================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 1999
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________
To _____________
____________________________
Commission File Number 0-15295
Nichols Research Corporation
(Exact name of registrant as specified in its charter)
____________________________
DELAWARE 63-0713665
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification no.)
4090 Memorial Parkway, South
Huntsville, Alabama 35802-1326
(256) 883-1140
(Address, including zip code and telephone number 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.
<PAGE>
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
14,155,230 SHARES OUTSTANDING ON February 28, 1999
____________________________
================================================================================
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
QUARTERLY REPORT FOR THE PERIOD ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the Three Months and Six Months Ended
February 28, 1999 and February 28, 1998 (Unaudited)....................... 1
Balance Sheets as of February 28, 1999 and August 31, 1998 (Unaudited).... 2-3
Statements of Changes in Stockholders' Equity for the Six Months
Ended February 28, 1999 and February 28, 1998 (Unaudited)................. 4
Statements of Cash Flows for the Six Months Ended February 28, 1999
and February 28, 1998 (Unaudited)......................................... 5
Notes to Financial Statements (Unaudited)................................. 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 10-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 20
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................... 21
Item 6. Exhibits and Reports on Form 8-K.......................................... 22
Signatures .......................................................................... 23
</TABLE>
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
----------------------------------- ----------------------------------
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
Restated Restated
------------------------------------------------------------------------
(amounts in thousands except share data)
<S> <C> <C> <C> <C>
Revenues ....................................... $ 98,616 $ 92,509 $ 199,965 $ 181,049
Costs and expenses:
Direct and allocable costs................. 81,645 76,976 166,323 150,920
General and administrative expenses........ 10,209 8,433 20,242 16,308
Amortization of intangibles.................. 1,041 1,193 2,062 2,288
Special charge............................. 4,297 - 4,297 -
-----------------------------------------------------------------------
Total costs and expenses............... 97,192 86,602 192,924 169,516
-----------------------------------------------------------------------
Operating profit................................ 1,424 5,907 7,041 11,533
Other income (expense):
Interest expense........................... (151) (103) (221) (193)
Other income, principally interest......... 148 311 294 596
Equity in earnings of unconsolidated
affiliates............................. 114 160 242 290
Minority interest in consolidated
subsidiaries........................... 68 (163) 2 (494)
-----------------------------------------------------------------------
Income before income taxes...................... 1,603 6,112 7,358 11,732
Income taxes.................................... 482 2,349 2,748 4,521
-----------------------------------------------------------------------
Net income...................................... $ 1,121 $ 3,763 $ 4,610 $ 7,211
=======================================================================
Earnings per common share....................... $ .08 $ .28 $ .33 $ .53
=======================================================================
Earnings per common share - assuming dilution... $ .08 $ .27 $ .32 $ .51
=======================================================================
Weighted average number of common shares........ 13,921,315 13,550,930 13,885,576 13,512,753
=======================================================================
Weighted average number of common
and common equivalent shares............... 14,261,779 14,050,049 14,206,186 14,035,987
=======================================================================
</TABLE>
NOTE: The Company has not declared or paid dividends in any of the periods
presented. All prior periods have been restated to reflect the acquisition of
Welkin Associates, Ltd., which was accounted for as a pooling of interests.
See accompanying notes.
1
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
Restated
-----------------------------------------------
(amounts in thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and temporary cash investments.................. $ 5,889 $ 11,275
Accounts receivable.................................. 116,556 113,392
Deferred income taxes................................ 2,513 2,488
Other................................................ 2,362 3,939
-----------------------------------------------
Total current assets............................. 127,320 131,094
Long-term investments.................................... 1,260 1,519
Property and equipment:
Computers and related equipment...................... 33,077 29,465
Furniture, equipment and improvements................ 13,479 12,210
Equipment-contracts.................................. 3,617 5,771
-----------------------------------------------
50,173 47,446
Less accumulated depreciation............................ 25,699 25,011
-----------------------------------------------
Net property and equipment........................... 24,474 22,435
Goodwill and other intangibles (net of accumulated
amortization)........................................ 55,267 57,262
Software development costs (net of accumulated
amortization)........................................ 4,052 3,928
Investment in affiliates................................. 9,938 9,607
Other assets............................................. 3,370 1,491
-----------------------------------------------
Total assets............................................. $ 225,681 $ 227,336
===============================================
</TABLE>
NOTE: The Company has not declared or paid dividends in any of the periods
presented. All prior periods have been restated to reflect the acquisition
of Welkin Associates, Ltd., which was accounted for as a pooling of
interests.
