluding intercompany
indebtedness, each Company is, and after receipt and application of
the first Advance under this Agreement will be, solvent such that (i)
the fair value of its assets (including without limitation the fair
salable value of the goodwill and other intangible property of such
Company) is greater than the total amount of its liabilities,
including without limitation, contingent liabilities, (ii) the present
fair salable value of its assets (including without limitation the
fair salable value of the goodwill and other intangible property of
such Company) is not less than the amount that will be required to pay
the probable liability on their debts as they become absolute and
matured, and (iii) they are able to realize upon their assets and pay
their debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business. No
Company intends to, nor believes that it will, incur debts or
liabilities beyond its ability to pay as such debts and liabilities
mature, and no Company is engaged in a business or transaction, or
about to engage in a business or transaction, for which its property
would constitute unreasonably small capital after giving due
consideration to the prevailing practice and industry in which it is
engaged. For purposes of this Paragraph 3.17, in computing the amount
of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount which, in light of all the
facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual matured liability
of the applicable Company.
<PAGE>
Each Company hereby agrees that to the extent a Company shall
have paid more than its proportionate share of any payment made
hereunder or under the Guaranty, such Company shall be entitled to
seek and receive contribution from and against any other Company who
has not paid its proportionate share of such payment; provided however
such Company shall not seek any such contribution from any other
Company until the Loans have been paid in full and all Commitments of
the Banks hereunder have been terminated. The provisions of this
paragraph shall in no respect limit the obligations and liabilities of
any Company to the Agent and the Banks and each Company shall remain
liable to the Agent and the Banks for the full amount of its
obligations hereunder and under the Guaranty.
3.18 Employee Controversies.
There are no material controversies pending or, to the knowledge
of the Companies, threatened or anticipated between any Company and
any of its respective employees, and there are no labor disputes,
grievances, arbitration proceedings or any strikes, work stoppages or
slowdowns pending, or to the Companies' knowledge, threatened between
any Company and its respective employees and representatives, which in
either event could impair the ability of the Company to perform their
obligations under the Loan Documents, or which might reasonably be
expected to have a Material Adverse Effect.
3.19 Government Contracting.
No Company has transferred or received any rights or obligations
with respect to any contract with any federal or state governmental
agency or instrumentality in violation of the federal Assignment of
Claims Act or related federal or state laws, rules or regulations. No
Company nor any employee of any Company has been proposed for or
received notice of intended suspension or debarment from federal
contracting pursuant to Part 9 of the Federal Acquisition Regulations,
nor has any similar event occurred under comparable state laws, rules
or regulations relating to contracting with state governmental
entities. No Company has received notice of cure or of default with
respect to any contract with a governmental agency, nor any claim for
excess reprocurement costs.
SECTION 4
CONDITIONS
4.1 Effectiveness
The effectiveness of this Agreement shall be subject to Agent's
receipt of the following documents and satisfaction of the following
conditions, each in form and substance satisfactory to Banks:
(a) Promissory Notes. The Notes duly executed by Borrower.
(b) Guaranty. A Guaranty Agreement executed by each Subsidiary of
Borrower in favor of Banks.
<PAGE>
(c) Authorization Documents. A certificate of the secretary of
each Company attaching and certifying as to (i) the certificate or
articles of incorporation and bylaws or other organizational documents
of such Company; (ii) resolutions or other evidence of authorization
by the board of directors or other governing body of such Company
authorizing its execution and full performance of Loan Documents and
all other documents and actions required hereunder; and (iii)
incumbency certificates setting forth the name, title and specimen
signature of each officer of such Company who is authorized to execute
the Loan Documents on behalf of such entity.
(d) Good Standing. Certificates of good standing or the
equivalent for each Company for which such certificates are available
in its state of formation and each of the states in which it is
qualified to do business.
(e) Opinion of Counsel. An opinion letter from counsel for the
Companies, as may be reasonably satisfactory to Banks.
(f) Compliance and Borrowing Base Certificates. A Compliance
Certificate in the form of Exhibit F attached hereto calculated as of
the end of the most recent fiscal quarter of the Borrower for which
such certificates would be required hereunder.
(g) Fees and Expenses. Payment of all fees required by Paragraph
2.12 hereof.
(h) Searches. Uniform Commercial Code, tax and judgment searches
against the Companies in those offices and jurisdictions as Agent
shall reasonably request.
(i) Financial Projections. Projections for Borrower and its
consolidated Subsidiary for the period through fiscal year 2000,
certified by the chief financial officer of Borrower as constituting a
good faith projection based upon assumptions believed to be
reasonable.
(j) Consents. Receipt of all required consents and approvals
under applicable law or contract.
(k) Pay-Off of Existing Loan. Payment in full of all indebtedness
and obligations of Borrower under the Existing Credit Agreement, and
release of all liens and encumbrances thereunder.
(l) Other Documents. Such additional documents as Agent
reasonably may request.
<PAGE>
4.2 Advances.
The obligation of Banks to make Advances under the Commitment or
issue Letters of Credit shall be subject to Borrower's compliance with
Paragraph 2.7 or 2A.3 hereof, as applicable, and it shall be a
condition to Banks' obligation hereunder to make any such Advance or
issue such Letter of Credit that (a) the representations and
warranties set forth herein and in the other Loan Documents shall be
true and correct as if made on the date of such Advance or issuance,
(b) no Event of Default or Default shall have occurred and not have
been waived on the date of such Advance or issuance or be caused by
such Advance or issuance, (c) all fees required pursuant to Paragraphs
2.11 and 2.12 hereof have been paid as and when due, and (d) there
shall have been no Material Adverse Effect since the date of this
Agreement, and no event or circumstance (or combination of events or
circumstances) shall have occurred which is reasonably likely to have
a Material Adverse Effect.
SECTION 5
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that so long as the Commitment
of Banks to Borrower or any Indebtedness of Borrower to Banks is outstanding,
unless Required Banks have otherwise agreed in writing, each of the Companies
will (and with respect to Paragraph 5.13, will cause each ERISA Affiliate) to:
5.1 Existence and Good Standing.
Preserve and maintain (a) its existence as a corporation,
partnership or other legal entity, as applicable, and its good
standing in all states in which it conducts business and (b) the
effectiveness and validity of all its franchises, licenses, permits,
certificates of compliance or grants of authority required in the
conduct of its business, except for such instances of ineffectiveness
or invalidity as would not, either singly or in the aggregate, have a
Material Adverse Effect.
5.2 Interim Financial Statements.
Furnish to Agent (with sufficient copies for each Bank) within
forty-five (45) days of the end of each of the first three quarterly
periods in each fiscal year of Borrower, unaudited quarterly
consolidated financial statements, in form and substance as reasonably
required by Agent, including (i) a consolidated balance sheet, (ii) a
consolidated statement of income, and (iii) a statement of cash flows,
prepared in accordance with GAAP consistently applied (except that
such interim statements need not contain footnotes and may be subject
to year-end adjustments).
<PAGE>
5.3 Annual Financial Statements.
Furnish to Agent (with sufficient copies for each Bank) within
ninety (90) days after the close of each fiscal year audited
consolidated annual financial statements, including the information
required under Paragraph 5.2 hereof, which financial statements shall
be prepared in accordance with GAAP and shall be certified without
qualification (except with respect to changes in GAAP as to which
Borrower's independent certified public accountants have concurred) by
an independent certified public accounting firm reasonably
satisfactory to Agent; and cause Agent to be furnished, at the time of
the completion of the annual audit, with copies of any management
letters prepared by such accountants and with a certificate signed by
such accountants to the effect that to the best of their knowledge
there exists no Event of Default or Default hereunder.
5.4 Compliance Certificate.
At the time of delivery of financial statements pursuant to
Paragraph 5.2 and 5.3 hereof, deliver to Agent (with sufficient copies
for each Bank) a certificate in the form of Exhibit F attached hereto
executed by the chief financial officer or treasurer of Borrower,
showing the calculation of the covenants set forth in Paragraph 5.14
through 5.17 hereof.
5.5 Public Information.
Deliver to Agent (with sufficient copies for each Bank) promptly
upon transmission thereof, copies of all financial statements, proxy
statements, notices and reports, and copies of any registration
statement or annual or quarterly reports, if any, filed with the
Securities and Exchange Commission (or successor entity).
5.6 Books and Records.
Keep and maintain satisfactory and adequate books and records of
account in accordance with GAAP and make or cause the same to be made
available to Agent or its agents or nominees at any reasonable time
upon reasonable notice for inspection and to make extracts thereof and
permit Agent or its agents or nominees to discuss contents of same
with senior officers of the Companies and also with outside auditors
and accountants of the Companies.
5.7 Interest Rate Hedging.
At such time as the outstanding principal balance of the Loan
shall equal or exceed Fifty Million Dollars ($50,000,000), enter into
interest rate protection agreements in a form acceptable to Agent and
from one or more of the Banks or an institution acceptable to Agent,
with respect to at least twenty percent (20%) of the Loan and for a
period of at least two years; provided, however, that (a) the
protected rate shall be no greater than 1.50% above the all-in rate on
the date hereof; and (b) all documentation for such interest rate
protection shall conform to ISDA standards and must be acceptable to
Agent with respect to intercreditor issues.
5.8 Insurance.
Keep and maintain all of its property and assets in good order
and repair and covered by insurance with reputable and financially
sound insurance companies against such hazards and in such amounts as
is customary in the industry, under policies requiring the insurer to
furnish reasonable notice to Agent and opportunity to cure any
non-payment of premiums prior to termination of coverage and naming
Agent, for the benefit of Banks, as loss payee and additional insured.
5.9 Litigation: Event of Default.
Notify Agent in writing immediately of the institution of any
litigation, the commencement of any administrative proceedings, the
happening of any event or the assertion or threat of any claim, to the
extent that any of the foregoing, could have a Material Adverse Effect
or the occurrence of any Event of Default or Default hereunder.
<PAGE>
5.10 Taxes
Pay and discharge all taxes, assessments or other governmental
charges or levies imposed on it or any of its property or assets prior
to the date on which any penalty for non-payment or late payment is
incurred, unless the same are currently being contested in good faith
by appropriate proceedings, diligently prosecuted and covered by
appropriate reserves maintained in accordance with GAAP.
5.11 Costs and Expenses.
Pay or reimburse Agent for all reasonable out-of-pocket costs and
reasonable expenses (including but not limited to reasonable
attorneys' fees and disbursements) Agent may reasonably pay or incur
in connection with the preparation and review of this Agreement and
all waivers, consents and amendments in connection therewith and all
other documentation related thereto, and the making of the Loan
hereunder, and pay or reimburse Banks for all costs, liabilities and
expenses (including but not limited to reasonable attorneys' fees and
disbursements) associated with the collection or enforcement of the
same, including without limitation any fees and disbursements incurred
in defense of or to retain amounts of principal, interest or fees paid
or in connection with any audit or examination of the Companies. All
obligations provided for in this Paragraph 5.11 shall survive any
termination of this Agreement or the Commitment and the repayment of
the Loan.
5. 12 Compliance; Notification
(a) Comply in all material respects with all local, state and
federal laws and regulations applicable to its business (and in all
respects with the Environmental Control Statutes), including without
limitation the federal Assignment of Claims Act and any comparable
state laws, all laws and regulations relating to government
contracting, and all laws and regulations of the Local Authorities,
and with the provisions and requirements of all franchises, permits,
certificates of compliance, approval and need issued by regulatory
authorities and with other like grants of authority held by any
Company; and notify Agent immediately in detail of any actual or
alleged failure to comply with or perform, breach, violation or
default under any such laws or regulations or under the terms of any
of such franchises, licenses or grants of authority, or of the
occurrence or existence of any facts or circumstances which with the
passage of time, the giving of notice or otherwise could create such a
breach, violation or default or could occasion the termination of any
of such franchises, licenses or grants of authority, to the extent
that any of the foregoing could have a Material Adverse Effect.
<PAGE>
(b) With respect to the Environmental Control Statutes,
immediately notify Agent when, in connection with the conduct of the
Companies' business(es) or operations, any person (including, without
limitation, EPA or any state or local agency) provides oral or written
notification to any Company, or any Company otherwise becomes aware,
of a condition with regard to an actual or imminently threatened
Release of Hazardous Substances which could reasonably be expected to
have a Material Adverse Effect; and notify Agent in detail immediately
upon the receipt by a Company of an assertion of liability under the
Environmental Control Statutes, of any actual or alleged failure to
comply with, failure to perform, breach, violation or default under
any such statutes or regulations which could reasonably be expected to
have a Material Adverse Effect or of the occurrence or existence of
any facts, events or circumstances which with the passage of time, the
giving of notice, or both, could create such a failure to breach,
violation or default.
5.13 ERISA.
(a) Comply in all material respects with the provisions of ERISA
to the extent applicable to any Plan maintained for the employees of
any Company or any ERISA Affiliate; (b) do or cause to be done all
such acts and things that are required to maintain the qualified
status of each Plan and tax exempt status of each trust forming part
of such Plan; (c) not incur any material accumulated funding
deficiency (within the meaning of ERISA and the regulations
promulgated thereunder), or any material liability to the PBGC (as
established by ERISA); (d) not permit any event to occur with respect
to any Plan sponsored by any Company or any ERISA Affiliate (i) as
described in Section 4042 of ERISA or (ii) which may result in the
imposition of a lien on its properties or assets; and (e) notify Agent
in writing promptly after it has come to the attention of senior
management of any Company of the written assertion or threat of any
event described in Section 4042 of ERISA (relating to the soundness of
a Plan) (including any "reportable event" described in Section
4042(a)(3) of ERISA) or the PBGC's ability to assert a material
liability against it or impose a lien on any Company's, or any ERISA
Affiliate's properties or assets; and (f) refrain from engaging in any
prohibited transactions or actions causing possible liability under
Section 502 of ERISA.
5.14 Maximum Debt to Capitalization Ratio.
Maintain at all times a Debt to Capitalization Ratio for Borrower
and its consolidated Subsidiaries of not greater than 0.50 to 1.
5.15 Maximum Funded Debt to EBITDA Ratio.
Maintain at all times a ratio of (a) Funded Debt of Borrower and
its consolidated Subsidiaries to (b) EBITDA of Borrower and its
Consolidated Subsidiaries for the most recent Rolling Period, of not
greater than 3.00 to 1.
5.16 Minimum Tangible Net Worth.
Maintain at all times Tangible Net Worth of Borrower and its
consolidated Subsidiaries in an amount not less than the Required
Tangible Net Worth.
5.17 Minimum Fixed Charge Coverage Ratio.
Maintain at all times a Fixed Charge Coverage Ratio for Borrower
and its consolidated Subsidiaries of not less than 1.75 to 1.
5.18 Management Changes.
Notify Agent in writing within ten (10) Business Days after any
change of the senior executive management of Borrower.
5.19 Transactions Among Affiliates.
Cause all transactions between and among it and its Affiliates,
other than transactions among the Companies, to be on an arms-length
basis and on such terms and conditions as are customary in the
applicable industry between and among unrelated entities.
<PAGE>
5.20 Joinders.
If any Subsidiary becomes a Material Subsidiary or if a new
Material Subsidiary is formed or acquired, cause such Material
Subsidiary to execute and deliver a joinder to the Guaranty and such
other documents as Agent may reasonably require in connection
therewith, including without limitation secretary's certificates and
opinions of counsel.
5.21 Year 2000 Compliance.
The Companies shall take all action necessary to assure that the
Companies' computer-based systems are able to operate and effectively
process dates on or after January 1, 2000. At the request of Banks,
the Companies shall provide Banks assurances acceptable to Banks of
the Companies' Year 2000 compatability
5.22 Other Information.
Provide any Bank with any other documents and information,
financial or otherwise, reasonably requested by such Bank from time to
time.
