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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________
FORM 10-Q/A
AMENDMENT NO. 1 TO
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________
To _____________
_____________________
Nichols Research Corporation
(Exact name of registrant as specified in its charter)
_____________________
Commission File Number 0-15295
DELAWARE 63-0713665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
4040 Memorial Parkway, South
Huntsville, Alabama 35802-1326
(256) 883-1140
(Address, including zip code, of principal offices)
_____________________
NO CHANGE
(Former name, address and fiscal year if changed since last report)
_____________________
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
COMMON STOCK, $.01 PAR VALUE
13,271,712 SHARES OUTSTANDING ON May 31, 1998
_____________________
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FORM 10-Q
NICHOLS RESEARCH CORPORATION
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview and Business Environment
---------------------------------
The Company is a leading provider of technical and
information technology (IT) services, inlcuding 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'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's business
and financial performance are subject to risks and
uncertainties, including those discussed below.
The Company is organized in 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.
Nichols InfoTec provides information and technology services
to various commercial clients, other than healthcare clients.
Nichols TXEN provides information services to clients in the
healthcare and insurance industries. The Company is currently
evaluating whether the services and products provided to the
insurance industry should continue to be included with Nichols
TXEN or reorganized into Nichols InfoTec. For the nine months
ended May 31, 1998, the percentage of total revenues
attributable to the four business units was approximately 55%
for Defense and Intelligence, 24% for Government Information
Technology, 10% for Nichols InfoTec, and 11% for Nichols TXEN.
Expansion through acquisitions is an important component of
the Company's overall business strategy. The Company has
successfully completed nine strategic acquisitions and
investments since September 1, 1994. 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.
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As part of the Company's business strategy to enter new
markets, the Company intends to pursue large systems integration
contracts in both the government and commercial markets,
although competition for such contracts is intense and many of
the Company's competitors have greater resources than the
Company. While such contracts are working capital intensive,
requiring large equipment and software purchases to be funded by
the Company before payment from the customer, the Company
believes such contracts offer attractive revenue growth and
margin expansion opportunities for the Company's range
of technical expertise and capabilities.
The Company's revenues and earnings may fluctuate from
quarter to quarter based on such factors as the number, size,
and scope of projects in which the 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.
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.
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EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY
REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E
OF THE SECRUITIES 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 FORE DETAIL IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997, AND IN THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS SECTION OF THIS QUARTERLY REPORT. THESE FORWARD-LOOKING
STATEMENTS CAN BE GENERALLY IDENTIFIED AS SUCH BECUASE THE CONTENT OF
THE STATEMENTS WILL USUALLY CONTAIN SUCH WORDS AS THE COMPANY OR
MANAGEMENT "BELIEVES," "ANTICIPATES," "EXPECTS," "HOPES," AND WORDS OF
SIMILAR IMPORT. SIMILARILY, STATEMENTS THAT DESCRIBE THE COMPANY'S
FUTURE PLANS, OBJECTIVES, GOALS OR STRATEGIES ARE FORWARD-LOOKING
STATEMENTS.
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FORM 10-Q
NICHOLS RESEARCH CORPORATION
Results of Operations
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The following table sets forth, for the periods indicated,
the percentage which certain items in the consolidated
statements of income bear to consolidated revenues:
For the Three For the Nine
Months Ended Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
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Revenues......................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Direct and allocable costs...... 84.5 88.3 83.7 88.3
General and administrative
expenses....................... 8.0 6.2 8.7 6.1
Amortization of intangibles..... 1.1 0.6 1.2 0.6
Purchased in-process research
and development................ 1.8 - 0.7 -
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Total costs and expenses..... 95.4 95.1 94.3 95.0
----------------------------------------
Operating profit................. 4.6 4.9 5.7 5.0
Interest expense................. (0.0) (0.0) (0.1) (0.2)
Other income, principally
interest........................ 0.1 0.3 0.3 0.3
Equity in earnings of
unconsolidated affilites........ 0.0 0.1 0.1 0.2
Minority interest in
consolidated subsidiaries....... (0.1) (0.0) (0.2) (0.1)
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Income before income taxes....... 4.6 5.3 5.8 5.2
Income taxes..................... 1.7 1.9 2.2 1.9
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Net income....................... 2.9% 3.4% 3.6% 3.3%
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The Company had a backlog of approximately $1.1 billion,
including options of $766.1 million, at May 31, 1998. The
Company had a backlog of approximately $1.2 billion, including
options of $684.4 million, at May 31, 1997. 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.