2
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
Restated
-------------------------------------------
(amounts in thousands except
per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $ 19,106 $ 24,278
Accrued compensation and benefits.................... 20,455 18,317
Income taxes payable................................. 158 1,681
Current maturities of long-term debt................. 997 997
Borrowings on line of credit......................... 5,000 5,000
Deferred revenue..................................... 397 1,797
Other................................................ 548 1,040
-------------------------------------------
Total current liabilities........................ 46,661 53,110
Deferred income taxes.................................... __ 354
Long-term debt:
Industrial development bonds......................... 1,113 1,335
Long-term notes...................................... 1,161 1,613
-------------------------------------------
Total long-term debt............................. 2,274 2,948
Minority interest in consolidated subsidiaries........... 289 1,177
Stockholders' equity:
Common stock, par value $.01 per share
Authorized - 30,000,000 shares
Issued 14,155,230 and 13,997,455 shares,
respectively..................................... 142 140
Additional paid-in capital........................... 97,729 95,631
Retained earnings.................................... 79,874 75,264
Less cost of treasury stock - 168,500 shares......... (1,288) (1,288)
-------------------------------------------
Total stockholders' equity....................... 176,457 169,747
-------------------------------------------
Total liabilities and stockholders' equity................ $ 225,681 $ 227,336
===========================================
</TABLE>
NOTE: The Company has not declared or paid dividends in any of the periods
presented. All prior periods have been restated to reflect the acquisition
of Welkin Associates, Ltd., which was accounted for as a pooling of
interests.
3
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
-----------------------------------------------------------------------------------------------
(amounts in thousands except share data)
For the Six Months Ended February 28, 1999
------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1998
(Restated) 13,997,455 $ 140 $ 95,631 $ 75,264 $ (1,288) $ 169,747
Exercise of stock options 79,700 1 822 - - 823
Employee stock purchases 78,075 1 1,276 - - 1,277
Net income - - - 4,610 - 4,610
-----------------------------------------------------------------------------------------------
Balance, February 28, 1999 14,155,230 $ 142 $ 97,729 $ 79,874 $ (1,288) $ 176,457
===============================================================================================
For the Six Months Ended February 28, 1998 - Restated
-----------------------------------------------------
Balance, August 31, 1997 13,553,346 $ 135 $ 90,076 $ 61,545 $ (1,288) $ 150,468
Exercise of stock options 167,523 2 1,709 - - 1,711
Employee stock purchases 49,421 - 1,053 - - 1,053
Adjustment for Welkin - - - (479) - (479)
Net income - - - 7,211 - 7,211
-----------------------------------------------------------------------------------------------
Balance, February 28, 1998 13,770,290 $ 137 $ 92,838 $ 68,277 $ (1,288) $ 159,964
===============================================================================================
</TABLE>
NOTE: The Company has not declared or paid dividends in any of the periods
presented. All prior periods have been restated to reflect the acquisition of
Welkin Associates, Ltd., which was accounted for as a pooling of interests.
4
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
February 28, February 28,
1999 1998
Restated
--------------------------------------
(amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,610 $ 7,211
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for doubtful accounts...................... 56 -
Depreciation......................................... 3,787 2,645
Amortization......................................... 2,062 2,288
Equity in earnings of unconsolidated affiliates...... (242) (290)
Minority interest.................................... (2) 494
Deferred taxes....................................... (379) 75
Special charges...................................... 4,297 -
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable.................................. (3,220) 5,956
Other assets......................................... (302) (1,502)
Accounts payable..................................... (5,172) (7,726)
Accrued compensation and benefits.................... 2,138 3,725
Income taxes payable................................. (1,523) 757
Other current liabilities............................ (1,683) 264
--------------------------------------
Total adjustments.................................... (183) 6,686
--------------------------------------
Net cash provided (used) by operating activities. 4,427 13,897
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (5,702) (5,245)
Purchase long-term investments............................ - (100)
Purchase capitalized software............................. (512) (355)
Payment for acquisition, net of cash...................... (5,200) -
Payment for investment in affiliates...................... (84) (1,028)
Proceeds from long-term investments....................... 259 1,145
--------------------------------------
Net cash used by investing activities............ (11,239) (5,583)
</TABLE>
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)CONTINUED
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
February 28, February 28,
1999 1998
Restated
--------------------------------------
(amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 2,100 2,764
Payments of long-term debt................................ (674) (492)
Proceeds from borrowings on line of credit................ 10,000 -
Payments on line of credit borrowings..................... (10,000) (10,000)
--------------------------------------
Net cash provided (used) by financing
activities..................................... 1,426 (7,728)
--------------------------------------
Net increase (decrease) in cash and temporary cash
investments.......................................... (5,386) 586
Cash and temporary cash investments at beginning
of period............................................ 11,275 23,964
======================================
Cash and temporary cash investments at end of period...... $ 5,889 $ 24,550
======================================
</TABLE>
5
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 1999
Note 1 - Basis of Presentation
---------------------
The condensed consolidated financial statements (and all other
information in this report) have not been examined by independent auditors, but
in the opinion of the Company, all adjustments, consisting of the normal
recurring accruals necessary for a fair presentation of the results for the
period, have been made. The condensed consolidated financial statements include
the accounts of Nichols Research Corporation and its majority-owned subsidiaries
and joint ventures. 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.