SECTION 6
NEGATIVE COVENANTS
So long as any Commitment or any Indebtedness of Borrower to
Banks remains outstanding hereunder, Borrower covenants and agrees
that without Required Banks' prior written consent, each Company will
not:
6.1 Indebtedness.
Borrow any monies or create or permit to exist any Indebtedness
except: (i) borrowings from Banks hereunder; (ii) trade Indebtedness
in the normal and ordinary course of business for value received;
(iii) Indebtedness under the ASIDA Bonds and the SouthTrust Term Loan,
provided, that the aggregate principal thereof shall not be increased
after the date of this Agreement; and (iv) additional unsecured
Indebtedness or Indebtedness incurred to purchase or lease fixed or
capital assets in an aggregate principal amount which, together with
guarantees permitted pursuant to Paragraph 6.2(iii) hereof, does not
exceed ten Million Dollars ($10,000,000) at any time.
6.2 Guaranties.
Guarantee or assume or be or agree to become liable in any way,
either directly or indirectly, for any Indebtedness or liability of
others except: (i) to endorse checks or drafts in the ordinary course
of business, (ii) a Company may guaranty or otherwise agree to be
liable for obligations of any other Company, and (iii) additional
guarantees by one or more Companies of Indebtedness in an aggregate
principal amount which, together with Indebtedness permitted pursuant
to Paragraph 6.1(iv) hereof, does not exceed Ten Million Dollars
($10,000,000).
<PAGE>
6.3 Loans.
Make any loans or advances to others; provided, however, that (a)
a Company may make loans and advances to any other Company and (b) the
Companies may make investments in companies that are not subsidiaries
to the extent permitted pursuant to Paragraph 6.8(b) hereof.
6.4 Liens and Encumbrances.
Create, permit or suffer the creation or existence of any liens,
security interests, or any other encumbrances on (including any
conditional sales arrangement with respect to) any of its property,
real or personal, except the security interests in favor of the Agent
on behalf of Banks as security for the Loan, and except (i) liens
arising in favor of sellers or lessors for indebtedness and
obligations incurred to purchase or lease fixed or capital assets
permitted under Paragraph 6.1(iv) hereof, provided, however, that such
liens secure only the indebtedness and obligations created thereunder
and are limited to the assets purchased or leased pursuant thereto and
the proceeds thereof; (ii) mechanic's and workman's liens, liens for
taxes, assessments or other governmental charges, federal, state or
local, which are then being currently contested in good faith by
appropriate proceedings and are covered by appropriate reserves
maintained in accordance with GAAP; (iii) pledges or deposits to
secure obligations under workmen's compensation, unemployment
insurance or social security laws or similar legislation; (iv)
deposits to secure surety, appeal or custom bonds required in the
ordinary course of business and (v) the liens in favor of IBM Credit
Corp. disclosed on Exhibit D attached hereto, securing trade
indebtedness from IBM to Nichols TXEN Corporation (formerly Computer
Services Corporation), provided, that such liens shall be released
within thirty (30) days after the date hereof.
6.5 Additional Negative Pledge.
Agree or covenant with or promise any person or entity other than
the Banks that it will not pledge its assets or properties or
otherwise grant any liens, security interests or encumbrances on its
property.
6.6 Restricted Payments.
Make any Restricted Payments, unless there is no Default or Event
of Default hereunder at such time, and such payment will not create a
Default or Event of Default.
6.7 Transfer of Assets; Liquidation
(a) Sell, lease, transfer or otherwise dispose of all or any
portion of its assets, real or personal, other than such transactions
in the normal and ordinary course of business for value received; or
(b) discontinue, liquidate, or change in any material respect any
substantial part of its operations or business(es).
<PAGE>
6.8 Acquisitions and Investments.
Purchase or otherwise acquire (including without limitation by
way of share exchange) any part or amount of the capital stock,
partnership interests, or assets of, or make any investments in, any
other firm or corporation; or enter into any new business activities
or ventures not directly related to its present business; or merge or
consolidate with or into any other firm or corporation; or create any
Subsidiary; provided, however that in the absence of a Default or an
Event of Default at such time and if such transaction will not give
rise to a Default or an Event of Default:
(a) the Companies may make a Permitted Acquisition and create
Subsidiaries, provided that (i) Borrower provides to Agent, with a
copy to its counsel, not less than thirty (30) days prior written
notice of the proposed Permitted Acquisition or Subsidiary creation in
the form of Exhibit G attached hereto, including, in the case of a
Permitted Acquisition with respect to which the Acquisition Price is
in excess of Twenty-Five Million Dollars ($25,000,000), the following
information:
(A) a narrative description of the proposed acquisition which
demonstrates it to be a Permitted Acquisition, and describes
the business to be acquired, the legal structure for the
acquisition (including identification of any new
subsidiaries that will result from the transaction), the
acquisition price to be paid and form thereof, the
anticipated closing date, the anticipated borrowings under
the Commitment in connection therewith, and other material
features of the proposed acquisition;
(B) copies of the financial statements, if available, or federal
income tax returns if not, dated as of the three (3) most
recently ended fiscal years of such business or the seller
of such assets;
(C) pro forma financial statements of the business or assets and
Borrower and its consolidated Subsidiaries giving effect to
the proposed acquisition on an historical basis for the two
most recent fiscal quarters for which a Compliance
Certificate has been delivered and on a projected basis for
the period ending on the Three Year Commitment Termination
Date, including the information required pursuant to
Paragraph 5.2 and showing all adjustments which have been
made in connection with such pro forma statements, and
demonstrating compliance with the covenants set forth in
Paragraph 5.14 through 5.17 as of the end of each fiscal
quarter; and
(D) such additional documents as Agent may reasonably request,
each of the foregoing to be in form and substance reasonably
satisfactory to Agent;
(ii) Borrower complies with the terms and conditions of Paragraph 5.20 hereof,
and (iii) taking into account any supplement or amendment to Exhibit D hereto
which is reasonably acceptable to Required Banks, all of the representations and
warranties set forth herein are true and correct prior to and following such
Permitted Acquisition or the creation of such Subsidiary; and
(b) the Companies may make investments in companies that are not
Subsidiaries, provided that the aggregate amount of such investments,
whether as debt, equity or otherwise, shall not exceed Twenty-Five
Million Dollars ($25,000,000).
<PAGE>
6.9 Payments to Affiliates.
Pay any salaries, compensation, management fees, consulting fees,
service fees, licensing fees, or other similar payments to Affiliates
of any Company other than on an arms-length basis for value, and on
terms and conditions as are customary in the industry between and
among unrelated entities.
6.10 Amendments to Documents.
Amend or modify the ASIDA Bonds or the SouthTrust Term Loan.
6.11 Use of Proceeds.
Use any of the proceeds of the Loan, directly or indirectly, to
purchase or carry margin securities within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System; or engage as
its principal business in the extension of credit for purchasing or
carrying such securities.
SECTION 7
ADDITIONAL COLLATERAL AND RIGHT OF SET-OFF
Each Bank is hereby authorized at any time and from time to time
following the occurrence and during the continuation of an Event of
Default hereunder, to the fullest extent permitted by law, to set-off
and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any
time owing by such Bank to or for the credit or the account of a
Company against any and all of the obligations of a Company now or
hereafter existing under this Agreement, the Notes or the Loan
Documents, irrespective of whether such Bank shall have made any
demand under this Agreement or such Notes and although such
obligations may be unmatured and irrespective of whether such Bank is
otherwise fully secured. Each Bank agrees promptly to notify the
applicable Company after any such set-off and application made by such
Bank; provided, however, that the failure to give such notice shall
not affect the validity of such set-off and application. The rights of
Banks under this Section Seven are in addition to other rights and
remedies (including, without limitation, other rights of set-off)
which Banks may have.
SECTION 8
DEFAULT
8.1 Events of Default.
Each of the following events shall be an Event of Default
hereunder:
(a) If Borrower shall fail to pay when due any installment of
principal or any interest, fees, costs, expenses or any other sum
payable to Banks or Agent hereunder; or
<PAGE>
(b) If any representation or warranty made herein or in
connection herewith or in any statement, certificate or other document
furnished hereunder is false or misleading in any material respect
when made; or
(c) If any Company shall default (after expiration of any
applicable cure or grace periods) in the payment or performance of any
obligation or Indebtedness to another either singly or in the
aggregate in excess of Five Million Dollars ($5,000,000), whether now
or hereafter incurred; or
(d) If there shall be a default in or failure to observe at any
test date the covenants set forth in Paragraphs 5.14 through 5.17
hereof or in Section 6 hereof; or
(e) If any Company shall default in the performance of any other
agreement or covenant contained herein (other than as provided in
subparagraphs (a), (b) or (d) above) or in any document executed or
delivered in connection herewith, including without limitation with
respect to any Collateral, and such default shall continue uncured for
twenty (20) days after notice thereof to Borrower given by Agent; or
(f) If the Chairman, Chief Executive Officer or Chief Financial
Officer of the Borrower as of the date of this Agreement shall cease
to serve in such capacity, unless within ninety (90) days Agent is
notified in writing of the identity and qualifications of a person
with experience in the business of Borrower to serve in such capacity
and such new management is not objected to in writing by Required
Banks within sixty (60) days of such notice, or if objected to, then
within ninety (90) days after such objection Agent is notified in
writing of another such person given such authority and such
management is not objected to within sixty (60) days of such
subsequent notice; or
<PAGE>
(g) If: (i) any person or group within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934
Act") and the rules and regulations promulgated thereunder, other than
any person described in Rule 13d-1(b)(i) (D) or (E) which is eligible
to file a Schedule 13G in lieu of a Schedule 13D (only for so long as
such person is so eligible), shall have beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of
securities of Borrower (or other securities convertible into such
securities)representing twenty percent (20%) of the combined voting
power of all securities of Borrower entitled to vote in the election
of directors (hereinafter called a "Controlling Person"); or (ii) a
majority of the Board of Directors of Borrower shall cease for any
reason to consist of (A) individuals who on the date hereof were
serving as directors of Borrower or (B) individuals who subsequently
become members of the Board if such individuals' nomination for
election or election to the board is recommended or approved by a
majority of the Board of Directors of Borrower. For purposes of clause
(i) above, a person or group shall not be a Controlling Person if such
person or group holds voting power in good faith and not for the
purpose of circumventing this Paragraph 8.1(g) as an agent, bank,
broker, nominee, trustee, or holder of revocable proxies given in
response to a solicitation pursuant to the 1934 Act, for one or more
beneficial owners who do not individually, or, if they are a group
acting in concert, as a group, have the voting power specified in
clause (i) above; or
(h) If custody or control of any substantial part of the property
of any Company shall be assumed by any governmental agency or any
court of competent jurisdiction at the instance of any governmental
agency; if any license or franchise of a Company shall be suspended,
revoked, not renewed or otherwise terminated the loss of which would
reasonably be expected to have a Material Adverse Effect; if any
company or any employee of any Company shall have been proposed for or
received notice of intended suspension or debarment from federal
contracting pursuant to Part 9 of the Federal Acquisition Regulations,
of if any similar event shall have occurred under comparable state
laws; or if any governmental regulatory authority or judicial body
shall make any other final non-appealable determination the effect of
which would have Material Adverse Effect; or
(i) If any Company becomes insolvent, bankrupt or generally fails
to pay its debts as such debts become due; is adjudicated insolvent or
bankrupt; admits in writing its inability to pay its debts; or shall
suffer a custodian, receiver or trustee for it or substantially all of
its property to be appointed; makes a general assignment for the
benefit of creditors; or suffers proceedings under any law related to
bankruptcy, insolvency, liquidation or the reorganization,
readjustment or the release of debtors to be instituted against it; if
proceedings under any law related to bankruptcy, insolvency,
liquidation, or the reorganization, readjustment or the release of
debtors is instituted or commenced by any Company; if any order for
relief is entered relating to any of the foregoing proceedings; if any
Company shall call a meeting of its creditors with a view to arranging
a composition or adjustment of its debts; or if any Company shall by
any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or
(j) any event or condition shall occur or exist with respect to
any activity or substance regulated under the Environmental Control
Statutes and as a result of such event or condition, the Companies
have incurred or in the opinion of Borrower are reasonably likely to
incur liabilities in the aggregate in excess of Five Million Dollars
($5,000,000); or
(k) if any judgment, writ, warrant or attachment or execution or
similar process which calls for payment or presents liability in
excess of Five Million Dollars ($5,000,000) shall be rendered, issued
or levied against any Company or its respective property and such
process shall not be paid, waived, stayed, vacated, discharged,
settled, satisfied or fully bonded within thirty (30) days after its
issuance or levy unless such judgment is covered by insurance and the
insurer has acknowledged coverage in writing with respect thereto.
<PAGE>
8.2 Remedies.
Upon the happening of any Event of Default and at any time
thereafter, and by notice by Agent on behalf of Required Banks to
Borrower (except if an Event of Default described in Paragraph 8.1(i)
shall occur in which case acceleration of the Loan and termination of
the Commitment shall occur automatically without notice), the Agent
shall, at the request of the Required Banks, and may, with the consent
of the Required Banks, (i) terminate the Short Term Commitment and/or
the Three Year Commitment, and (ii) declare the entire unpaid balance,
principal, interest, fees, and other amounts of all indebtedness of
Borrower to Banks, hereunder or otherwise, to be immediately due and
payable. Upon such declaration, Agent and Banks shall have the
immediate right to enforce or realize on any collateral granted
therefor in any manner or order it deems expedient without regard to
any equitable principles of marshaling or otherwise. In addition to
any rights granted hereunder or in any of the Loan Documents delivered
in connection herewith, Agent and Banks shall have all the rights and
remedies granted by any applicable law, all of which shall be
cumulative in nature.
SECTION 9
AGENCY PROVISIONS
This Section sets forth the relative rights and duties of
Agent and Banks respecting the Loan and, with the exception of Paragraphs 9.3
and 9.15 hereof, does not confer any enforceable rights on Borrower against
Banks or create on the part of Banks any duties or obligations to Borrower.
9.1 Application of Payments.
Agent shall apply all payments of principal, interest, commitment
fee or other amounts hereunder made to Agent by or on behalf of
Borrower with respect to the Loan to Banks on the basis of their Pro
Rata Shares of the outstanding principal balance of the Loan, except
the fees payable under Paragraph 2.12 and Paragraph 2A.4(a)(iv)
hereof, which shall be paid solely to Agent. Such distribution of
payments shall be made promptly in federal funds immediately available
at the office of each Bank set forth above.
9.2 Set-Off.
In the event a Bank, by exercise of its right of set-off, or
otherwise, receives any payment of principal or interest, in an amount
greater than its Pro Rata Share of such payment based upon the Banks'
respective shares of principal Indebtedness outstanding hereunder
immediately before such payment, such Bank shall purchase a portion of
the Indebtedness hereunder owing to each other Bank so that after such
purchase each Bank shall hold its Pro Rata Share of all the
Indebtedness then outstanding hereunder, provided that if all or any
portion of such excess payment is thereafter recovered from such Bank,
such purchase shall be rescinded and the purchase price restored to
the extent of any such recovery, but without interest.
<PAGE>
9.3 Modifications and Waivers.
No modification or amendment hereof, consent hereunder or waiver
of any Event of Default shall be effective except by written consent
of the Required Banks; provided, however, that the written consent of
all Banks shall be required to (i) modify, amend, waive, discharge,
terminate or suspend compliance with (A) any rate of interest
applicable to the Loan to the extent it is proposed to be decreased,
(B) the amount of the Commitment to the extent it is proposed to be
increased, or the Banks' respective shares thereof; (C) the date or
amounts of payment of the Loan or interest thereon, to postpone or
decrease payment thereof, (D) the commitment fee set forth in
Paragraph 2.11 hereof or other amounts payable by Borrower hereunder
except if payable solely to the Agent, to the extent any such amount
is proposed to be decreased or postponed, (E) the definition of
Required Banks, (F) this Paragraph 9.3, or (G) the definition of Pro
Rata Share; or (ii) release any Guarantor.
9.4 Obligations Several.
The obligations of the Banks hereunder are several, and each Bank
hereunder shall not be responsible for the obligations of the other
Banks hereunder, nor will the failure of one Bank to perform any of
its obligations hereunder relieve the other Banks from the performance
of their respective obligations hereunder.