The table below presents contract award and backlog data for the
periods indicated:
May 31, May 31,
1998 1997
----------------------
(amounts in thousands)
Contract award amount....... $ 174,996 $ 444,309
Backlog (with options)...... $1,138,331 $1,201,087
Backlog (without options)... $ 372,212 $ 516,681
Comparison of Operating Results for Fiscal Third Quarter 1998
with Fiscal Third Quarter 1997
REVENUES. Revenues increased $19.4 million (20.6%) for the
three months and $16.1 million (6.0%) for the nine months ended
May 31, 1998 as compared to the three months and nine months
ended May 31, 1997. The Defense and Intelligence unit, which
represents approximately 55% of consolidated revenue for the
nine months ended May 31, 1998, reported an increase of $10.4
million ( 7.0%) for the nine months ended May 31, 1998 as
compared to the nine months ended May 31, 1997, primarily as a
result of continued growth in existing contract base. The
Government Information Technology unit,representing approximately
24% of consolidated revenue for the nine months ended May 31,
1998, reported a decrease of $31.3 million (31.6%) for the nine
months ended May 31, 1998 as compared to the nine months ended
May 31, 1997. The decrease is due to a reduction in the number
of hardware systems integrated during the current period.Nichols
InfoTec revenues increased $15.1 million (127%) for the
nine months ended May 31, 1998 as compared to the nine months
ended May 31, 1997, primarily as a result of SAP software sales
and integration services as well as the award of new contracts
in the third quarter ended May 31, 1998. Nichols TXEN
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revenues have increased $21.9 million (209%) for the nine
months ended May 31, 1998 as compared to the nine months ended
May 31, 1997 primarily as a result of the acquisition of TXEN,
Inc. completed in August 1997.
OPERATING PROFIT. In the third fiscal quarter the Company
expensed, pre-tax, $2 million of purchased in-process research
and development activities related to the acquisition of
Mnemonic Systems, Inc. (MSI). Operating profit, including the $2
million write-off of purchased in-process research and
development, increased $0.6 million (14.0%) for the three months
and $2.9 million (21.3%) for the nine months ended May 31, 1998
as compared to the three months and nine months ended May 31,
1997. Operating profit, excluding the $2 million write-off of
purchased in-process research and development, increased $2.6
million (57.4%) for the three months and $4.9 million (36.2%)
for the nine months ended May 31, 1998 as compared to the three
months and nine months ended May 31, 1997. Direct and allocable
costs during fiscal year 1998 have 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 $8.5 million (51.6%) for
the nine months ended May 31, 1998 compared to the nine months
ended May 31, 1997, primarily as a result of the acquisition of
TXEN, Inc. completed in August 1997. Amortization of
intangibles increased $1.8 million (119.8%) for the nine months
ended May 31, 1998 as compared to the nine months ended May 31,
1997 primarily as a result of the amortization of the
intangibles recorded with the TXEN, Inc. acquisition completed
in August 1997. The $2 million pre-tax write-off of purchased
in-process research and development activities related to the
MSI acquisition, represents 0.7% of total costs and expenses for
the nine months ended May 31, 1998.
Total costs and expenses were 95.4% of revenues for the three
months and 94.3% for the nine months ended May 31, 1998 as
compared to 95.1% for the three months and 95.0% for the nine
months ended May 31, 1997.