Note 2 - 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 it components. Adoption of Statement
No. 130 by the Company on September 1, 1998 had 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.
Note 3 - Reclassification
----------------
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
6
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 4 - Impairment of Long-lived Assets
-------------------------------
During the second quarter of fiscal year 1999 the Company evaluated the
operations of its Practice Management Services unit in accordance with Financial
Accounting Standards No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF, to determine if an adjustment was
necessary to the carrying value of the Company's intangible assets. Therefore,
in accordance with applicable accounting rules, management prepared an
undiscounted cash flow analysis over the estimated recovery period to determine
if these intangible assets were still recoverable. Management prepared the
analysis with assumptions that reflected its current outlook on the business.
Since the undiscounted cash flow model showed an impairment of the Company's
long-lived assets, the Company used a discounted cash flow model to measure the
fair value of these long-lived assets. The fair value calculation determined
that the fair value of the long-lived assets was less than book value. As a
result, in the second quarter of fiscal year 1999 the Company recorded a pretax
intangible asset impairment charge of $4.3 million which was included in Special
charges on the Consolidated Statements of Income for the quarter ended February
28, 1999.
Note 5 - Acquisitions
------------
On January 15, 1999, the Company completed the purchase of an
additional 35% ownership in Nichols ENTEC Systems, L.L.C (Nichols ENTEC).
Nichols ENTEC provides SAP(TM) R/3 implementation services to both Fortune 500
and mid-size companies and resells SAP(TM) R/3 software to mid-sized companies
in selected states. Aggregate consideration of approximately $5.2 millions was
paid at closing. Additional consideration is contingent upon achieving specified
operating results as defined in the purchase agreement. The goodwill of
approximately $4.1 million resulting from this transaction is being amortized
using the straight-line method over an estimated useful life of fifteen years.
Note 6 - Investment in Affiliates
------------------------
As of February 28, 1999 the Company holds a 50% interest in NCCIM,
L.L.C.. at an aggregate cost of $1,345,000. Undistributed equity earnings of
$766,000 are included in the February 28, 1999 Retained Earnings balance
reported in the Consolidated Balance Sheet.
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 7 - Line of Credit
--------------
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) expired in November, 1998 and was renewed for one year. The
short-term commitment agreement continues to be renewable annually and the long-
term commitment agreement ($50,000,000) is renewable in November, 2000. At
February 28, 1999, there was $5,000,000 outstanding on this line of
credit at an effective interest rate of 5.29 percent.
7
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 8 - Earnings Per Share
------------------
The following table sets forth the computation of earnings per common
share and earnings per common share assuming dilution:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
Restated Restated
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income and income available to common
stockholders and income available to
common stockholders after assumed
conversions............................ $ 1,121,000 $ 3,763,000 $ 4,610,000 $ 7,211,000
========================================================================
Denominator:
Denominator for earnings per common
share - weighted average common
shares................................. 13,921,315 13,550,930 13,885,576 13,512,753
Effect of dilutive securities:
Employee stock options................. 340,464 499,119 320,610 523,234
Denominator for earnings per common share
assuming dilution - adjusted
weighted average common shares
and assumed coversions................. 14,261,779 14,050,049 14,206,186 14,035,987
========================================================================
Earnings per common share....................... $ .08 $ .28 $ .33 $ .53
========================================================================
Earnings per common share assuming
dilution................................... $ .08 $ .27 $ .32 $ .51
========================================================================
</TABLE>
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 9 - Restatement
-----------
In connection with the Company's filing of a Form S-3 registration
statement unrelated to its subsidiary, Nichols TXEN Corporation (TXEN), the
Company engaged in discussions with the Staff of the Securities and Exchange
Commission (SEC) regarding the purchase price allocation related to its 1997
acquisition of TXEN, including the amount allocated to in-process research and
development. The Company and its independent auditors, Ernst & Young LLP,
believed the purchase price allocation recorded and related amortization
charges, were in accordance with widely recognized appraisal practices and
generally accepted accounting principles. However, the SEC Staff has recently
expressed views on in-process research and development as set forth in a letter
dated September 15, 1998 to the American Institute of Certified Public
Accountants. The Company, in consultation with its independent auditors and
based on discussions with the Staff, has adjusted the amount originally
allocated to acquired in-process research and development and, accordingly, has
restated its 1997 and 1998 consolidated financial statements. As a result, the
1997 write-off of acquired research and development was decreased $3.5 million
from the $12.0 million amount previously recorded to $8.5 million.