9.5 Banks' Representations.
Each Bank represents and warrants to the other Banks that (i) it
has been furnished all information it has requested for the purpose of
evaluating its proposed participation under this Agreement; and (ii)
it has decided to enter into this Agreement on the basis of its
independent review and credit analysis of Borrower, this Agreement and
the documentation in connection therewith and has not relied for such
analysis on any information or analysis provided by any other Bank.
9.6 Investigation.
No Bank shall have any obligation to the others to investigate
the condition of Borrower or any of the Collateral or any other matter
concerning the Loan.
9.7 Powers of Agent.
Agent shall have and may exercise those powers specifically
delegated to Agent herein, together with such powers as are reasonably
incidental thereto.
9.8 General Duties of Agent, Immunity and Indemnity.
Upon receipt of notices and reports delivered by Borrower to the
Agent under this Agreement, the Agent shall promptly deliver the same
in the form received to the Banks. Required Banks shall also have the
right to request Agent to inspect Borrower's books and records and
take the other steps provided in Paragraph 5.6 hereof. In performing
its duties as Agent hereunder, Agent will take the same care as it
takes in connection with loans in which it alone is interested,
subject to the limitations on liabilities contained herein; provided
that Agent shall not be obligated to ascertain or inquire as to the
performance of any of the terms, covenants or conditions hereof by
Borrower. Neither Agent nor any of its directors, officers, agents or
employees, shall be liable for any action or omission by any of them
hereunder or in connection herewith except for gross negligence or
willful misconduct. Subject to such exception, each of the Banks
hereby indemnifies Agent (in its capacity as Agent) on the basis of
such Bank's Pro Rata Share, against any liability, claim, loss or
expense arising from or relating to any action taken or omitted to be
taken with respect to this Agreement, any other Loan Document or the
transactions contemplated thereby or Borrower, to the extent that the
Agent has not been reimbursed therefor by Borrower, without affecting
any obligation of Borrower to reimburse.
<PAGE>
9.9 No Responsibility for Representations or Validity, etc.
Each Bank agrees that Agent shall not be responsible to any Bank
for any representations, statements, or warranties of Borrower herein
or in the other Loan Documents. Neither Agent nor any of its
directors, officers, employees or agents, shall be responsible for the
validity, effectiveness, sufficiency, perfection or enforceability of
this Agreement or the other Loan Documents, or any collateral, or any
documents relating thereto or for the priority of any of Banks'
security interests in any such collateral.
9.10 Action on Instruction of Banks; Right to Indemnity.
Agent shall act upon written instruction of Banks or Required
Banks, as appropriate, and in all cases Agent shall be fully protected
in acting or refraining from acting hereunder in accordance with such
written instructions to it signed by Required Banks unless the consent
of all the Banks is expressly required hereunder in which case Agent
shall be so protected when acting in accordance with such instructions
from all the Banks. Such instructions and any action taken or failure
to act pursuant thereto shall be binding on all the Banks, provided
that except as otherwise provided herein, Agent may act hereunder in
its own discretion without requesting such instructions.
9.11 Employment of Agents.
In connection with its activities hereunder, Agent may employ
agents and attorneys-in-fact and shall not be answerable, except as to
money or securities received by it or its authorized agents, for the
default or misconduct of agents or attorneys-in-fact selected with
reasonable care.
9.12 Reliance on Documents.
Agent shall be entitled to rely upon (a) any paper or document
believed by it to be genuine and correct and to have been signed or
sent by the proper person or persons and (b) upon the opinion of its
counsel with respect to legal matters.
9.13 Agent's Rights as a Bank.
With respect to their share of the indebtedness hereunder, Agent
shall have the same rights and powers hereunder as any other Bank and
may exercise the same as though it were not Agent. Each of the Banks
may accept deposits from and generally engage in other banking or
trust business with Borrower as if it were not Agent or a Bank
hereunder.
9.14 Expenses.
Each of the Banks shall reimburse Agent from time to time at the
request of Agent for its Pro Rata Share of any expenses incurred by
Agent in connection with the performance of its functions hereunder
without affecting any obligation of Borrower to reimburse, provided
however that in the event Banks shall reimburse Agent for expenses for
which Borrower subsequently reimburses Agent, then Agent shall remit
to each Bank the respective amount received from such Bank against
such expenses.
<PAGE>
9.15 Resignation of Agent.
Agent may at any time resign its position as Agent, without
affecting its position as a Bank, by giving written notice to Banks
and Borrower. Such resignation shall take effect upon the appointment
of a successor agent in accordance with this Paragraph 9.15. In the
event Agent shall resign, Required Banks with the consent of Borrower,
which consent will not be unreasonably withheld, shall appoint a Bank
as successor Agent. If within thirty (30) days of the Agent's notice
of resignation no successor agent shall have been appointed by Banks
and accepted such appointment, then Agent, in its discretion may
appoint any other Bank with banking powers as a successor agent.
9.16 Successor Agent.
The successor Agent appointed pursuant to Paragraph 9.15 shall
execute and deliver to its predecessor and Banks an instrument in
writing accepting such appointment, and thereupon such successor,
without any further act, deed or conveyance, shall become fully vested
with all the properties, rights, duties and obligations of its
predecessor Agent. The predecessor Agent shall deliver to its
successor Agent forthwith all Collateral, documents and moneys held by
it as Agent, if any, whereupon such predecessor Agent shall be
discharged from its duties and obligations as Agent under this
Agreement.
9.17 Collateral Security.
Agent will hold, administer and manage any Collateral pledged
from time to time hereunder either in its own name or as Agent on
behalf of the Banks, but each Bank shall hold a direct, undivided
pro-rata beneficial interest therein, on the basis of its Pro Rata
Share, by reason of and as evidenced by this Agreement.
9.18 Enformcement by Agent.
All rights of action under this Agreement and under the Notes and
all rights to the Collateral hereunder may be enforced by Agent and
any suit or proceeding instituted by Agent in furtherance of such
enforcement shall be brought in its name as Agent, without the
necessity of joining as plaintiffs or defendants any other Banks, and
the recovery of any judgment shall be for the benefit of Banks subject
to the expenses of Agent.
SECTION 10
MISCELLANEOUS
<PAGE>
10.1 Indemnification and Release Provisions.
Borrower hereby agrees to defend Agent and each Bank and their
directors, officers, agents, employees and counsel from, and hold each
of them harmless against, any and all losses, liabilities (including
without limitation settlement costs and amounts, transfer taxes,
documentary taxes, or assessments or charges made by any governmental
authority), claims, damages, interest judgments, costs, or expenses,
including without limitation reasonable fees and disbursements of
counsel, incurred by any of them arising out of or in connection with
or by reason of this Agreement, the Commitment, the making of the Loan
or any collateral therefor, other than those resulting primarily from
any such party's own wilful misconduct or gross negligence, including
without limitation, any and all losses, liabilities, claims, damages,
interests, judgments, costs or expenses relating to or arising under
any Environmental Control Statute or the application of any such
Statute to any of the Companies' properties or assets. Borrower hereby
releases Agent and each Bank and their directors, officers, agents,
employees and counsel from any and all claims for loss, damages, costs
or expenses caused or alleged to be caused by any act or omission on
the part of any of them other than those resulting primarily from any
such party's own wilful misconduct or gross negligence. All
obligations provided for in this Paragraph 10.1 shall survive any
termination of this Agreement or the Commitment and the repayment of
the Loan.
10.2 Participations and Assignments.
Borrower hereby acknowledges and agrees that a Bank may at any
time: (a) grant participations in all or any portion of its Maximum
Principal Amount of the Loan or of its right, title and interest
therein or in or to this Agreement (collectively, "Participations") to
any other lending office or to any other bank or lending institution
("Participants"); provided, however, that: (i) all amounts payable by
Borrower hereunder shall be determined as if such Bank had not granted
such Participation; and (ii) any agreement pursuant to which any Bank
may grant a Participation: (x) shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of
Borrower hereunder including, without limitation, the right to approve
any amendment, modification or waiver of any provisions of this
Agreement; (y) may provide that such Bank will not agree to any
modification, amendment or waiver of this Agreement without the
consent of the Participant if such modification, amendment or waiver
would require approval of all Banks pursuant to Paragraph 9.3 hereof;
and (z) shall not relieve such Bank from its obligations, which shall
remain absolute, to make Advances hereunder; and (b) assign its rights
and obligations under the Commitment and the Loan (i) to any Federal
Reserve Bank, (ii) to any Affiliate of such Lender, or (iii) with
notice to Borrower and Agent together with the payment to Agent of a
$3,500 transfer fee, to any other financial institution, provided,
that (x) any such assignment under this clause (iii) shall be in a
minimum amount of Five Million Dollars ($5,000,000), and (y) in the
absence of an Event of Default hereunder no Bank shall assign under
this clause (iii) more than forty-nine percent (49%) of its rights and
obligations hereunder. Any grant of an assignment pursuant to this
Paragraph 10.2 shall be pro rata as to the Short Term Loan and the
Three Year Loan. Borrower may not assign or otherwise transfer its
rights or obligation under this Agreement without the prior written
consent of Banks.
10.3 Binding and Government Law.
This Agreement and all documents executed hereunder shall be
binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns and, except as may be required
by mandatory provisions of applicable law, shall be governed as to
their validity, interpretation and effect by the laws of the
Commonwealth of Pennsylvania.
10.4 Survival.
All agreements, representations, warranties and covenants of
Borrower contained herein or in any documentation required hereunder
shall survive the execution of this Agreement and the making of the
Loan hereunder, and except for Paragraphs 5.11 and 10.1 which provide
otherwise will continue in full force and effect as long as any
indebtedness or other obligation of Borrower to Banks remains
outstanding.
<PAGE>
10.5 No Waiver; Delay.
If Banks shall waive any power, right or remedy arising hereunder
or under any applicable law, such waiver shall not be deemed to be a
waiver upon the later occurrence or recurrence of any of said events
with respect to Banks. No delay by Banks in the exercise of any power,
right or remedy shall, under any circumstances, constitute or be
deemed to be a waiver, express or implied, of the same and no course
of dealing between the parties hereto shall constitute a waiver of
Banks' powers, rights or remedies. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
10.6 Modification;Waiver.
Except as otherwise provided in this Agreement, no modification
or amendment hereof, or waiver or consent hereunder, shall be
effective unless made in a writing signed by appropriate officers of
the parties hereto.
10.7 Headings.
The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of
this Agreement or any provision hereof.
10.8 Notices.
Any notice, request or consent required hereunder or in
connection herewith shall be deemed satisfactorily given if in writing
and delivered by hand, mailed (registered or certified mail) or sent
by facsimile transmission to Agent or Borrower at their respective
addresses or telecopier number set forth below, or to Banks at their
respective addresses or telecopier numbers set forth on Schedule 1
attached hereto, or to any party at such other addresses or telecopier
numbers as may be given by any party to the others in writing:
if to Borrower:
Nichols Research Corporation
4040 Memorial Parkway, South
Huntsville, Alabama 35802-1326
Attention: Allen Dillard
Telecopier: (205) 650-2240
if to Agent:
CoreStates Bank, N.A.
1345 Chestnut Street
FC 1-8-3-12
Philadelphia, PA 19107
Attention: Karen Leaf
Telecopier: (215) 973-6745
with a copy to:
Pepper, Hamilton & Scheetz LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Lisa D. Kabnick, Esquire
Telecopier: (215) 981-4750
<PAGE>
10.9 Payment on Non-Business Days.
Whenever any payment to be made hereunder shall be stated to be
due on a day other than a Business Day, such payment may be made on
the next succeeding Business Day, provided however that such extension
of time shall be included in the computation of interest due in
conjunction with such payment or other fees due hereunder, as the case
may be.
10.10 Time of Day.
All time of day restrictions imposed herein shall be calculated
using Agent's local time.
10.11 Severability.
If any provision of this Agreement or the application thereof to
any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
10.12 Counterparts.
This Agreement may be executed in any number of counterparts with
the same effect as if all the signatures on such counterparts appeared
on one document, and each such counterpart shall be deemed to be an
original.
10.13 Consent to Jurisdiction and Service of Process.
Each Company irrevocably appoints each officer of Borrower as its
attorney upon whom may be served any notice, process or pleading in
any action or proceeding against it arising out of or in connection
with this Agreement, the Notes, the Loan Documents or any collateral;
each Company hereby consents that any action or proceeding against it
be commenced and maintained in any court within the Commonwealth of
Pennsylvania or in the United States District Court for the Eastern
District of Pennsylvania by service of process on any officer of
Borrower; and each Company agrees that the courts of the Commonwealth
of Pennsylvania and the United States District Court for the Eastern
District of Pennsylvania shall have jurisdiction with respect to the
subject matter hereof and the person of each Company and any
collateral. Notwithstanding the foregoing, Agent, in its absolute
discretion may also initiate proceedings in the courts of any other
jurisdiction in which any Company may be found or in which any of its
properties or collateral may be located.
10.14 WAIVER OF JURY TRIAL.
EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY, AND
INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR THE NOTES OR OTHER LOAN DOCUMENTS OR
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF AGENT OR BANKS. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR BANKS' ENTERING INTO THIS AGREEMENT.
10.15 ACKNOWLEDGMENTS.
BORROWER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL
IN THE REVIEW AND EXECUTION OF THIS AGREEMENT AND, SPECIFICALLY,
PARAGRAPH 10.14 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING AND
EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED
TO BORROWER BY SUCH COUNSEL.
IN WITNESS WHEREOF, the undersigned, by their duly authorized
officers, as applicable, have executed this Agreement the day and year first
above written.
Attest: NICHOLS RESEARCH CORPORATION
By: Patsy L. Hattox By: Allen E. Dillard
--------------- ----------------
Name: Patsy L. Hattox Name: Allen E. Dillard
Title: Secretary Title:VP
CORESTATES BANK, N.A., for
itself and as Agent
By: Karen Leaf
----------
Name:Karen Leaf
Title:Vice President
SOUTHTRUST BANK, N.A.
By: Meloe K. Barfield
-----------------
Name: Meloe K. Barkfield
Title:Vice President
AMSOUTH BANK
By: David W. Cochran
----------------
Name: David W. Cochran
Title: Vice President
[EXECUTIONS CONTINUED]
SUNTRUST BANK, NASHVILLE, N.A.
By:Thomas W. Powell
----------------
Name: Thomas W. Powell
Title:First Vice President
FIRST UNION COMMERCIAL
CORPORATION
By: Chris Hetterly
---------------
Name: Chris Hetterly
Title:Vice President
NOTE: Schedules available upon request.
EMPLOYMENT AGREEMENT
By and Among
Welkin Associates, Ltd.,
Nichols Research Corporation
and
Carl W. Monk, Jr.
Dated: July 28, 1998
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 28th day of July, 1998, by Carl
W. Monk, Jr., residing at 35795 Dunthorpe Lane, Purcellville, Virginia 20132
(herein called the "Employee"), Welkin Associates, Ltd., a Virginia corporation,
with a principal place of business located at 4801 Stonecroft Boulevard, Suite
210, Chantilly, Virginia 20151 (herein called "Welkin"), and Nichols Research
Corporation, a Delaware corporation ("Nichols"), whose address is 4040 South
Memorial Parkway, Huntsville, Alabama 35802. Unless otherwise defined,
capitalized terms used herein shall have the meaning ascribed to such terms in
the Merger Agreement as hereinafter defined.