OPERATING MARGIN. Operating margin, including the $2 million
write-off of purchased in-process research and development, was
4.6% for the three months and 5.7% for the nine months ended May
31, 1998 as compared to 4.9% for the three months and 5.0% for
the nine months ended May 31, 1997. Operating margin, excluding
the $2 million write-off of purchased in-process research and
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development was 6.4% for the three months and nine months ended
May 31, 1998. Defense and Intelligence realized a 5.4%
operating margin for the nine months ended May 31, 1998 as
compared to 4.6% for the nine months ended May 31, 1997 which
decrease was primarily because of the adverse affect of the
completion of two significant contracts in fiscal 1997.
Government Information Technology realized operating margins,
excluding the $2 million write-off of purchased in-process
research and development, of 6.2% for the nine months ended May
31, 1998 as compared to 5.2% for the nine months ended May 31,
1997. The improved margins are the result of increased margins
on modifications awarded to existing contracts during fiscal
year 1998. The $2 million write-off of purchased in-process
research and development related to MSI is associated with
Government Information Technology and represents a decrease of
0.7% operating margin for the nine months ended May 31, 1998.
Nichols InfoTec realized operating margins of 6.2% for the nine
months ended May 31, 1998 as compared to 9.8% for the nine months
ended May 31, 1997. The decrease is attributable to expenses
incurred in acquiring and training staff for new client projects
and development of additional sales and marketing infrastructure.
Nichols TXEN realized operating margins of 11.7% for the nine
months ended May 31, 1998 as compared to 3.0% for the nine months
ended May 31, 1997. The improved margins are the result of
the managed care operations acquired with the acquisition of
TXEN, Inc. completed in August 1997.
OTHER INCOME (EXPENSE). Other income (expense) decreased
$426,000 for the three months and $433,000 for the nine months
ended May 31 , 1998 as compared to the three months and nine
months ended May 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 nine
months ended May 31, 1998 primarily represents the Company's
share of the earnings of NCCIM, LLC a joint venture, 50% of
which is owned by the Company; while the comparable amount for
the nine months ended May 31, 1997 primarily represents the
Company's share of earnings of TXEN, Inc. As of August 1997,
TXEN, Inc. became a wholly-owned subsidiary of the Company.
Minority interest primarily represents the minority partner's
share of earnings of Nichols ENTEC, LLC a joint venture, 60% of
which is owned by the Company. The increase in minority
interest of $0.5 million for the nine months ended May 31, 1998
as compared to the nine months ended May 31,1997 is primarily
the result of an increase in SAP software sales and integration
services in this Nichols InfoTec unit.
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INCOME TAXES. Income taxes as a percentage of income before
taxes was 38.0% for the nine months ended May 31, 1998 as
compared to 36.3% for the nine months ended May 31, 1997. The
increase is primarily a result of the differences between
financial and taxable income related to the amortization of
intangibles.
NET INCOME. Net income, including the $2 million pre-tax
write-off of purchased in-process research and development,
increased $0.1 million (1.7%) for the three months and $1.3
million (14.2%) for the nine months ended May 31, 1998 as
compared to the three months and nine months ended May 31, 1997.
Net income, excluding the $2 million pre-tax write-off of
purchased in-process research and development, increased $0.9
million (51.2%) for the three months and $1.9 million (37.8%)
for the nine months ended May 31, 1998 as compared to the three
months and nine months ended May 31, 1997. The increases are a
result of the discussions above.
EARNINGS PER COMMON SHARE ASSUMING DILUTION. Earnings per
common share assuming dilution, including the $2 million pre-tax
write-off of purchased in-process research and development for
the three months and nine months ended May 31, 1998 were $0.24
and $0.74 as compared to $0.24 and $0.73 for the three months
and nine months ended May 31, 1997. Earnings per common share
assuming dilution, excluding the $2 million pre-tax write-off of
purchased in-process research and development for the three
months and nine months ended May 31, 1998 were $0.33 and $0.84.