8
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Intangible assets and net income were increased by a like amount because the
write-off was not tax deductible. For 1998, amortization of intangibles
increased $225 thousand or $0.02 per common share and $0.01 per common share
assuming dilution, respectively. Accordingly, 1998 earnings per share and
earnings per common share assuming dilution were reduced by $0.02 and $0.01 to
$1.04 and $1.01, respectively. For the first two quarters of 1999, amortization
of intangibles increased $112 thousand.
9
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY REPORT
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 COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1998, AND IN THE FOLLOWING
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION OF THIS QUARTERLY 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.
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 other
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 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, state and local government
agencies and judicial systems. The Healthcare Information Technology unit,
formerly Nichols SELECT, provides information and administrative services to
clients in the healthcare and insurance industries. For the six months ended
February 28, 1999, the percentage of total revenues attributable to the four
business units was approximately 58% for Defense and Intelligence, 19% for
Government IT, 10% for Commercial IT, and 13% for Healthcare IT.
Risk Factors
- ------------
The Company's business and financial performance are subject to risks
and uncertainties, including those discussed below.
10
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Acquisition Strategy
- --------------------
Expansion through acquisitions is an important component of the
Company's overall business strategy. The Company has successfully completed
thirteen 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.
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
11
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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 th 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 th 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.
12
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Results of Operations
- ---------------------
The following tables set forth, for the periods indicated, the percentage
which certain items in the consolidated statements of income bear to
consolidated revenues, and the percentage change of such items for the periods
indicated:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
---------------------------------------------- ----------------------------------------------
February 28, February 28, February 28, February 28,
1999 1998 Percentage 1999 1998 Percentage
Restated Change Restated Change
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 6.6% 100.0% 100.0% 10.4%
Costs and expenses:
Direct and allocable costs..... 82.8 83.2 6.1 83.2 83.3 10.2
General and administrative
expenses..................... 10.3 9.1 21.1 10.1 9.0 24.1
Amortization of intangibles.... 1.1 1.3 (12.7) 1.0 1.3 (9.9)
Special charge................. 4.4 - N/A 2.2 - N/A
----------------------------------------------------------------------------------------------
Total costs and expenses... 98.6 93.6 12.2 96.5 93.6 13.8
----------------------------------------------------------------------------------------------
Operating profit.................... 1.4 6.4 (75.9) 3.5 6.4 (38.9)
Interest expense.................... (0.2) (0.1) 46.6 (0.1) (0.1) 14.5
Other income, principally interest.. 0.2 0.3 (52.4) 0.2 0.3 (50.7)
Equity in earnings of unconsolidated
affiliates......................... 0.1 0.2 (28.8) 0.1 0.2 (16.6)
Minority interest in consolidated
Subsidiaries................... 0.1 (0.2) 141.7 0.0 (0.3) 100.4
----------------------------------------------------------------------------------------------
Income before income taxes.......... 1.6 6.6 (73.8) 3.7 6.5 (37.3)
Income taxes........................ 0.5 2.5 (79.5) 1.4 1.4 (39.2)
----------------------------------------------------------------------------------------------
Net income.......................... 1.1% 4.1% (70.2)% 2.3% 2.3% (36.1)%
==============================================================================================
</TABLE>
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
The table below presents contract award and backlog data for the periods
indicated:
February 28, February 28,
1999 1998
Restated
---------------------------------------
(amounts in thousands)
Contract award amount..................... $ 105,484 $ 103,241
Backlog (with options).................... $ 1,156,487 $ 1,186,336
Backlog (without options)................. $ 336,622 $ 496,503
13
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
COMPARISON OF OPERATING RESULTS FOR FISCAL SECOND QUARTER 1999 WITH FISCAL
SECOND QUARTER 1998
REVENUES. Revenues increased $6.1 million (6.6%) for the three months and
$18.9 million (10.4%) for the six months ended February 28, 1999 as compared to
the three months and six months ended February 28, 1998. The revenues of the
Defense and Intelligence unit, representing approximately 58% of the Company's
consolidated revenue increased $4.1 million (3.7%) for the six months ended
February 28, 1999 as compared to the six months ended February 28, 1998
primarily as a result of continued growth in existing contract base. The
revenues of the Government IT unit, representing approximately 19% the Company's
consolidated revenue, increased $5.2 million (15.5%) for the six months ended
February 28, 1999 compared to the six months ended February 28, 1998 primarily
as a result of the acquisition of Mnemonic Systems, Incorporated. The revenues
of the Commercial IT unit, representing approximately 10% of the Company's
consolidated revenue, increased $3.4 million (20.4%) for the six months ended
February 28, 1999 as compared to the six months ended February 28, 1998
primarily as a result of its expanded business base. Revenues of the Healthcare
IT unit, representing 13% of the Company's consolidated revenue, increased $6.2
million (32.5%) for the six months ended February 28, 1999 compared to the six
months ended February 28, 1998 as the result of continued growth in the number
of customers contracted and expanded use of its other services by existing
customers.