W I T N E S S E T H:
WHEREAS, Nichols, WAL Acquisition Company, Inc., a wholly owned
subsidiary of Nichols ("WAL"), and Welkin have entered into and consummated an
Agreement and Plan of Merger dated as of June 26, 1998 (the "Merger Agreement")
whereby WAL merged with and into Welkin with Welkin as the surviving
corporation;
WHEREAS, as a result of the merger Welkin became a wholly-owned
subsidiary of Nichols;
WHEREAS, the Employee was a shareholder of Welkin prior to the merger
and as a result of the merger Employee became a shareholder of Nichols;
WHEREAS, prior to the merger Employee was an employee of Welkin;
WHEREAS, the Employee's continued employment with Welkin was a material
inducement to WAL and Nichols to enter into the Merger Agreement;
WHEREAS, Welkin is engaged in the business of providing engineering and
management services to national intelligence organizations with emphasis on
systems engineering, processing and analysis, mission utility assessment,
systems acquisition, and tactical operations and support (the "Welkin
Business"); and
WHEREAS, Welkin desires to obtain the services of the Employee as
President of Welkin and the Employee is willing to render such services to
Welkin upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
<PAGE>
1. Duties.
Subject to the terms and provisions of this Agreement, Welkin hereby
employs Employee and Employee hereby accepts employment by Welkin as President
of Welkin. The Employee's duties shall include the duties and responsibilities
identified on Schedule I attached hereto. The Employee shall perform such other
tasks and duties as may be assigned by Welkin from time to time, consistent with
the Employee's training and experience and with the position of President of
Welkin. The Employee shall devote his full time, attention, skill and efforts to
the tasks and duties assigned by Welkin. The Employee shall carry out his duties
under the general supervision of the Board of Directors of Welkin. The Employee
hereby agrees to undertake such travel as may be required in the performance of
his duties. The reasonable travel expenses of the Employee shall be reimbursed
in accordance with Welkin's reimbursement policy in effect from time to time.
The Employee shall not be required to relocate from the Washington, D.C. area
without his consent. For this purpose the Washington, D.C. area shall mean
Washington, D.C. and an area within seventy-five (75) mile radius of Washington,
D.C. (the "D.C. Area").
2. Compensation.
(a) Base Salary. Welkin shall pay the Employee a base monthly salary of
Sixteen Thousand Two Hundred Fifty Dollars ($16,250.00) per month payable during
the Term of Employment, as hereinafter defined, in accordance with the standard
payroll practices of Welkin. Such salary may be increased from time to time in
the discretion of the Welkin Board of Directors consistent with Nichols
executive compensation practices.
(b) Bonus Compensation. The Employee shall be eligible to participate
in the Nichols bonus plan on the same basis as other executives of Nichols and
its affiliates. It is estimated that the bonus will be approximately $35,000.00.
(c) Stock Options. Employee shall be granted the option to purchase ten
thousand (10,000) shares of Nichols stock at the fair market value per share of
such stock on the date hereof pursuant to the terms and conditions of the
Nichols Research Corporation 1997 Stock Option Plan, as maintained by Nichols
from time to time.
(d) Fringe Benefits. The Employee's current employee benefits shall be
continued, or converted to or replaced by the employee benefit plans, as set
forth in the Merger Agreement.
3. Term of Employment.
This Agreement shall commence on the date hereof and shall end three
(3) years from such date (the "Term of Employment"), unless terminated earlier
as provided in Section 4 below.
<PAGE>
4. Termination Before Expiration of Term of Employment.
The termination of the employment of the Employee during the initial
Term of Employment may occur in one of the following ways:
(a) By Welkin, for Cause. Termination by Welkin shall be deemed to
be for cause only upon:
(i) Employee's conviction of or pleading guilty to a felony or
debarment regarding federal contracts;
(ii) Willful and repeated refusal or
failure by the Employee, without reasonable excuse or proper authorization,
to carry out any reasonable instructions of Welkin consistent with
Employee's rights or duties as set forth in this Agreement;
(iii) Material breach of this Agreement;
(iv) The Employee's willful misconduct in the execution of his
duties, including without limitation breach of fiduciary duty,
dishonesty, theft of company property or the breach of the duty of
loyalty owed Welkin.
If Welkin intends to terminate for cause, Welkin shall provide notice
to Employee of intent to terminate his employment, stating the termination
provision in this Agreement relied upon and setting forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination under the
provisions so indicated, and shall provide Employee with an opportunity to cure
the alleged default or breach within thirty (30) days of receipt of the notice,
provided that if the matter is not curable within such thirty (30) day period,
the Employee shall not be deemed in default if the Employee commences
immediately to cure the matter and proceeds diligently thereafter to complete
the cure, further provided that the alleged breach or default must be cured
within ninety (90) days of receipt of the notice. Welkin shall not be required
to give more than one notice with respect to the same matter. Notwithstanding
the foregoing, no notice and no cure right shall be required with respect to
termination for cause under 4(a)(i) or 4(a)(iv).
(b) By Welkin, Without Cause. Any termination of Employee by Welkin for
reasons other than as set forth in subsections 4(a), (e), (f) or (g) shall be a
termination without cause. Welkin may terminate the employment of Employee
without cause by thirty (30) days prior written notice at any time.
<PAGE>
(c) By Employee, for Good Reason. Termination by the Employee shall be
deemed for Good Reason only because of (i) a material breach by Welkin of this
Agreement (including without limitation the provisions of Sections 1 or 2
hereof), or (ii) a Change of Control (as defined below). "Change of Control"
shall mean any capital reorganization, reclassification, consolidation, merger,
sale of capital stock, sale of all or substantially all of Welkin's assets or
similar transaction which is effected in such a way that holders of Common Stock
of Welkin are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock of Welkin. In all cases in which Employee intends to terminate for
Good Reason, the Employee shall provide Welkin with notice of intent to
terminate this Agreement, stating the facts and circumstances giving rise to a
breach of this Agreement claimed to provide a basis for termination under the
provisions so indicated, and shall provide Welkin with an opportunity to cure
the alleged default or breach within thirty (30) days of receipt of the notice,
provided that if the matter is not curable within such thirty (30) day period,
Welkin shall not be deemed in default if it commences immediately to cure the
matter and proceeds diligently thereafter to complete the cure, further provided
that the alleged breach or default must be cured within ninety (90) days of
receipt of the notice. Employee shall not be required to give more than one such
notice with respect to the same matter.
(d) By the Employee, Without Good Reason. Any termination by Employee
for reasons other than as set forth in subsections 4(c), (e), (f), (g) or (h)
shall be a termination without Good Reason. The Employee may terminate his
employment without Good Reason upon thirty (30) days prior written notice at any
time.
(e) Death of the Employee. This Agreement shall terminate upon the
death of the Employee.
(f) Disability of Employee. If, during the Term of Employment, a
physician selected by Welkin and the Employee determines that the Employee has
become physically or mentally disabled so as to be unable to carry out the
normal and usual duties of his employment for six (6) continuous months, and
reasonable accommodation cannot be made to allow the Employee to continue to
perform his duties full-time, his employment hereunder may be terminated at the
election of Welkin or the Employee.
(g) Mutual Consent. The parties by mutual consent may terminate
Employee's employment.
(h) Family Hardship. If, during the Term of Employment, an Employee's
spouse becomes employed outside the D.C. Area and as a result the Employee moves
from the D.C. Area, or if a spouse or child of the Employee suffers a
life-threatening illness or injury reasonably expected to extend for more than
120 days, the Employee may voluntarily terminate employment hereunder upon
thirty (30) days prior written notice.
5. Consequences of Termination.
The termination of the employment of Employee pursuant to Section 4
above will cause the following results:
<PAGE>
(a) For Cause Termination. If the termination is by Welkin for cause
under Section 4(a) above, Welkin will pay the Employee at the next payroll
payment date after the date of termination any unpaid base monthly salary under
Section 2(a) prorated to the date of termination, the amount of any accrued
annual vacation pay to which he may be entitled under Welkin's vacation plan and
benefits, with such compensation and benefits (if any) paid only through the
date termination occurs.
(b) Termination Without Good Reason or Family Hardship; Liquidated
Damages from the Employee. If termination is by Employee without Good Reason or
without Family Hardship under Section 4(d) above, the Employee shall pay to
Welkin, as liquidated damages, and not as a penalty an amount equal to the
product of the base monthly salary under Section 2(a) on the date of termination
multiplied by the lesser of (i) six (6) or (ii) the number of full months
remaining until the end of the initial Term of Employment. The liquidated
damages shall be paid in 12 equal, consecutive monthly installments without
interest commencing 30 days after termination, provided that, if any monthly
installment is not paid within 10 days after notice of default, the entire
amount of liquidated damages shall be paid in lump sum immediately. The
liquidated damages may be prepaid.
(c) Payments on Termination Without Cause or for Good Reason;
Liquidated Damages from Welkin. If the termination is by Welkin without cause
under Section 4(b) above, or is by the Employee for Good Reason under Section
4(c) above, Welkin shall pay to the Employee, in addition to the amounts set
forth in 5(a) above, as liquidated damages and not as a penalty, an amount equal
to (i) the product of the base monthly salary under Section 2(a) on the date of
termination multiplied by the lesser of (A) six (6), or (B) the number of months
remaining until the initial Term of Employment, plus the bonus compensation
otherwise payable to the Employee under Section 2(b) over the portion of the
bonus measurement period elapsed on the date of termination. The liquidated
damages shall be paid in six (6) equal, consecutive monthly installments without
interest commencing 30 days after termination, provided that, if any monthly
installment is not paid within 10 days after notice of default, the entire
amount of liquidated damages shall be paid in lump sum immediately. The
liquidated damages may be prepaid.
(d) Mutual Grounds for Termination or Consent. If the parties mutually
agree to terminate under Section 4(g), neither party shall owe the other party
the liquidated damages set forth above in Sections 5(b) or 5(c).
(e) Death or Disability or Family Hardship. In the event of termination
of employment on account of the Employee's death, disability or family hardship
as provided in Sections 4(e), (f) or (h), the following provisions will apply:
<PAGE>
(i) Upon his death, the Employee's estate will be
entitled to receive the amount set forth in Section
5(a) and the benefits set forth in any plans of
Welkin then in effect and applicable under the
circumstances. The Employee or his estate shall be
entitled to no other compensation or benefits in the
event of death other than the right of the Employee's
estate to exercise any or all stock options
exercisable but not yet exercised during the period
of three (3) months after the date of death.
(ii) Upon termination on account of disability, Employee
will be entitled to receive the amount set forth in
Section 5(a) and the benefits set forth in any plans
of Welkin then in effect and applicable under the
circumstances. The Employee or his personal
representative shall be entitled to no other
compensation or benefits in the event of disability,
except as provided in the Nichols Research
Corporation 1997 Stock Option Plan, if any.
(iii) Upon termination on account of family hardship, the
Employee will be entitled to receive the amount set
forth in Section 5(a) and the benefits set forth in
any plans of Welkin then in effect and applicable
under the circumstances. The Employee or his personal
representative shall be entitled to no other
compensation or benefits in the event of disability,
except as provided in the Nichols Research
Corporation 1997 Stock Option Plan, if any.
(f) Mitigation. The Employee shall not be required to mitigate the
amount of payment provided for in this Section 5 by seeking employment.
(g) Termination After Initial Term. After the initial Term of
Employment, only the amounts specified in Section 5(a) shall be due the Employee
upon termination and neither party shall be liable for any other payment
hereunder.
6. Non-Disclosure Covenants and Proprietary Matters.
<PAGE>
(a) Nondisclosure of Confidential Information. Unless authorized or
instructed in writing by Welkin, the Employee shall not, except as required in
the conduct of Welkin's business or in response to a lawful subpoena or
discovery order or as may otherwise be required by law, disclose to others or
use any of Welkin's inventions or discoveries or its respective secret or
confidential information or data (oral, written, or in machine readable form)
which the Employee has obtained prior to entering into this Agreement, whether
as an employee, officer, director or shareholder of Welkin or may obtain during
the course of or in connection with the Employee's employment under this
Agreement (or employment or affiliation with any company that transfers to
Welkin such information or data), including such inventions, discoveries,
information or data relating to machines, equipment, products, systems,
software, contracts, contract performance, research or development, designs,
computations, formulas, manufacturing procedures, prices and earnings, customer
lists, and suppliers, whether or not developed by the Employee, by others in
Welkin or obtained by Welkin from third parties, and irrespective of whether or
not such inventions, discoveries, information, knowledge or data have been
identified by Welkin as secret or confidential, unless and until, and then to
the extent and only to the extent that, such inventions, discoveries,
information, knowledge or data become available to the public otherwise than by
the Employee's act or omission.
(b) Patents. The Employee agrees to disclose immediately to Welkin or
any persons designated by it and to transfer and assign to Welkin, or its
successors or assigns, all of Employee's rights, title and interest in and to
any inventions made, discovered, or first reduced to practice by the Employee,
solely or jointly with others, during the Term of Employment (either during or
outside of the Employee's working hours and either on or off Welkin's premises
as it relates to the subject matter of employment), which inventions are made,
discovered or conceived either in the course of such employment, or with the use
of Welkin's time, material, facilities or funds, or which are directly related
to any investigations or obligations undertaken by Welkin; and the Employee
hereby grants and agrees to grant the right to Welkin and its nominees to
obtain, for its own benefit and in its own name (entirely at its expense)
patents and patent applications including original, continuation, reissue,
utility and design patents, and applications, patents of addition, confirmation
patents, registration patents, petty patents, utility models, and all other
types of patents and the like, and all renewals and extensions of any of them
for those inventions in any and all countries; and the Employee shall assist
Welkin, at Welkin's expense, without further charge during the term of the
Employee's employment, and after termination of the Employee's employment to the
extent such assistance does not unreasonably interfere with the Employee's
performance of subsequent employment, at the same base salary rate (excluding
any bonuses, incentive or deferred compensation or other benefits and based upon
a forty hour work week) as during the last year of the Employee's employment
(determined on an hourly basis for this purpose), through counsel designated by
Welkin, to execute, acknowledge, and deliver all such further papers, including
assignments, applications for Letters Patent (of the United States or of any
foreign country), oaths, disclaimers or other instruments and to perform such
further acts, including giving testimony or furnishing evidence in the
prosecution or defense of appeals, interferences, suits and controversies
relating to any aforesaid inventions as may reasonably be deemed necessary by
Welkin or its nominees to effectuate the vesting or perfecting in Welkin or its
nominees of all right, title and interest in and to said inventions,
applications and patents.
<PAGE>
(c) Copyrights. The Employee agrees to disclose immediately to Welkin
or any persons designated by it and to assign to Welkin, at its option, or its
successors or assigns, all works of authorship, including all writings, computer
programs, software, and firmware, written or created by the Employee solely or
jointly with others, during the course of his employment by Welkin (either
during or outside of the Employee's working hours and either on or off Welkin's
premises as it relates to the subject matter of employment), which works are
made or conceived either in the course of such employment, or with the use of
Welkin's time, material, facilities or funds, or which are directly related to
any investigations or obligations undertaken by Welkin; and the Employee hereby
agrees that all such works are works made for hire, of which Welkin is the
author and the beneficiary of all rights and protections afforded by the law of
copyright in any and all states and countries; and the Employee will assist
Welkin at Welkin's expense without further charges during the term of his
employment, and after termination of his employment to the extent such
assistance does not unreasonably interfere with the Employee's performance of
subsequent employment, at the same base salary rate (excluding any bonuses,
incentive or deferred compensation or other benefits) as during the last year of
his employment (determined on an hourly basis for this purpose assuming a forty
hour work week), through counsel designated by Welkin, to execute, acknowledge,
and deliver all such further papers, including assignments, applications for
copyright registration (in the United States or in any foreign country), oaths,
disclaimers or other instruments, and to perform such further acts, including
giving testimony or furnishing evidence in the prosecution or defense of
appeals, interferences, suits and controversies relating to any aforesaid works,
as may be deemed necessary by Welkin or by its nominees to effectuate the
vesting or perfecting in Welkin or its nominees of all rights and interest in
and to said works and copies thereof, including the exclusive rights of copying
and distribution.
(d) Records. The Employee shall keep complete, accurate and authentic
accounts, notes, data and records of all inventions made, discovered or
developed and all works of authorship written or created by the Employee as
aforesaid in the manner and form requested by Welkin.