Net income, including the $2 million pre-tax write-off of
purchased in-process research and development, increased $1.3
million (14.2%) for the nine months ended May 31, 1998 as
compared to the nine months ended May 31, 1997. Net income,
excluding the $2 million pre-tax write-off of purchased in-
process research and development, increased $1.9 million (37.8%)
for the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 1997. Weighted average common shares and
common equivalent shares increased 11.4% (1,399,330 shares) for
the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 1997.
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 $68.8 million and $79.8 million at May 31,
1998 and 1997, respectively. Operating activities provided cash
of $10.9 million and $1.7 million for the nine months ended May
31, 1998 and 1997, respectively.
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Investing activities used cash of $19.7 million and $7.3
million for the nine months ended May 31, 1998 and 1997,
respectively. Financing activities used cash of $6.8 million
for the nine months ended May 31, 1998 and provided cash of
$2.4 million for the nine months ended May 31, 1997.
Cash provided by operating activities increased $9.2 million
for the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 1997. The increase is the result of
increased net income ($1.3 million), an increase in the non-cash
adjustments to reconcile net income to net cash provided by
operations ($4.9 million) and changes in operating assets and
liabilities, net of the effects of acquisitions ($3.0 million).
Cash used for investing activities was $19.7 million for the
nine months ended May 31, 1998. The Company acquired all of the
capital stock of Mnemonic Systems, Inc. for aggregate
consideration of approximately $12.3 million. Purchases of
property and equipment were $7.1 million and $3.2 million for
the nine months ended May 31, 1998 and 1997, respectively. The
Company realized net proceeds of $1.3 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 $6.8 million for the
nine months ended May 31, 1998. The primary use of cash for
financing activities was during the first fiscal quarter of 1998
for the repayment of $10 million indebtedness under the bank
line of credit. The Company realized proceeds from the sale of
common stock of $3.9 million and $3.0 million for the nine
months ended May 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 no
outstanding borrowings on this line of credit at May 31, 1998.
The Company is regularly evaluating potential acquisition
candidates and expects to complete other transactions this
fiscal year. The purchase price allocation for TXEN, Inc. was
finalized during the first fiscal quarter of 1998. Of the total
purchase prince of $43.8 million, $29.9 million was allocated
to the following intangibles: $15.4 million to goodwill,
$12.7 million to other intangibles and $1.8 million to
capitalized software development. Goodwill and other
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intangibles of $27.4 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 million, pre-tax,
purchased in-process research and development and the recording
of approximately $9.9 million in goodwill which is being
amortized using the straight- line method over an estimated
useful life of fifteen years.
The Company is evaluating the realignment of certain business
areas, including the insurance business activities, in the fourth
quarter of fiscal 1998. In connection with this evaluation, it
will be determined whether any required reductions in the
carrying amount of certain intangibles will be required.
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 its existing capital resources,
together with available borrowing capacity, will be sufficient
for the next four fiscal quarters to fund operating needs,
finance acquisitions of property and equipment, and make
strategic acquisitions.
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 has reported using the new EPS basis
beginning in the second quarter ending February 28, 1998 and has
restated all prior period EPS amounts to conform to the
provisions of Statement No. 128.
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.
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FORM 10-Q
NICHOLS RESEARCH CORPORATION
MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Balance Sheets at May
31, 1998, and August 31, 1997 as well as the Consolidated
Statements of Income, Consolidated Statements of Changes in
Stockholders' Equity and Consolidated Statements of Cash Flows
for the nine months ended May 31, 1998 and 1997, have been
prepared in accordance with instructions to Form 10-Q and do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered
necessary for a fair presentation have been included.
January 13, 1999 By:Allen E. Dillard
---------------------- -----------------------
Date Allen E. Dillard
Corporate Vice President,Chief
Financial Officer and Corporate
Treasurer (Principal Finance and
Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to the
registrant's Quarterly Report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
NICHOLS RESEARCH CORPORATION
January 13, 1999 By:Allen E. Dillard
---------------------- -----------------------
Date Allen E. Dillard
Corporate Vice President,Chief
Financial Officer and Corporate
Treasurer (Principal Finance and
Accounting Officer)
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