OPERATING PROFIT. In the second quarter, the Company recorded a pretax
intangible asset impairment charge of $4.3 million related to its Practice
Management Service unit. Operating profit, including the $4.3 million intangible
asset impairment charge, decreased $4.5 million (75.9%) for the three months and
$4.5 million (38.9%) for the six months ended February 28, 1999 as compared to
the three months and six months ended February 28, 1998. Operating profit,
excluding the $4.3 million intangible asset impairment charge, decreased $0.2
million (3.1%) for the three months and $0.2 million (1.7%) for the six months
ended February 28, 1999 as compared to the three months and six months ended
February 28, 1998.
Direct and allocable costs increased $15.4 million (10.2%) for the six
months ended February 28, 1999 as compared to the six months ended February 28,
1998, as a result of increases in revenue. General and administrative expenses
increased $3.9 million (24.1%) for the six months ended February 28, 1999 as
compared to the six months ended February 28, 1998, primarily as a result of the
acquisition of Mnemonic Systems, Incorporated completed in April 1998.
Amortization of intangibles decreased $0.2 million (9.9%). The $4.3 million
intangible asset impairment charge related to the Practice Management Services
division, represents 2.2% of the total costs and expenses for the six months
ended February 28, 1999.
Total costs and expenses were 98.6% of revenue for the three months and
96.5% for the six months ended February 28, 1999 as compared to 93.6% for the
three months and 93.6% for six months ended February 28, 1998.
14
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
OPERATING MARGIN. Operating margin, including the $4.3 million intangible
asset impairment charge, was 1.4% for the three months and 3.5% for the six
months ended February 28, 1999 as compared to 6.4% for the three months and six
months ended February 28, 1998. Operating margin, excluding the $4.3 million
intangible asset impairment charge, was 5.8% for the three months and 5.7% for
the six months ended February 28, 1999. The Defense and Intelligence unit
realized a 6.0% operating margin for the six months ended February 28, 1999 as
compared to 5.1% for the six months ended February 28, 1998. This improvement is
principally the result of increases in award fees and margins on time-and-
material contracts. The Government IT unit realized a 7.0% operating margin for
the six months ended February 28, 1999 as compared to 7.7% for the six months
ended February 28, 1998. This decrease is primarily the result of a declines in
high margin contracts and lower margins on modifications awarded to existing
contracts. The Commercial IT unit realized a (7.1%) operating margin for the six
months ended February 28, 1999 as compared to 5.1% for the six months ended
February 28, 1998. The Commercial IT unit is in the final phases of transforming
itself into a market focused organization that services specific target markets.
Over the first two quarters of fiscal year 1999, the Commercial IT unit incurred
increased costs associated with underutilization of staff, hiring employees in
anticipation of contracts that did not materialize, infrastructure costs, and
performing unprofitable contracts. New business and operating strategies have
been implemented to correct these problems and reduce costs. The negative effect
on operating profits and margins in the Commercial IT unit is expected to
decrease during the final two quarters of fiscal year 1999 resulting in improved
profits and margins in the Commercial IT unit. The Healthcare IT unit realized a
12.2% operating margin, excluding the $4.3 million intangible asset impairment
charge, for the six months ended February 28, 1999 as compared to 12.6% for the
six months ended February 28, 1998. The $4.3 million intangible asset impairment
charge is related to the Healthcare IT unit's Practice Management Services
division and represents a decrease of 2.2% in the Company's operating margin for
the six months ended February 28,1999.