(e) Return of Welkin Property. All computer or other hardware, computer
software, computer programs, source codes, object codes, magnetic tapes,
printouts, samples, notes, records, reports, documents, customer lists,
photographs, catalogues and other writings, whether copyrightable or not,
relating to or dealing with Welkin's business and plans, and those of others
entrusted to Welkin, which are prepared or created by the Employee or which may
come into his possession during or as a result of his employment, are the
property of Welkin, as applicable, and upon termination of his employment, the
Employee agrees to return all such computer software, computer programs, source
codes, object codes, magnetic tapes, printouts, samples, notes, records,
reports, documents, customer lists, photographs, catalogues and writings and all
copies thereof to Welkin. The Employee is not required to turn over personal
notes unnecessary and unrelated to the Welkin business.
<PAGE>
7. Non-Solicitation and Non-Competition. During the "Restriction Period" (as
hereinafter defined) and within the "Territory" (as hereinafter defined), the
Employee shall not directly or indirectly, compete with Welkin or Nichols with
respect to the Welkin Business only, and the Employee shall not (i) solicit the
business of Welkin from any customer of Welkin or any entity controlled by
Welkin; (ii) directly or indirectly, hire any employees of Welkin or any entity
controlled by or controlling Welkin or cause any entity with which the Employee
is affiliated to hire any such employees of Welkin; (iii) engage in, represent
in any way or be connected with, as a consultant, officer, director, partner,
employee, sales representative, proprietor, member, stockholder (except for
stock ownership of less than 1% in a publicly owned corporation) or otherwise,
any business competing with the Welkin Business as conducted by Welkin on the
date hereof or during the period of Employee's employment by Welkin. During the
Restriction Period and after termination of Employee's employment, Employee may
be employed by Welkin or its affiliates as an independent consultant upon terms
and conditions mutually acceptable to the parties.
As used herein, the "Restriction Period" shall mean the period while
the Employee is employed by Welkin and a period of twenty-four (24) months after
the date of termination of the Employee's employment. As used herein, the
"Territory" shall mean the United States of America and any other country in
which Welkin does business as of or after the date hereof while Employee is
employed by Welkin or Nichols and its subsidiaries. As used herein, the term
"employees" shall mean persons who are, at the time in question, current
employees of Welkin or its affiliates or who were, within six (6) months of the
date of the prohibited hiring, employees of Welkin or its affiliates. For this
purpose, affiliates of Welkin shall include Nichols and its subsidiaries.
8. No Conflict.
Employee represents and warrants that he is not a party to or otherwise
subject to or bound by the terms of any contract, agreement or understanding
which in any manner would limit or otherwise affect his ability to perform his
obligations hereunder, including without limitation any contract, agreement or
understanding containing terms and provisions similar in any manner to those
contained in Sections 6 and 7 hereof.
9. Survival of Covenants; Effect.
(a) Remedy. The covenants on the part of the Employee contained or
referred to in Sections 6 and 7 above shall survive termination of this
Agreement, and the existence of any claim or cause of action of the Employee
against Welkin, whether predicated on this Agreement or otherwise. The Employee
agrees that a remedy at law for any breach of the foregoing covenants contained
or referred to in Sections 6 and 7 would be inadequate, that Welkin would suffer
irreparable harm as a result and that Welkin shall be entitled to a temporary
and permanent injunction or an order for specific performance of such covenants
without the necessity of proving actual damage to Welkin and without the posting
of any bond or other security. Any breach (whether or not material) by Welkin
shall not release the Employee from his obligations under Sections 6 and 7.
(b) Reasonableness. The Employee hereby represents and acknowledges
that Welkin is relying on the covenants in Sections 6 and 7 in entering into
this Agreement and that the restrictions in Sections 6 and 7 are fair and
reasonable. The Employee acknowledges that Welkin presently intends to do
business throughout the United States and that the geographic scope of the
covenants in Section 7 is reasonable and necessary to protect the interests of
Welkin. The Employee acknowledges that the restrictions in Sections 6 and 7 are
a material inducement to Nichols to enter into the Merger Agreement.
<PAGE>
(c) Intent. It is the intent of the parties that the provisions of
Sections 6 and 7 shall be enforced to the fullest extent permissible under the
laws and public policies of each jurisdiction in which enforcement is sought. If
any particular provision of Sections 6 and 7 shall be adjudicated to be invalid
or unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended
to provide restrictions to the fullest extent permissible and consistent with
applicable law and policies, and such amendment shall apply only with respect to
the particular jurisdiction in which such adjudication is made. If such deemed
amendment is not allowed by the adjudicating body, the offending provision,
only, shall be deleted and the remainder of Sections 6 and 7 shall not be
affected.
10. Assignment.
The rights and obligations of Welkin under this Agreement may be
assigned or delegated by Welkin to any affiliate of Welkin or to any successors
in interest of Welkin or of that part of the business of Welkin to which this
Agreement applies so long as the duties of Employee are not materially affected.
Any other assignment of this Agreement shall require the written consent of
Employee. After the date hereof, Welkin may change its name and such name change
shall not affect the rights and duties of the parties hereto. This Agreement may
not be assigned and any duties of the Employee may not be delegated by the
Employee, but any amounts owing to the Employee upon his death shall inure to
the benefit of his estate. In the event of any merger or other corporate
reorganization of Welkin wherein Welkin is not the surviving entity, provisions
reasonably satisfactory to Employee shall be made to ensure the Employee that
the compensation and other benefits of this Agreement are not diminished
thereby.
11. Notices.
All notices or other communications which may be or are required to be
given, served or sent by either party to the other party pursuant to this
Agreement shall be in writing, addressed to its/his residence or place of
business as set forth above, and shall be mailed by first-class certified mail,
return receipt requested, postage prepaid, next-day air delivery, or transmitted
by facsimiles or hand delivery. Such notice or other communication shall be
deemed sufficiently given, served, sent or received for all purposes at such
time as it is delivered to the addressee or at such time as delivery is refused
by the addressee upon presentation. Each party may designate by notice in
writing an address to which any notice or communication may thereafter be so
given, served or sent.
12. Applicable Law Jurisdiction.
This Agreement shall be governed by, construed and enforced in
accordance with the internal substantive laws and not the choice of law rules of
the State of Delaware.
<PAGE>
13. Effectiveness/Interpretation.
The parties acknowledge and agree that this Agreement has been
negotiated at arm's length between parties equally sophisticated and
knowledgeable in the matters dealt with herein. Each party has been represented
by counsel of its or his own choosing. Accordingly, any rule of law or legal
decision that would require interpretation of any ambiguities in this Agreement
against the party that drafted it is not applicable and is waived.
14. Severability.
If any of the articles, sections, paragraphs, clauses or provisions of
this Agreement shall be held by a court of last resort to be invalid, the
remainder of this Agreement shall not be affected thereby.
15. Entire Agreement.
The foregoing contains the entire agreement between the parties
relating to the subject matter of this Agreement, and may not be altered or
amended except by an instrument in writing approved by Welkin and signed by the
parties hereto, and this Agreement supersedes all prior understandings and
agreements relating to employment of the Employee by Welkin. The waiver of any
rights under this Agreement on any one or more occasions shall not constitute a
waiver on any subsequent occasion.
16. Arbitration. Any dispute among the parties shall be submitted to binding
arbitration in accordance with Chapter 1, Title 9 of the United States Code
(United States Arbitration Act). Arbitration shall be administered by the
American Arbitration Association ("AAA") in accordance with its Commercial
Arbitration Rules.
(a) Situs. The situs of the arbitration shall be Washington, D.C.
(b) Number and Qualification of Arbitrators. The arbitration shall be
decided by a panel of three (3) neutral arbitrators. AAA shall recommend
arbitrators from its commercial panel. Each party shall promptly appoint an
arbitrator. The two (2) party-appointed arbitrators shall jointly and promptly
appoint the third arbitrator, who shall act as chairperson of the panel.
Recognizing intent of the parties to obtain impartial, independent decisions and
rulings, each arbitrator shall disclose to the parties and to the other members
of the panel, any professional, familial or social relationships, present or
past, with any party or counsel. Any party may challenge in writing the
appointment or continued service of any arbitrator for lack of independence,
partiality or any other case likely to impair such arbitrator's ability to
render a fair and equitable decision. Where such challenge is made to an
arbitrator, the AAA shall uphold or dismiss the challenge. In the event the
challenge is upheld, such arbitrator shall cease to be a member of the panel.
Any arbitrator may be removed upon agreement of the parties.
<PAGE>
(c) Remedies. All decisions or rulings of the panel, as well as any
interim or final award, shall be pursuant to the majority vote of the three (3)
arbitrators comprising the panel. Except as limited in this Section 16, the
arbitrators shall have authority to award any remedy or relief that a court of
Delaware could award or grant, including, without limitation, specific
performance of any obligation created under this Employment Agreement, the
issuance of an injunction, pre-judgment or post-judgment interest, or the
imposition of sanctions for abuse or frustration of the arbitration process. The
arbitrators shall have no authority to award punitive damages or any other
damages not measured by the prevailing party's actual damages.
(d) Fees and Expenses. The arbitrators shall have the discretion and
authority to award to the prevailing party, if any, as determined by the
arbitrators, all of its costs and fees, in such amounts as the arbitrators deem
just. "Costs and Fees" means all reasonable pre-award expenses of the
arbitration, including the arbitrators' fees, administrative fees, travel
expenses, other out-of-pocket expenses, witness fees and attorneys' fees.
(e) Finality and Enforcement. Any decision or award rendered by the
arbitrators shall be final, binding and conclusive. The parties hereby agree to
submit to the personal jurisdiction of the courts of the State of Delaware for
the enforcement of the award.
IN WITNESS WHEREOF, Welkin and Nichols have caused this Agreement to be
executed by its duly authorized officers and the Employee has hereunto set his
hand as of the date first above written.
WELKIN ASSOCIATES, LTD., a Virginia
corporation
By: Patsy L. Hattox
---------------
Its:Secretary/Treasurer
NICHOLS RESEARCH CORPORATION,
a Delaware corporation
By: Patsy L. Hattox
---------------
Patsy L. Hattox, Vice President
Carl W. Monk, Jr.
------------------------------------------
Carl W. Monk, Jr., Employee
NOTE: Schedules available upon request.
AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT
NICHOLS TXEN CORPORATION
AND
THOMAS L. PATTERSON
Dated: June 1, 1998
<PAGE>
AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT, dated December 16,
1994, as amended August 29, 1997 (the "Employment Agreement"), is entered into
on this the 1st day of June, 1998, by NICHOLS TXEN CORPORATION, formerly known
as NICHOLS SELECT CORPORATION, a Delaware corporation and the wholly owned
subsidiary of NRC ("Nichols TXEN"), and Thomas L. Patterson, ("Employee").
Unless otherwise defined, capitalized terms used herein shall have the meaning
ascribed to such terms in the Employment Agreement or Merger Agreement
(hereinafter defined).
W I T N E S S E T H:
WHEREAS, Nichols Research Corporation ("NRC"), NICHOLS SELECT
CORPORATION ("Nichols Select"), a wholly owned subsidiary of NRC, TXEN, Inc.
("TXEN"), and the holders of all of the $0.002 par value Class A Common Stock of
TXEN (the "Shareholders") entered into and consummated an Agreement of Merger
dated as of August 27, 1997 (the "Merger Agreement") whereby TXEN merged with
and into Nichols Select with Nichols Select as the surviving corporation;
WHEREAS, Nichols Select changed its name to Nichols TXEN after the
merger;
WHEREAS, Employee entered into the Employment Agreement with TXEN which
has been assumed by Nichols TXEN; and
WHEREAS, Nichols TXEN, and Employee mutually desire to amend the
Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the undersigned parties do hereby amend the Employment Agreement as
follows:
1. Section 1(a) is hereby deleted in its entirety and a new
Section 1(a) is hereby substituted as follows:
<PAGE>
Nichols TXEN agrees to employ the Employee, and the
Employee agrees to accept employment by Nichols TXEN
on a part-time basis averaging approximately 20 hours
per week beginning June 1, 1998, and ending January
31, 1999, at the hourly rate of Seventy-Five and
60/100 Dollars ($75.60), which shall be the
Employee's base salary. Effective February 1, 1999,
the Employee shall work on a part-time basis
averaging approximately ten (10) hours per week at an
hourly rate of Seventy-Nine and 08/100 Dollars
($79.08), which shall be the Employee's base salary.
2. Section 1(d) is hereby deleted in its entirety and a new
Section 1(d) is hereby substituted as follows:
Employee shall be employed in the position of
Chairman of the Board of Directors of Nichols TXEN
until such time as he is removed from that position
by death, resignation, or action of the Nichols TXEN
Board of Directors. Employee's duties shall include
the duties and responsibilities identified on
Schedule I-A attached hereto. The Employee shall
perform such other tasks and duties as may be
reasonably assigned by Nichols TXEN, from time to
time.
3. Section 5 entitled Fringe Benefits is hereby deleted in its
entirety and a new Section 5 is hereby substituted as follows:
<PAGE>
Employee shall participate in any group health
insurance, vacation, and sick leave plans, and other
benefits available to part-time employees of Nichols
TXEN in accordance with their terms and conditions
which may be amended or terminated by Nichols TXEN at
any time. In addition, the Employee shall be allowed
to purchase the prevailing Blue Cross/Blue Shield
group coverage offered to full-time employees by
directly reimbursing the Company on a monthly basis
for the cost of the premiums therefor. Employee may
continue this purchase of health care coverage at the
applicable monthly insured rate until the plan
terminates or until the Employee attains age 65,
whichever occurs first. If the Employee's spouse is
younger than the Employee, then his spouse may
continue to purchase such insurance by paying to
Nichols TXEN the premium cost for individual coverage
until age 65 or until the plan terminates, whichever
occurs first. If group health insurance coverage with
Blue Cross/Blue Shield is terminated and group health
insurance coverage is placed with another insurer,
health maintenance organization (HMO), or other
provider of such coverage, the Employee and his
spouse shall be entitled to obtain health insurance
coverage by paying the premium cost therefor in the
same manner as permitted with respect to the Blue
Cross/Blue Shield plan, provided such insurer, HMO,
or other provider approves such participation by
Employee and/or his spouse.
Except as amended above, the Employment Agreement shall remain in full
force and effect according to its terms and conditions.
IN WITNESS WHEREOF, the parties have hereunto executed this Amendment
Number Two to Employment Agreement on the date and year first above written.
NICHOLS TXEN CORPORATION
By:Paul D. Reaves
--------------
PAUL D. REAVES
Its: Chief Executive Officer
Thomas L. Patterson
-------------------
Thomas L. Patterson, Employee
TXEN, INC.
==================================
EMPLOYMENT AGREEMENT
with
PAUL D. REAVES
=================================
Dated: December 16, 1994
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 16th day of December, 1994, by
and among Paul D. Reaves, residing at 2933 Clydebank Circle,
Birmihgham, AL 35243 (herein called the "Employee"),
TXEN, INC. (herein called "TXEN") with a principal place of business at 10
Inverness Center Parkway, Suite 140, Birmingham, Alabama 35242, and NICHOLS
RESEARCH CORPORATION, with a principal place of business located at 4040
Memorial Parkway South, Huntsville, Alabama 35802 (herein called "NRC").
W I T N E S S E T H:
WHEREAS, TXEN is engaged in the business of managed care administration
and providing information systems and services to managed care administrators;
WHEREAS, NRC, as purchaser, and TXEN, as seller, entered into and
consummated a Convertible Preferred Stock Purchase Agreement dated as of the
date hereof (the "Purchase Agreement") whereby NRC acquired one share of
Preferred Stock of TXEN, and the Employee's continued employment with TXEN was a
material inducement to NRC to enter into the Purchase Agreement;
WHEREAS, NRC has also entered into a Stock Purchase Option Agreement of
even date herewith giving NRC the option to purchase all of the capital stock of
TXEN owned by the Employee together with the capital stock owned by the other
shareholders of TXEN provided NRC converts the Preferred Stock into Class B
Common Stock; and
WHEREAS, TXEN and NRC desire to obtain the services of the Employee as
Executive Vice President of TXEN and the Employee is willing to render such
services to TXEN upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
1. Duties and Salary.
<PAGE>
(a) TXEN agrees to employ the Employee and the Employee agrees to
accept employment by TXEN on a full-time basis as Executive Vice President of
TXEN at a base salary of $5,416.66 per month plus such incentive compensation as
the Board of Directors of TXEN (the "Board") may determine payable during the
Term of Employment, as hereinafter defined. Such salary shall be subject to
increases from time to time as authorized by the Board, provided any increase in
compensation paid to the Employee shall require the affirmative vote of the
director or directors elected to the Board by NRC so long as NRC owns any
capital stock of TXEN.
(b) The Employee hereby agrees to undertake such travel as may be
required in the performance of his duties. The reasonable travel expenses of the
Employee shall be reimbursed in accordance with TXEN's reimbursement policy, in
effect from time to time.
(c) The Employee shall carry out his duties under the general
supervision of the Board or its designee.
(d) The Employee's duties shall include the duties and responsibilities
identified on Schedule I attached hereto. The Employee shall perform such other
tasks and duties as may be assigned by TXEN, from time to time and TXEN reserves
the right to change the office and/or position of the Employee within TXEN, so
long as such change is mutually acceptable. The Employee shall devote his full
time, attention, skill and efforts to the tasks and duties assigned by TXEN. The
Employee shall not provide services, for compensation, to any other person or
business entity while employed by TXEN without approval of the Board and NRC.
(e) The Employee shall not be required to relocate beyond the
Birmingham, Alabama, metropolitan area without his consent.
2. Term of Employment. This Agreement shall commence as of the date hereof and
shall end four years from the date hereof (the "Term of Employment"), unless
terminated earlier or extended as provided herein. Upon expiration of the
initial Term of Employment unless earlier terminated as provided herein, the
Term of Employment shall continue automatically month-to-month until terminated
by either party with at least thirty (30) days' prior written notice with or
without cause. Notwithstanding the foregoing, if NRC purchases all of the
capital stock of TXEN pursuant to the Stock Purchase Option Agreement, NRC may
elect to (1) immediately terminate the Employee's employment or (2) extend the
Employee's employment for thirty months after the purchase of all of the capital
stock of TXEN by NRC in which event the Term of Employment shall be extended by
such additional period, unless terminated earlier as provided herein.
3. Termination Before Expiration of Term of Employment. The termination of the
employment of the Employee during the Term of Employment may occur in one of the
following ways:
(a) By TXEN, for Cause. Termination by TXEN shall be deemed to be for
cause only upon:
(i) Employee's conviction of or pleading guilty to a felony;
<PAGE>
(ii) A good faith determination by the Board that the
Employee has breached either this Agreement, the
Purchase Agreement or the Stock Purchase Option
Agreement;
(iii) Refusal or failure by the Employee, without
reasonable excuse or proper authorization, to carry
out any reasonable instructions of the Board
consistent with Employee's rights or duties as set
forth in this Agreement;
(iv) Material breach of this Agreement or any material breach of
any agreement with NRC;
(v) The Employee's demonstration of negligence or willful
misconduct in the execution of his duties, including
without limitation breach of fiduciary duty or the
duty of loyalty owed TXEN.
If TXEN intends to terminate for cause, TXEN shall provide notice to
Employee of intent to terminate this Agreement, stating the termination
provision in this Agreement relied upon and setting forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination under the
provisions so indicated, and shall provide Employee with an opportunity to cure
the alleged default or breach within thirty (30) days of receipt of the notice,
provided that if the matter is not curable within such thirty (30) day period,
the Employee shall not be deemed in default if the Employee commences
immediately to cure the matter and proceeds diligently thereafter to complete
the cure, further provided that the alleged breach or default must be cured
within ninety (90) days of receipt of the notice. TXEN shall not be required to
give more than one notice with respect to the same matter. Notwithstanding the
foregoing, no notice and no cure right shall be required with respect to
termination for cause under 3(a)(i) or an act involving theft of information or
property of TXEN.
(b) By TXEN, Without Cause. Any termination of Employee by TXEN for
reasons other than as set forth in subsections 3(a)(i) through 3(a)(v) above
shall be a termination without cause. TXEN may terminate the employment of
Employee without cause by thirty (30) days' prior written notice at any time. If
NRC purchases all of the capital stock of TXEN pursuant to the Stock Purchase
Option Agreement, NRC may cause TXEN to terminate the employment of Employee
without cause immediately after the closing of such purchase and without giving
30 days' prior notice.
(c) By the Employee. The Employee may by written notice terminate his
employment at any time during the Term of Employment:
(i) For any reason other than for Good Reason (as defined below) upon
thirty (30) days' prior written notice at any time.
<PAGE>
(ii) For "Good Reason," defined as termination because of a material breach
by TXEN of this Agreement including, without limitation, making a
material change in the Employee's duties, responsibilities or
authority as set forth in this Agreement, without his express written
consent. In all cases in which Employee intends to terminate for Good
Reason, the Employee shall provide TXEN with notice of intent to
terminate this Agreement, stating the facts and circumstances giving
rise to a breach of this Agreement claimed to provide a basis for
termination under the provisions so indicated, and shall provide TXEN
with an opportunity to cure the alleged default or breach within
thirty (30) days of receipt of the notice, provided that if the matter
is not curable within such thirty (30) day period, TXEN shall not be
deemed in default if it commences immediately to cure the matter and
proceeds diligently thereafter to complete the cure, further provided
that the alleged breach or default must be cured within ninety (90)
days of receipt of the notice. Employee shall not be required to give
more than one such notice with respect to the same matter.
(d) Death of the Employee.
(e) Disability of Employee. If, during the Term of Employment, a
physician selected by TXEN determines that the Employee has
become physically or mentally disabled so as to be unable to
carry out the normal and usual duties of his employment for
three (3) continuous months, and reasonable accommodation
cannot be made to allow the Employee to continue to perform
his duties full-time, his employment hereunder may be
terminated at the election of TXEN or the Employee.
4. Consequences of Termination. The termination of the employment of Employee
will cause the following results:
(a) If the termination is by TXEN for cause, or is by the Employee for
any reason other than for Good Reason, TXEN will pay the Employee within five
(5) days after the date of termination any unpaid salary, the amount of any
accrued annual vacation pay to which he may be entitled under TXEN's vacation
plan, and benefits. All such compensation and benefits (if any) shall be paid
only through the date termination occurs.
<PAGE>
(b) If the termination is by TXEN without cause or because of death or
disability, TXEN shall pay to the Employee, in addition to the amounts set forth
in 4(a) above, an amount equal to fifty percent (50%) of the Employee's monthly
base salary then in effect in monthly installments over a three-month period
immediately following the termination.
(c) If the termination is by the Employee for Good Reason, TXEN shall
pay to the Employee, in addition to the amounts set forth in 4(a) above, an
amount equal to fifty percent (50%) of the Employee's monthly base salary then
in effect in monthly installments over a three-month period immediately
following the termination.
(d) In the event of the Employee's death or disability, the following
provisions will apply:
(i) Upon his death, the Employee's estate will be
entitled to receive the amount set forth in Section
4(b) and the benefits set forth in any plans of TXEN
then in effect and applicable under the
circumstances. The Employee or his estate shall be
entitled to no other compensation or benefits in the
event of death.
(ii) Upon termination on account of disability, Employee
will be entitled to receive the amount set forth in
Section 4(b) and the benefits set forth in any plans
of TXEN then in effect and applicable under the
circumstances. The Employee or his personal
representative shall be entitled to no other
compensation or benefits in the event of disability.
(e) The Employee shall not be required to mitigate the amount of
payment provided for in this Section 4 by seeking employment.
(f) The amounts set forth above in this Section 4 shall be paid and
received in complete discharge of any other obligation of TXEN (or NRC) to
Employee resulting from termination of his employment.
5. Fringe Benefits.
The Employee shall participate in any group health insurance, vacation
and sick leave plans, and other benefit plans available to all employees of TXEN
in accordance with their terms and conditions which may be amended or terminated
by TXEN at any time.
6. Non-Disclosure Covenants and Proprietary Matters.
<PAGE>
(a) Unless authorized or instructed in writing by TXEN and NRC, the
Employee shall not, except as required in the conduct of TXEN's business, during
or at any time after the Term of Employment, disclose to others, or use, any of
NRC's or TXEN's inventions or discoveries or their respective secret or
confidential information or data (oral, written, or in machine readable form)
which the Employee may obtain during the course of or in connection with the
Employee's employment, including such inventions, discoveries, information,
know-how or data relating to machines, equipment, products, systems, software,
contracts, contract performance, research and/or development, designs,
compositions, formulae, processes, manufacturing procedures or business methods,
whether or not developed by the Employee, by others in NRC or TXEN or obtained
by NRC or TXEN from third parties, and irrespective of whether or not such
inventions, discoveries, information, knowledge or data have been identified by
NRC or TXEN as secret or confidential, unless and until, and then to the extent
and only to the extent that, such inventions, discoveries, information,
knowledge or data become available to the public otherwise than by the
Employee's act or omission.
(b) The Employee shall not, except as required in the conduct of TXEN's
business, disclose to others, or use, any of the information (which, if
disclosed or used, could be harmful to NRC or TXEN) relating to present and
prospective customers of NRC or TXEN, business dealings with such customers,
prospective sales and advertising programs and agreements with representatives
or prospective representatives of NRC or TXEN, present or prospective sources of
supply or any other business arrangements of NRC or TXEN, including but not
limited to customers, customer lists, costs, prices and earnings, whether or not
such information is developed by the Employee, by others in NRC or TXEN or
obtained by NRC or TXEN from third parties, and irrespective of whether or not
such information has been identified by NRC or TXEN as secret or confidential,
unless and until, and then to the extent and only to the extent that, such
information becomes available to the public otherwise than by the Employee's act
or omission.
<PAGE>
(c) The Employee agrees to disclose immediately to TXEN or any persons
designated by it and to assign to TXEN or its successors or assigns, all
inventions made, discovered, or first reduced to practice by the Employee,
solely or jointly with others, during the Term of Employment or within a period
of six months from the date of termination of such employment (either during or
outside of the Employee's working hours and either on or off TXEN's premises),
which inventions are made, discovered or conceived either in the course of such
employment, or with the use of TXEN's time, material, facilities or funds, or
which are directly related to any investigations or obligations undertaken by
TXEN; and the Employee hereby grants and agrees to grant the right to TXEN and
its nominees to obtain, for its own benefit and in its own name (entirely at its
expense) patents and patent applications including original, continuation,
reissue, utility and design patents, and applications, patents of addition,
confirmation patents, registration patents, petty patents, utility models, and
all other types of patents and the like, and all renewals and extensions of any
of them for those inventions in any and all countries; and the Employee shall
assist TXEN, at TXEN's expense, without further charge during the term of the
Employee's employment, and after termination of the Employee's employment at the
same base salary rate (excluding any bonuses, incentive or deferred compensation
or other benefits and based upon a forty hour work week) as during the last year
of the Employee's employment (determined on an hourly basis for this purpose),
through counsel designated by TXEN, to execute, acknowledge, and deliver all
such further papers, including assignments, applications for Letters Patent (of
the United States or of any foreign country), oaths, disclaimers or other
instruments and to perform such further acts, including giving testimony or
furnishing evidence in the prosecution or defense of appeals, interferences,
suits and controversies relating to any aforesaid inventions as may reasonably
be deemed necessary by TXEN or its nominees to effectuate the vesting or
perfecting in TXEN or its nominees of all right, title and interest in and to
said inventions, applications and patents. Notwithstanding the foregoing, the
Employee need not take any action called for under this Section 6(c) which will
cause undue personal hardship to the Employee.
(d) The Employee agrees to disclose immediately to TXEN or any persons
designated by it and to assign to TXEN, at its option, or its successors or
assigns, all works of authorship, including all writings, computer programs,
software, and firmware, written or created by the Employee solely or jointly
with others, during the course of his employment by TXEN (either during or
outside of the Employee's working hours and either on or off TXEN's premises),
which works are made or conceived either in the course of such employment, or
with the use of TXEN's time, material, facilities or funds, or which are
directly related to any investigations or obligations undertaken by TXEN; and
the Employee hereby agrees that all such works are works made for hire, of which
TXEN is the author and the beneficiary of all rights and protections afforded by
the law of copyright in any and all countries; and the Employee will assist TXEN
at TXEN's expense without further charges during the term of his employment, and
after termination of his employment at the same base salary rate (excluding any
bonuses, incentive or deferred compensation or other benefits) as during the
last year of his employment (determined on an hourly basis for this purpose
assuming a forty hour work week), through counsel designated by TXEN, to
execute, acknowledge, and deliver all such further papers, including
assignments, applications for copyright registration (in the United States or in
any foreign country), oaths, disclaimers or other instruments, and to perform
such further acts, including giving testimony or furnishing evidence in the
prosecution or defense of appeals, interferences, suits and controversies
relating to any aforesaid works, as may be deemed necessary by TXEN or by its
nominees to effectuate the vesting or perfecting in TXEN or its nominees of all
rights and interest in and to said works and copies thereof, including the
exclusive rights of copying and distribution.
<PAGE>
(e) The Employee shall keep complete, accurate and authentic accounts,
notes, data and records of all inventions made, discovered or developed and all
works of authorship written or created by the Employee as aforesaid in the
manner and form requested by TXEN.
(f) All computer or other hardware, computer software, computer
programs, source codes, object codes, magnetic tapes, printouts, samples, notes,
records, reports, documents, customer lists, photographs, catalogues and other
writings, whether copyrightable or not, relating to or dealing with TXEN's or
NRC's business and plans, and those of others entrusted to TXEN or NRC, which
are prepared or created by the Employee or which may come into his possession
during or as a result of his employment, are the property of TXEN or NRC, as
applicable, and upon termination of his employment, the Employee agrees to
return all such computer software, computer programs, source codes, object
codes, magnetic tapes, printouts, samples, notes, records, reports, documents,
customer lists, photographs, catalogues and writings and all copies thereof to
TXEN or NRC.
7. Non-Solicitation and Non-Competition. During the Restriction Period (as
hereinafter defined) within the United States of America, the Employee shall not
directly or indirectly:
(a) Solicit the business of TXEN from any customer of TXEN or any
entity controlled by TXEN or solicit any employees of TXEN to leave the employ
of TXEN.
(b) Directly or indirectly, hire any employees or former employees of
TXEN or any entity controlled by TXEN within one year of the date of termination
of his employment with TXEN or cause any entity with which the Employee is
affiliated to hire any such employees or former employees of TXEN.
(c) Engage in, represent in any way or be connected with, as
consultant, officer, director, partner, employee, sales representative,
proprietor, stockholder or otherwise (except for the ownership of a less than 1%
stock interest in a publicly-traded corporation where Employee is not in a
management or control position), any business competing with the business of
TXEN as conducted by TXEN on the date hereof or during the period of Employee's
employment by TXEN.
(d) As used herein, the Restriction Period shall mean the period while
the Employee is employed by TXEN and the following periods:
(i) 36 months after the date the Employee ceases to be
employed by TXEN and/or
(ii) 36 months after NRC purchases all of the capital stock of
TXEN pursuant to the Stock Purchase Option Agreement.
<PAGE>
The above periods in sections 7(d)(i) and 7(d)(ii) shall not be
mutually exclusive. For example, if NRC purchases the capital stock of TXEN more
than 36 months after the Employee ceases to be employed by TXEN, the Restriction
Period of 7(d)(ii) shall apply even though the Restriction Period of 7(d)(i)
also applied. Similarly, if the Employee ceases to be employed by TXEN more than
36 months after NRC purchases the capital stock of TXEN, the Restriction Period
of section 7(d)(i) shall apply even though the Restriction Period of 7(d)(ii)
also applied.