OTHER INCOME (EXPENSE). Other income (expense) decreased $36,000 for the
three months and increased $118,000 for the six months ended February 28, 1999
as compared to the three months and six months ended February 28, 1998. 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 comprised of the cost
associated with the long-term borrowings of the Company, the commitment fee on
unused line of credit, and the average outstanding borrowing on the Company's
line of credit.
Equity in earnings of unconsolidated affiliates for the six months ended
February 28, 1999 and 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.
Minority interest primarily represents the minority partner's share of
earnings of Nichols ENTEC, L.L.C. a joint venture, 95% of which is owned by the
Company as of January 15,1999 (See Note 5 of Notes of Condensed Consolidated
Financial Statements). The decrease in minority interest of $0.5 million for the
six months ended February 28, 1999 as compared to the six months ended February
28, 1998 is principally the result of decreased profitability and the decrease
of the minority partner interest.
15
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
INCOME TAXES. Income taxes as a percentage of income before taxes was
37.3% for the six months ended February 28, 1999 as compared to 38.5% for the
six months ended February 28, 1998. The decrease is primarily a result of the
differences between financial and taxable income related to the amortization of
intangibles.
NET INCOME. Net income, including the $4.3 million intangible asset
impairment charge, decreased $2.6 million (70.2%) for the three months and $2.6
million (36.1%) for the six months ended February 28, 1999 as compared to the
three months and six months ended February 28, 1998. Net income, excluding the
$4.3 million intangible asset impairment charge, decreased $0.1 million (3.8%)
for the three months and $0.1 million (1.4%) for the six months ended February
28, 1999 as compared to the three months and six months ended February 28, 1998.
The decreases are a result of the matters discussed above.
EARNINGS PER SHARE ASSUMING DILUTION. Earnings per share assuming
dilution, including the $4.3 million intangible asset impairment charge, were
$0.08 for the three months and $0.32 for the six months ended February 28, 1999
as compared to $0.27 for the three months and $0.51 for the six months ended
February 28, 1998. Earnings per share assuming dilution, excluding the $4.3
million intangible asset impairment charge, were $0.25 for the three months and
$0.50 for the six months ended February 28, 1999. Net income, including the $4.3
million intangible asset impairment charge, decreased 36.1% ($2.6 million),
while weighted average common shares and common equivalent shares increased 1.2%
(170,199 shares) for the six months ended February 28, 1999 as compared to the
six months ended February 28, 1998. Net income, excluding the $4.3 million
intangible asset impairment charge, decreased 1.4% ($0.1 million) for the six
months ended February 28, 1999
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 $80.3 million and $77.1 million at February 28,
1999 and 1998, respectively. Operating activities provided cash of $4.4 million
and $13.9 million for the six months ended February 28, 1999 and February 28,
1998, respectively. Investing activities used cash of $11.2 million and $5.6
million for the six months ended February 28, 1999 and February 28, 1998,
respectively. Financing activities provided cash of $1.4 million for the six
months ended February 28, 1999 and used cash of $7.7 million for the six months
ended February 28, 1998.
Cash provided by operating activities decreased by $9.5 million for the
six months ended February 28, 1999 as compared to the six months ended February
28, 1998 as a result of changes in operating assets and liabilities.
Cash used for investing activities was $11.2 million for the six months
ended February 28, 1999. The Company purchased an additional 35% ownership in
Nichols ENTEC for approximately $5.2 million. Purchases of property and
equipment were $5.7 million and $5.2 million for the six months ended February
28, 1999 and 1998, respectively.
16
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Cash provided by financing activities was $1.4 million for the six months
ended February 28, 1999. The Company realized proceeds from the sale of common
stock of $2.1 million and $2.8 million for the six months ended February 28,
1999 and 1998, respectively. Cash of $0.7 million was used to reduce long-term
debt.
The Company negotiated its bank line of credit in November 1998. 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. At February
28, 1999, there was $5,000,000 outstanding on this line of credit.
The Company regularly evaluates potential acquisition candidates and has
completed two acquisitions to date in the third quarter of fiscal year 1999. On
March 10, 1999 the Company purchased Murray & West, Inc./Trans-Link USA, Inc.
for approximately $14.6 million and on March 17, 1999 it purchased Prism
Consulting Group, L.L.C. for approximately $5.3 million. These acquisitions
complement the Company's SAP(TM) implementation, integration, and support
business.
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 its 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.
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.