8. No Conflict. Employee represents and warrants that he is not a party to or
otherwise subject to or bound by the terms of any contract, agreement or
understanding which in any manner would limit or otherwise affect his ability to
perform his obligations hereunder, including without limitation any contract,
agreement or understanding containing terms and provisions similar in any manner
to those contained in Sections 6 and 7 hereof. Employee covenants to indemnify
and hold NRC, TXEN and any of their affiliates harmless from any cost or damages
(including attorneys' fees and expenses) resulting from any breach of the
provisions of this Agreement.
9. Survival of Covenants, Effect.
(a) The covenants on the part of the Employee contained or referred to
in Sections 6 and 7 above shall survive termination of this Agreement, and the
existence of any claim or cause of action of the Employee against TXEN or NRC,
whether predicated on this Agreement or otherwise. The Employee agrees that a
remedy at law for any breach of the foregoing covenants contained or referred to
in Sections 6 and 7 would be inadequate, that TXEN and NRC would suffer
irreparable harm as a result and that NRC and/or TXEN shall be entitled to a
temporary and permanent injunction or an order for specific performance of such
covenants without the necessity of proving actual damage to NRC or TXEN and
without the posting of any bond or other security. Any breach of this Agreement
by TXEN or NRC shall not release the Employee from his obligations under
Sections 6 and 7 hereof.
(b) The Employee hereby represents and acknowledges that NRC and TXEN
are relying on the covenants in Sections 6 and 7 in entering into this Agreement
and the Purchase Agreement and other agreements related thereto and that the
restrictions in Sections 6 and 7 are fair and reasonable. The Employee
acknowledges that TXEN does business throughout the United States and that the
geographic scope of the covenants in Section 7 is therefore reasonable and
necessary to protect the interests of TXEN.
<PAGE>
(c) It is the intent of the parties that the provisions of Sections 6
and 7 shall be enforced to the fullest extent permissible under the laws and
public policies of each jurisdiction in which enforcement is sought. If any
particular provision of Sections 6 and 7 shall be adjudicated to be invalid or
unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended to
provide restrictions to the fullest extent permissible and consistent with
applicable law and policies, and such amendment shall apply only with respect to
the particular jurisdiction in which such adjudication is made. If such deemed
amendment is not allowed by the adjudicating body, the offending provision,
only, shall be deleted and the remainder of Sections 6 and 7 shall not be
effected.
10. Assignment.
The rights and obligations of TXEN under this Agreement may be assigned
by TXEN to NRC or to any other successors in interest of TXEN and/or NRC of that
part of the business of TXEN or NRC to which this Agreement applies or to their
respective affiliates. This Agreement may not be assigned and any duties of the
Employee may not be delegated by the Employee, but any amounts owing to the
Employee upon his death shall inure to the benefit of his estate.
11. Notices.
All notices or other communications which may be or are required to be
given, served or sent by either party to the other party pursuant to this
Agreement shall be in writing, addressed to its/his residence or place of
business as set forth above, and shall be mailed by first-class certified mail,
return receipt requested, postage prepaid, next-day air delivery, or transmitted
by facsimiles or hand delivery. Such notice or other communication shall be
deemed sufficiently given, served, sent or received for all purposes at such
time as it is delivered to the addressee or at such time as delivery is refused
by the addressee upon presentation. Each party may designate by notice in
writing an address to which any notice or communication may thereafter be so
given, served or sent. Any notice or other communication sent by Employee to
TXEN shall also be sent, at the same time, to NRC. Notices hand delivered to
TXEN or NRC must be delivered to an officer of TXEN and NRC and all other
notices shall be sent to the attention of the Board, in the case of TXEN, or to
the President, in the case of NRC.
12. Applicable Law Jurisdiction.
This Agreement has been negotiated and executed in the State of
Alabama, and it shall be governed by, construed and enforced in accordance with
the internal substantive laws and not the choice of law rules of the State of
Alabama.
13. Effectiveness/Interpretation.
<PAGE>
The parties acknowledge and agree that this Agreement has been
negotiated at arm's length between parties equally sophisticated and
knowledgeable in the matters dealt with herein. Each party has been represented
by counsel of its or his own choosing. Accordingly, any rule of law or legal
decision that would require interpretation of any ambiguities in the Agreement
against the party that drafted it is not applicable and is waived.
14. Third Party Beneficiary.
NRC is a third party beneficiary to this entire Agreement but shall
have no liability to pay the compensation due Employee and to perform the other
obligations of TXEN hereunder. NRC is not a guarantor of any of the TXEN
obligations hereunder.
15. Severability.
If any of the articles, sections, paragraphs, clauses or provisions of
this Agreement shall be held by a court of last resort to be invalid, the
remainder of this Agreement shall not be affected thereby.
16. Entire Agreement.
The foregoing contains the entire agreement between the parties
relating to the subject matter of this Agreement, and may not be altered or
amended except by an instrument in writing approved by TXEN and NRC and signed
by the parties hereto, and this Agreement supersedes all prior understandings
and agreements relating to employment of the Employee by TXEN. The parties
acknowledge that any prior oral or written agreements between NRC and the
Employee, if any, are hereby terminated. The parties acknowledge that the
Employee and NRC have also entered into the Purchase Agreement and Stock
Purchase Option Agreement which shall be in addition to and not in lieu of the
provisions of this Agreement.
IN WITNESS WHEREOF, TXEN and NRC have caused this Agreement to be
executed by their duly authorized officers and the Employee has hereunto set his
hand as of the date first above written.
TXEN, INC.
By:Thomas L. Patterson
-------------------
Thomas L. Patterson, President
NICHOLS RESEARCH CORPORATION
By:Louis Rachmeler
---------------
Its:VP Acquisitions
---------------
Paul D. Reaves
---------------
Paul D. Reaves, Employee
NOTE: Schedules available upon request.
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
NICHOLS SELECT CORPORATION
AND
PAUL D. REAVES
Dated: August 29, 1997
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO CERTAIN EMPLOYMENT AGREEMENT, dated 16th of December,
1994, entered into on this the 29th day of August, 1997, by NICHOLS SELECT
CORPORATION, a Delaware corporation and the wholly owned subsidiary of NRC
("SELECT") and Paul D. Reaves ("Employee"). Unless otherwise defined,
capitalized terms used herein shall have the meaning ascribed to such terms in
the Employment Agreement or the Merger Agreement (hereinafter defined).
W I T N E S S E T H:
WHEREAS, Nichols Research Corporation ("NRC"), SELECT, a wholly owned
subsidiary of NRC, TXEN, Inc. ("TXEN"), and the holders of all of the $0.002 par
value Class A Common Stock of TXEN (the "Shareholders") have entered into and
consummated an Agreement of Merger dated as of August 27, 1997 (the "Merger
Agreement") whereby TXEN merged with and into SELECT;
WHEREAS, the Employee's continued employment with SELECT was a material
inducement to SELECT and NRC to enter into the Merger Agreement;
WHEREAS, the Employee owned Class A Common Stock of TXEN and received a
portion of the Merger Consideration;
WHEREAS, NRC, pursuant to Section 2 of the Employment Agreement, has
elected to extend Employee's Term of Employment after the Effective Date of the
merger of TXEN into SELECT; and
WHEREAS, NRC,SELECT and Employee mutually desire that Employee continue
to be employed by SELECT;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the undersigned parties do hereby amend the Employment Agreement as
follows:
1. SELECT agrees to the continued employment of the Employee,
and the Employee agrees to accept continued employment by SELECT on a
full-time basis as Senior Vice President of SELECT with the same Duties
and Salary as set forth in the Employment Agreement, except that
Employee shall report to the Chief Executive Officer of SELECT.
2. Section 2 of said Employment Agreement is amended to read
as follows:
<PAGE>
2. Term of Employment. This Agreement shall commence
as of the Effective Date of the Merger Agreement and
shall end thirty (30) months from the date hereof
(the "Term of Employment"), unless terminated earlier
or extended as provided herein.
3. Unless the context requires otherwise, all
references to TXEN, Inc., in the Employment Agreement
shall mean SELECT.
Except as amended above, the Employment Agreement shall remain in full
force and effect according to its terms and conditions.
IN WITNESS WHEREOF, the parties have hereunto executed this Amendment
to Employment Agreement on the date and year first above written.
NICHOLS SELECT CORPORATION
By: Michael J. Mruz
---------------
Michael J. Mruz,
Its: Chief Executive Officer
Paul D. Reaves
--------------
Paul D. Reaves, Employee
NICHOLS SELECT CORPORATION
H. GREY WOOD
EMPLOYMENT AGREEMENT
Dated: August 29, 1997
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into on the 29th day of August, 1997, by H.
Grey Wood, residing at 3549 Chippenham, Birmingham, Alabama 35242 (herein called
the "Employee"), and Nichols SELECT Corporation, with a principal place of
business located at 4040 Memorial Parkway South, Huntsville, Alabama 35802
(herein called "SELECT"). Unless otherwise defined, capitalized terms used
herein shall have the meaning ascribed to such terms in the Merger Agreement as
hereinafter defined.
W I T N E S S E T H:
WHEREAS, Nichols Research Corporation ("NRC"), SELECT, a wholly owned
subsidiary of NRC, TXEN, Inc. ("TXEN"), and the holders of all of the $0.002 par
value Class A Common Stock of TXEN (the "Shareholders") have entered into and
consummated an Agreement of Merger dated as of August 27, 1997 (the "Merger
Agreement") whereby TXEN merged with and into SELECT;
WHEREAS, the Employee's continued employment with SELECT was a material
inducement to SELECT and NRC to enter into the Merger Agreement;
WHEREAS, Employee owned Class A Common Stock of TXEN and received a
portion of the Merger Consideration;
WHEREAS, SELECT is engaged in the business of health care
administration and providing information systems and services to health care
providers and administrators throughout the United States; and
WHEREAS, SELECT desires to obtain the services of the Employee as Vice
President and General Manager of SELECT and the Employee is willing to render
such services to SELECT upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
1. Duties and Salary.
<PAGE>
(a) SELECT agrees to employ the Employee and the Employee agrees to
accept employment by SELECT on a full-time basis as Vice President and General
Manager of SELECT at a base salary of $10,416.67 per month plus such incentive
compensation as the Board of Directors of SELECT (the "Board") may determine
payable during the Term of Employment, as hereinafter defined. Such salary shall
be subject to increases from time to time as authorized by the Board.
(b) The Employee hereby agrees to undertake such travel as may be
required in the performance of his duties. The reasonable travel expenses of the
Employee shall be reimbursed in accordance with SELECT's reimbursement policy,
in effect from time to time.
(c) The Employee shall carry out his duties under the general
supervision of the Board or its designee.
(d) The Employee's duties shall include the duties and responsibilities
identified on Schedule I attached hereto. The Employee shall perform such other
tasks and duties as may be assigned by SELECT, from time to time and SELECT
reserves the right to change the office and/or position of the Employee within
SELECT, so long as such change is mutually acceptable. The Employee shall devote
his full time, attention, skill and efforts to the tasks and duties assigned by
SELECT. The Employee shall not provide services, for compensation, to any other
person or business entity while employed by SELECT without approval of the
Board.
(e) The Employee shall not be required to relocate beyond the
Birmingham, Alabama, metropolitan area without his consent.
2. Term of Employment. This Agreement shall commence as of the effective date of
the Merger Agreement and shall end two years from the date thereof (the "Term of
Employment"), unless terminated earlier or extended as provided herein. Upon
expiration of the initial Term of Employment unless earlier terminated as
provided herein, the Term of Employment shall continue automatically
month-to-month until terminated by either party with at least thirty (30) days'
prior written notice with or without cause.
3. Termination Before Expiration of Term of Employment. The termination of the
employment of the Employee during the Term of Employment may occur in one of the
following ways:
(a) By SELECT, for Cause. Termination by SELECT shall be deemed to be
for cause only upon:
(i) Employee's conviction of or pleading guilty to a felony;
(ii) A good faith determination by the Board that the
Employee has breached this Agreement or the Merger
Agreement;
(iii) Refusal or failure by the Employee, without
reasonable excuse or proper authorization, to carry
out any reasonable instructions of the Board
consistent with Employee's rights or duties as set
forth in this Agreement;
<PAGE>
(iv) Material breach of this Agreement or any material
breach of any agreement with SELECT or NRC;
(v) The Employee's demonstration of negligence or willful
misconduct in the execution of his duties, including
without limitation breach of fiduciary duty or the
duty of loyalty owed SELECT.
If SELECT intends to terminate for cause, SELECT shall provide notice
to Employee of intent to terminate this Agreement, stating the termination
provision in this Agreement relied upon and setting forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination under the
provisions so indicated, and shall provide Employee with an opportunity to cure
the alleged default or breach within thirty (30) days of receipt of the notice,
provided that if the matter is not curable within such thirty (30) day period,
the Employee shall not be deemed in default if the Employee commences
immediately to cure the matter and proceeds diligently thereafter to complete
the cure, further provided that the alleged breach or default must be cured
within ninety (90) days of receipt of the notice. SELECT shall not be required
to give more than one notice with respect to the same matter. Notwithstanding
the foregoing, no notice and no cure right shall be required with respect to
termination for cause under 3(a)(i) or an act involving theft of information or
property of SELECT.
(b) By SELECT, Without Cause. Any termination of Employee by SELECT for
reasons other than as set forth in subsections 3(a)(i) through 3(a)(v) above
shall be a termination without cause. SELECT may terminate the employment of
Employee without cause by thirty (30) days prior written notice at any time.
(c) By the Employee. The Employee may by written notice terminate his
employment at any time during the Term of Employment:
(i) For any reason other than for Good Reason (as defined below) upon
thirty (30) days prior written notice at any time. <PAGE>
(ii) For "Good Reason," defined as termination because of a material
breach by SELECT of this Agreement including, without limitation, making
a material change in the Employee's duties, responsibilities, or authority
as set forth in this Agreement, without his express written consent.
In all cases in which Employee intends to terminate for Good Reason, the
Employee shall provide SELECT with notice of intent to terminate this
Agreement, stating the facts and circumstances giving rise to a breach
of this Agreement claimed to provide a basis for termination under the
provisions so indicated, and shall provide SELECT with an opportunity
to cure the alleged default or breach within thirty (30) days of receipt
of the notice, provided that if the matter is not curable within such
thirty (30) day period, SELECT shall not be deemed in default if it
commences immediately to cure the matter and proceeds diligently thereafter
to complete the cure, further provided that the alleged breach or default
must be cured within ninety (90) days of receipt of the notice. Employee
shall not be required to give more than one such notice with respect to the
same matter.
(d) Death of the Employee.
(e) Disability of Employee. If, during the Term of Employment, a
physician selected by SELECT determines that the Employee has
become physically or mentally disabled so as to be unable to
carry out the normal and usual duties of his employment for
three (3) continuous months, and reasonable accommodation
cannot be made to allow the Employee to continue to perform
his duties full-time, his employment hereunder may be
terminated at the election of SELECT or the Employee.
4. Consequences of Termination. The termination of the employment of Employee
will cause the following results:
(a) If the termination is by SELECT for cause, or is by the Employee
for any reason other than for Good Reason, SELECT will pay the Employee within
five (5) days after the date of termination any unpaid salary, the amount of any
accrued annual vacation pay to which he may be entitled under SELECT's vacation
plan and benefits. All such compensation and benefits (if any) shall be paid
only through the date termination occurs.
(b) If the termination is by SELECT without cause or because of death
or disability, SELECT shall pay to the Employee, in addition to the amounts set
forth in 4(a) above, an amount equal to the Employee's monthly base salary then
in effect over a six-month period immediately following the termination.
(c) If the termination is by the Employee for Good Reason, SELECT shall
pay to the Employee, in addition to the amounts set forth in 4(a) above, an
amount equal to the Employee's monthly base salary then in effect over a
six-month period immediately following the termination.
(d) In the event of the Employee's death or disability, the following
provisions will apply:
(i) Upon his death, the Employee's estate will be
entitled to receive the amount set forth in Section
4(b) and the benefits set forth in any plans of
SELECT then in effect and applicable under the
circumstances. The Employee or his estate shall be
entitled to no other compensation or benefits in the
event of death.