17
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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
18
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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 updated status of each major category of mission
essential systems is as follows:
<TABLE>
<CAPTION>
System Category Phase Estimated Date For Compliance
==================================================== ================= ========================================
<S> <C> <C>
Mission Essential Software Systems Renovation April 1999
Mission Essential Computational Systems Renovation April 1999
Mission Essential Network Systems Validation Completed
Mission Essential Facilities Systems Validation Completed
Mission Essential Customer Systems Renovation April 1999
Mission Essential Vendor-Supplied Services Validation Unknown
</TABLE>
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.
While the Mission Essential Vendor Supplied services category is listed
as having an Unknown estimated date for compliance, many of the services within
this category have had their validation phase completed.
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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.
19
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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 8,830 hours of Year 2000 compliance work, and purchased
new equipment valued at $27,000, for a total cost of $542,000.
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 3 - Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
20
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On January 14, 1999, the annual meeting of the Company's stockholders
was held at the Corporate Headquarters in Huntsville, Alabama. Proxies were
solicited and cast by the Company's transfer agent, ChaseMellon Shareholder
Services, New York, New York. Matters put to vote and acted upon were the
proposal to amend the Company's 1988 Employee Stock Purchase Plan to increase
the number of shares, amend the Company's 1988 Employee Stock Purchase Plan to
change the exercise price of options issued under the Plan, and to ratify
appointment of Ernst & Young LLP as the Company's independent auditors for the
current fiscal year.
All directors were elected for a term of one year and will serve until
the next annual meeting. Directors elected were as follows:
For Withheld
--- --------
Chris H. Horgen 11,297,453 136,949
Michael J. Mruz 11,300,907 133,495
Charles A. Leader 11,005,565 428,837
Roy J. Nichols 11,308,583 125,819
Patsy L. Hattox 11,307,109 127,293
Roger P. Heinisch 11,338,244 96,158
John R. Wynn 11,260,433 173,969
William E. Odom 11,337,299 97,103
James R. Thompson, Jr. 11,338,922 95,480
Phil E. DePoy 11,338,650 95,752
Thomas L. Patterson 11,308,828 125,574
David Friend 11,336,561 97,841
Daniel W. McGlaughlin 11,328,168 106,234
The Amendment to the Company's 1988 Employee Stock Purchase Plan to
increase the number of shares by 1,000,000 was approved. Voting for approval
were 8,260,580 shares, voting against were 1,256,428 shares, and 151,496 shares
abstained.
The Amendment to the Company's 1988 Employee Stock Purchase Plan to
change the exercise price of options issued was approved. Voting for amendment
were 10,201,172 shares, voting against 1,133,895 shares, and 99,335 shares
abstained.
Ernst & Young, LLP was ratified to serve as the Company's independent
auditors for the fiscal year ending August 31, 1999. Voting for ratification
were 11,341,137 shares, voting against were 19,308 shares and 73,957 shares
abstained.
21
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
10 Memorandum of Understanding Regarding Michael J. Mruz's
Resignation as Nichols Research CEO*
10.1 Amendment No. 1 to Employment Agreement between
Nichols Research Corporation and Charles A. Leader*
27 Financial Data Schedule
* Denotes management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report.
b) Reports on Form 8-K. On January 15, 1999, the Company filed a current
report on Form 8-K/A dated August 31, 1997, to revise Footnote 1 contained in
the Notes to the TXEN, Inc. financial statements. This revision added a section
entitled "Research and Development" detailing the research and development
costs incurred by TXEN, Inc. during fiscal years June 30, 1996 and 1997.
On February 5, 1999, the Company filed a current report Form 8-K dated January
15, 1999, reporting (i) the filing of Form S-1 Registration Statement relating
to the initial public offering of stock by Nichols TXEN Corporation, (ii) the
Company's acquisition of an additional 35% interest in Nichols ENTEC Systems,
L.L.C. and (iii) the signing of a Letter of Intent to acquire all of the capital
stock of Murray and West, Inc. and Trans-Link USA, Inc.
22
<PAGE>
FORM 10-Q
NICHOLS RESEARCH CORPORATION
SIGNATURES
MANAGEMENT REPRESENTATION
-------------------------
The accompanying unaudited Consolidated Balance Sheets at February
28, 1999, and August 31, 1998 as well as the Consolidated Statements of Income,
Consolidated Statements of Changes in Stockholders' Equity and Consolidated
Statements of Cash Flows for the six months ended February 28, 1999 and 1998,
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.
April 14, 1999 By: Allen E. Dillard
- -------------- -------------------
Date Allen E. Dillard
Corporate Vice President, Chief
Financial Officer and Corporate
Treasurer (Principal Financial
and Accounting Officer)
Pursuant to the requirements 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
April 14, 1999 By: Allen E. Dillard
- -------------- -------------------
Date Allen E. Dillard
Corporate Vice President, Chief
Financial Officer and Corporate
Treasurer (Principal Financial
and Accounting Officer)
23
EXHIBIT 10.1
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
NICHOLS RESEARCH CORPORATION
AND
CHARLES A. LEADER
Dated: March 1, 1999
<PAGE>
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT dated October 26,
1998 (the "Employment Agreement"), is entered into on this the 1st day of March,
1999, by NICHOLS RESEARCH CORPORATION (the Company") and CHARLES A. LEADER
("Employee"). Unless otherwise defined, capitalized terms used herein shall have
the meaning ascribed to such terms in the Employment Agreement.
W I T N E S S E T H:
WHEREAS, Nichols TXEN Corporation, a wholly-owned subsidiary of the
Company, filed a Form S-1 Registration Statement with the Securities and
Exchange Commission on January 22, 1999, to register 2,500,000 shares of its
$.01 par value common stock in an initial public stock offering (the "IPO"); and
WHEREAS, the Employment Agreement provides that Employee would be
issued a stock option to purchase shares of Nichols TXEN Corporation common
stock pursuant to the Nichols TXEN Corporation 1998 Stock Option Plan which
option would be converted to a stock option to purchase shares of the Company's
common stock if the IPO was not completed within four months of the date of the
Employment Agreement (the "Conversion Period"); and
WHEREAS, it is not anticipated that the IPO will be completed within
the Conversion Period; and
WHEREAS, the Company and the Employee desire to revise the Employment
Agreement to extend the Conversion Period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the undersigned parties do hereby amend the Employment Agreement as
follows:
1. The sixth sentence of Section 4(c) of the Employment
Agreement is hereby revised to delete the phrase "within four months of
the date of this Agreement" and to substitute in its place the phrase
"before September 1, 1999." Except as amended above, the Employment
Agreement shall remain in full force and effect according to its
terms and conditions.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto executed this Amendment
Number One to Employment Agreement on the date and year first above written.
NICHOLS RESEARCH CORPORATION
By:Michael J. Mruz
----------------------------------------
Michael J. Mruz, Chief Executive Officer
Charles A. Leader, Employee
-----------------------------------------
Charles A. Leader, Employee
EXHIBIT 10.2
MEMORANDUM OF UNDERSTANDING
The following are points of understanding regarding Michael J. Mruz's
resignation as Nichols Research CEO.
- - Michael J. Mruz resigns as Nichols Research CEO effective March 15, 1999.
Mr. Mruz will remain in a regular full-time employment status during the 60
day notification period (March 15, 1999 to May 14, 1999), which would then
be followed by six months severance payment (per employment agreement).
- - Mr. Mruz will remain in a Temporary-On-Call (TOC) status until December
31, 2000, to permit Nichols Research stock options to continue to vest; and
should the company be sold during that time or some form of agreement be
consummated during this time with such sale planned to occur during some
reasonable time after December 31, 2000, then Mr. Mruz would enjoy the same
benefits as any other option holder regarding acceleration of vesting of
any unvested options.
- - The above does not change any other aspect of the Nichols Research stock
options that have previously been granted to Mr. Mruz (i.e., the 45,000
options that expire on August 16, 1999, if not exercised by then are
unaffected by the above).
- - Mr. Mruz will support Chris Horgen on matters he determines, if any,
during the 60 day notification period and during the subsequent period
(until December 2000). No compensation or benefits will be paid other than
that associated with being a regular full-time employee during the 60 day
notification period. Mr. Mruz will receive a six month severance payment.
- - Mr. Mruz will remain on the Nichols Research Board until his current term
expires or other such events occur that would dissolve the current board.
- - Mr. Mruz will resign as a member of the board of Nichols TXEN Corporation
and understands he will not receive Nichols TXEN stock options in the event
that the Nichols TXEN IPO is effective.
- - Mr. Mruz will work with Pat Hattox and Scott Parker regarding the normal
transition of health care benefits, 401k, etc.
- - Mr. Mruz will remove personal items from his office over the next couple
of weeks. He will retain access to Nichols e-mail and voice mail through
May 14, 1999.
- - Mr. Mruz will retain the phone in his car and the personal computer he has
at his home. At the end of the 60 day notification period, the company paid
wireless service will cease.
- - At the end of the 60 day notification period, Mr. Mruz will turn in his
Nichols badge.
Michael J. Mruz March 15, 1999 Chris H. Horgen March 15, 1999
- --------------- -------------- --------------- --------------
Michael J. Mruz Date Chris H. Horgen Date
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