<PAGE>
(ii) Upon termination on account of disability, Employee
will be entitled to receive the amount set forth in
Section 4(b) and the benefits set forth in any plans
of SELECT then in effect and applicable under the
circumstances. The Employee or his personal
representative shall be entitled to no other
compensation or benefits in the event of disability.
(e) The Employee shall not be required to mitigate the amount of
payment provided for in this Section 4 by seeking employment.
(f) The amounts set forth above in this Section 4 shall be paid and
received in complete discharge of any other obligation of SELECT to Employee
resulting from termination of his employment.
5. Fringe Benefits.
The Employee shall participate in any group health insurance, vacation
and sick leave plans, and other benefit plans available to all employees of
SELECT in accordance with their terms and conditions which may be amended or
terminated by SELECT at any time. Effective on August 31, 1997, Employee shall
receive an incentive stock option grant to purchase 8,000 shares of NRC Common
Stock under the terms and provisions of the Nichols Research Corporation 1991
Incentive Stock Option Plan.
6. Nondisclosure Covenants and Proprietary Matters.
(a) Unless authorized or instructed in writing by SELECT, the Employee
shall not, except as required in the conduct of SELECT's business, during or at
any time after the Term of Employment, disclose to others, or use, any of
SELECT's inventions or discoveries or their respective secret or confidential
information or data (oral, written, or in machine readable form) which the
Employee may obtain during the course of or in connection with the Employee's
employment, including such inventions, discoveries, information, know-how or
data relating to machines, equipment, products, systems, software, contracts,
contract performance, research and/or development, designs, compositions,
formulae, processes, manufacturing procedures or business methods, whether or
not developed by the Employee, by others in SELECT or obtained by SELECT from
third parties, and irrespective of whether or not such inventions, discoveries,
information, knowledge or data have been identified by SELECT as secret or
confidential, unless and until, and then to the extent and only to the extent
that, such inventions, discoveries, information, knowledge or data become
available to the public otherwise than by the Employee's act or omission.
<PAGE>
(b) The Employee shall not, except as required in the conduct of
SELECT's business, disclose to others, or use, any of the information (which, if
disclosed or used, could be harmful to SELECT relating to present and
prospective customers of SELECT, business dealings with such customers,
prospective sales and advertising programs and agreements with representatives
or prospective representatives of SELECT, present or prospective sources of
supply or any other business arrangements of SELECT, including but not limited
to customers, customer lists, costs, prices and earnings, whether or not such
information is developed by the Employee, by others in SELECT or obtained by
SELECT from third parties, and irrespective of whether or not such information
has been identified by SELECT as secret or confidential, unless and until, and
then to the extent and only to the extent that, such information becomes
available to the public otherwise than by the Employee's act or omission.
(c) The Employee agrees to disclose immediately to SELECT or any
persons designated by it and to assign to SELECT or its successors or assigns,
all inventions made, discovered, or first reduced to practice by the Employee,
solely or jointly with others, during the Term of Employment or within a period
of six months from the date of termination of such employment (either during or
outside of the Employee's working hours and either on or off SELECT's premises),
which inventions are made, discovered or conceived either in the course of such
employment, or with the use of SELECT's time, material, facilities or funds, or
which are directly related to any investigations or obligations undertaken by
SELECT; and the Employee hereby grants and agrees to grant the right to SELECT
and its nominees to obtain, for its own benefit and in its own name (entirely at
its expense) patents and patent applications including original, continuation,
reissue, utility and design patents, and applications, patents of addition,
confirmation patents, registration patents, petty patents, utility models, and
all other types of patents and the like, and all renewals and extensions of any
of them for those inventions in any and all countries; and the Employee shall
assist SELECT, at SELECT's expense, without further charge during the term of
the Employee's employment, and after termination of the Employee's employment at
the same base salary rate (excluding any bonuses, incentive or deferred
compensation or other benefits and based upon a forty hour work week) as during
the last year of the Employee's employment (determined on an hourly basis for
this purpose), through counsel designated by SELECT, to execute, acknowledge,
and deliver all such further papers, including assignments, applications for
Letters Patent (of the United States or of any foreign country), oaths,
disclaimers or other instruments and to perform such further acts, including
giving testimony or furnishing evidence in the prosecution or defense of
appeals, interferences, suits and controversies relating to any aforesaid
inventions as may reasonably be deemed necessary by SELECT or its nominees to
effectuate the vesting or perfecting in SELECT or its nominees of all right,
title and interest in and to said inventions, applications and patents.
Notwithstanding the foregoing, the Employee need not take any action called for
under this Section 6(c) which will cause undue personal hardship to the
Employee.
<PAGE>
(d) The Employee agrees to disclose immediately to SELECT or any
persons designated by it and to assign to SELECT, at its option, or its
successors or assigns, all works of authorship, including all writings, computer
programs, software, and firmware, written or created by the Employee solely or
jointly with others, during the course of his employment by SELECT (either
during or outside of the Employee's working hours and either on or off SELECT's
premises), which works are made or conceived either in the course of such
employment, or with the use of SELECT's time, material, facilities or funds, or
which are directly related to any investigations or obligations undertaken by
SELECT; and the Employee hereby agrees that all such works are works made for
hire, of which SELECT is the author and the beneficiary of all rights and
protections afforded by the law of copyright in any and all countries; and the
Employee will assist SELECT at SELECT's expense without further charges during
the term of his employment, and after termination of his employment at the same
base salary rate (excluding any bonuses, incentive or deferred compensation or
other benefits) as during the last year of his employment (determined on an
hourly basis for this purpose assuming a forty hour work week), through counsel
designated by SELECT, to execute, acknowledge, and deliver all such further
papers, including assignments, applications for copyright registration (in the
United States or in any foreign country), oaths, disclaimers or other
instruments, and to perform such further acts, including giving testimony or
furnishing evidence in the prosecution or defense of appeals, interferences,
suits and controversies relating to any aforesaid works, as may be deemed
necessary by SELECT or by its nominees to effectuate the vesting or perfecting
in SELECT or its nominees of all rights and interest in and to said works and
copies thereof, including the exclusive rights of copying and distribution.
(e) The Employee shall keep complete, accurate and authentic accounts,
notes, data and records of all inventions made, discovered or developed and all
works of authorship written or created by the Employee as aforesaid in the
manner and form requested by SELECT.
(f) All computer or other hardware, computer software, computer
programs, source codes, object codes, magnetic tapes, printouts, samples, notes,
records, reports, documents, customer lists, photographs, catalogues and other
writings, whether copyrightable or not, relating to or dealing with SELECT's
business and plans, and those of others entrusted to SELECT, which are prepared
or created by the Employee or which may come into his possession during or as a
result of his employment, are the property of SELECT, as applicable, and upon
termination of his employment, the Employee agrees to return all such computer
software, computer programs, source codes, object codes, magnetic tapes,
printouts, samples, notes, records, reports, documents, customer lists,
photographs, catalogues and writings and all copies thereof to SELECT.
7. Nonsolicitation and Noncompetition. During the Restriction Period (as
hereinafter defined) within the United States of America, the Employee shall not
directly or indirectly:
(a) Solicit the business of SELECT from any customer of SELECT or any
entity controlled by SELECT or solicit any employees of SELECT to leave the
employ of SELECT.
(b) Hire any employees or former employees of SELECT or any entity
controlled by SELECT within one year of the date of termination of his
employment with SELECT or cause any entity with which the Employee is affiliated
to hire any such employees or former employees of SELECT unless such former
employee has not been employed by SELECT within 180 days of the hire date.
<PAGE>
(c) Engage in, represent in any way or be connected with, as
consultant, officer, director, partner, employee, sales representative,
proprietor, stockholder or otherwise (except for the ownership of a less than
one percent (1%) stock interest in a publicly traded corporation where Employee
is not in a management or control position), any business competing with the
business of SELECT as conducted by SELECT on the date hereof or during the
period of Employee's employment by SELECT.
(d) As used herein, the Restriction Period shall mean the period while
the Employee is employed by SELECT and twelve (12) months after the date the
employee ceases to be employed by SELECT.
8. No Conflict. Employee represents and warrants that he is not a party to or
otherwise subject to or bound by the terms of any contract, agreement or
understanding which in any manner would limit or otherwise affect his ability to
perform his obligations hereunder, including without limitation any contract,
agreement or understanding containing terms and provisions similar in any manner
to those contained in Sections 6 and 7 hereof. Employee covenants to indemnify
and hold SELECT and any of its affiliates harmless from any cost or damages
(including attorneys' fees and expenses) resulting from any breach of the
provisions of this Agreement.
9. Survival of Covenants, Effect.
(a) The covenants on the part of the Employee contained or referred to
in Sections 6 and 7 above shall survive termination of this Agreement, and the
existence of any claim or cause of action of the Employee against SELECT,
whether predicated on this Agreement or otherwise. The Employee agrees that a
remedy at law for any breach of the foregoing covenants contained or referred to
in Sections 6 and 7 would be inadequate, that SELECT would suffer irreparable
harm as a result and that SELECT shall be entitled to a temporary and permanent
injunction or an order for specific performance of such covenants without the
necessity of proving actual damage to SELECT and without the posting of any bond
or other security. Any breach of this Agreement by SELECT shall not release the
Employee from his obligations under Sections 6 and 7 hereof.
(b) The Employee hereby represents and acknowledges that SELECT is
relying on the covenants in Sections 6 and 7 in entering into this Agreement and
the Merger Agreement and other agreements related thereto and that the
restrictions in Sections 6 and 7 are fair and reasonable. The Employee
acknowledges that SELECT does business throughout the United States and that the
geographic scope of the covenants in Section 7 is therefore reasonable and
necessary to protect the interests of SELECT.
<PAGE>
(c) It is the intent of the parties that the provisions of Sections 6
and 7 shall be enforced to the fullest extent permissible under the laws and
public policies of each jurisdiction in which enforcement is sought. If any
particular provision of Sections 6 and 7 shall be adjudicated to be invalid or
unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended to
provide restrictions to the fullest extent permissible and consistent with
applicable law and policies, and such amendment shall apply only with respect to
the particular jurisdiction in which such adjudication is made. If such deemed
amendment is not allowed by the adjudicating body, the offending provision,
only, shall be deleted and the remainder of Sections 6 and 7 shall not be
affected.
10. Assignment.
The rights and obligations of SELECT under this Agreement may be
assigned by SELECT to any other successors in interest of SELECT of that part of
the business of SELECT to which this Agreement applies or to their respective
affiliates. This Agreement may not be assigned and any duties of the Employee
may not be delegated by the Employee, but any amounts owing to the Employee upon
his death shall inure to the benefit of his estate.
11. Notices.
All notices or other communications which may be or are required to be
given, served or sent by either party to the other party pursuant to this
Agreement shall be in writing, addressed to its/his residence or place of
business as set forth above, and shall be mailed by first-class certified mail,
return receipt requested, postage prepaid; next-day air delivery; or transmitted
by facsimiles or hand delivery. Such notice or other communication shall be
deemed sufficiently given, served, sent or received for all purposes at such
time as it is delivered to the addressee or at such time as delivery is refused
by the addressee upon presentation. Each party may designate by notice in
writing an address to which any notice or communication may thereafter be so
given, served or sent. Notices hand delivered to SELECT must be delivered to an
officer of SELECT and all other notices shall be sent to the attention of the
Board.
12. Applicable Law Jurisdiction.
This Agreement has been negotiated and executed in the State of
Alabama, and it shall be governed by, construed and enforced in accordance with
the internal substantive laws and not the choice of law rules of the State of
Alabama.
13. Effectiveness/Interpretation.
The parties acknowledge and agree that this Agreement has been
negotiated at arm's length between parties equally sophisticated and
knowledgeable in the matters dealt with herein. Each party has been represented
by counsel of its or his own choosing. Accordingly, any rule of law or legal
decision that would require interpretation of any ambiguities in the Agreement
against the party that drafted it is not applicable and is waived.
14. Severability.
If any of the articles, sections, paragraphs, clauses or provisions of
this Agreement shall be held by a court of last resort to be invalid, the
remainder of this Agreement shall not be affected thereby.
<PAGE>
15. Entire Agreement.
The foregoing contains the entire agreement between the parties
relating to the subject matter of this Agreement, and may not be altered or
amended except by an instrument in writing approved by SELECT and signed by the
parties hereto, and this Agreement supersedes all prior understandings and
agreements relating to employment of the Employee by SELECT. The parties
acknowledge that any prior oral or written agreements between SELECT and the
Employee, if any, are hereby terminated.
IN WITNESS WHEREOF, SELECT has caused this Agreement to be executed by
its duly authorized officers and the Employee has hereunto set his hand as of
the date first above written.
NICHOLS SELECT CORPORATION
By:Michael J. Mruz
---------------
Its:Chief Executive Officer
-----------------------
H. Grey Wood
-------------------------------
H. Grey Wood, Employee
NOTE: Schedules available upon request.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Name of Subsidiary State of Incorporation
1) Communications & Systems Specialists, Inc. Delaware
2) Nichols TXEN Corporation Delaware
3) NRC Technical Services Corporation Alabama
4) Conway Computer Group Alabama
5) Advanced Marine Enterprises, Inc. Virginia
6) Welkin Associates, Ltd. Virginia
7) Mnemonic Systems, Incorporated Virginia
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of Nichols Research Corporation and in the related Prospectuses of
our report dated October 7, 1998, with respect to the consolidated financial
statements of Nichols Research Corporation included in the Annual Report (Form
10-K) for the year ended August 31, 1998.
Form S-8 No. 33-13464 pertaining to the Nichols Research Corporation 1984
Incentive Stock Option Plan;
Form S-8, as amended, File Nos. 33-13464 and 333-07164 pertaining to the
Nichols Research Corporation 1988 Employees' Stock Purchase Plan;
Form S-8, as amended, File Nos. 33-38568 and 333-29791 pertaining to the
Nichols Research Corporation Non-Employee Officer and Director Stock Option
Plan;
Form S-8, as amended, File Nos. 33-44409 and 333-07160 pertaining to the
Nichols Research Corporation 1989 Incentive Stock Option Plan;
Form S-8, as amended, File Nos. 33-55454 and 333-07162 pertaining to the
Nichols Research Corporation 1991 Stock Option Plan;
Form S-8 No. 333-60199 pertaining to the Nichols TXEN Corporation Key
Employee Incentive Stock Option Plan;
Form S-8 No. 333-60193 pertaining to the Nichols TXEN Corporation 1996
Incentive Stock Option Plan;
Form S-8 No. 333-61093 pertaining to the Incentive Stock Option Plan of
1988 of Welkin Associates, Ltd.; and
Form S-3 No. 333-61143 pertaining to the registration of 415,689 shares of
Nichols Research Corporation Common Stock issued to the shareholders of Welkin
Associates, Ltd.
Ernst & Young LLP
Birmingham, Alabama
November 25, 1998
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 11,275
<SECURITIES> 0
<RECEIVABLES> 113,926
<ALLOWANCES> 534
<INVENTORY> 0
<CURRENT-ASSETS> 131,094
<PP&E> 47,446
<DEPRECIATION> 25,011
<TOTAL-ASSETS> 224,061
<CURRENT-LIABILITIES> 53,110
<BONDS> 2,948
0
0
<COMMON> 140
<OTHER-SE> 166,332
<TOTAL-LIABILITY-AND-EQUITY> 224,061
<SALES> 427,043
<TOTAL-REVENUES> 427,043
<CGS> 355,750
<TOTAL-COSTS> 355,750
<OTHER-EXPENSES> 4,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 467
<INCOME-PRETAX> 23,724
<INCOME-TAX> 9,301
<INCOME-CONTINUING> 14,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,423
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.02
</TABLE>
EXHIBIT 99
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 the Shareholders to be held January 14, 1999, and
hereby consent to serve as a director of Nichols Research Corporation.
Dated this 23rd day of November,1998.
Charles A. Leader
-----------------
Charles A. Leader
