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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED AUGUST 31, 1997.
( ) 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
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NICHOLS RESEARCH CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 63-0713665
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4040 SOUTH MEMORIAL PARKWAY
HUNTSVILLE, ALABAMA 35802-1326
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(Address of principal executive offices) (Zip Code)
The registrant's telephone number including area code: (205) 883-1140
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of November 3, 1997, there were 13,089,417 shares outstanding of Nichols
Research Corporation voting Common Stock, $.01 par value. The aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $274,613,775 based on the closing price of such stock as reported
by the Nasdaq National Market on November 3, 1997, assuming that all shares
beneficially held by officers and members of the registrant's Board of Directors
are shares owned by "affiliates," a status which each of the officers and
directors individually disclaims.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- - --------- -------------------
Portions of the Proxy Statement Part III
for the January 8, 1998
Annual Shareholders' Meeting
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Except for historical information contained herein, this document contains
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. These risks and uncertainties
discussed in more detail in the Management's Discussion and Analysis of
Financial Conditions and Results of Operations section of this Annual Report.
These forward-looking statements can be generally identified as such because the
content of the statements will usually contain such words as the Company or
management "believes," "anticipates," "expects," "hopes," and words of similar
import. Similarly statements that describe the Company's future plans,
objectives, goals, of strategies are forward-looking looking statements.
This Annual Report on Form 10-K/A amends and supersedes, to the extent set forth
herein, the Registrant's Annual Report on Form 10-K for the year ended August
31, 1997 previously filed on November 28, 1997.
DESCRIPTION
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PART I Item 1. Business
PART II Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
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PART I
ITEM 1. BUSINESS
GENERAL
As used in this report, the term "the Company" means Nichols Research
Corporation and its majority-owned subsidiaries and joint ventures.
The Company is a premier provider of high-performance technology-based
solutions and services where information access, movement, and evaluation are
mission critical to an organization's success. The Company provides these
services to a wide range of clients, in four markets: national security,
government information technology ("IT"), commercial IT, and healthcare IT. The
Company's substantial expertise and capabilities in a wide range of technologies
have been built over a 21-year period of providing advanced development,
scientific and application services to U.S. military programs, including air
defense systems, national and theater missile defense systems, and weapons
development programs. These activities have allowed the Company to build and
maintain a foundation of advanced skills in: systems engineering; command,
control, communication, computers and intelligence ("C4I") systems; virtual
reality-based training systems; test and evaluation; naval architecture; high
performance systems integration; information systems support; network and
computer facility outsourcing and management; software and systems development;
data warehousing and mining; and systems security. The Company's advanced
technical capabilities gained while performing services for mission critical
federal projects provide the Company with a technological competence which the
Company is transferring to the commercial sector. The Company today addresses
the technology needs of a diverse customer base by applying its state-of-the-art
technical capabilities in commercial system integration, simulation, software
development and client-server architectures, including SAP(TM) consulting. As a
result, the Company has expanded the market for its services by offering
innovative technical solutions to customers' needs. Although the Company's
traditional military technology business has continued to grow, other growing
markets for the Company's services now represent approximately 47% of revenues.
Market Overview
- Information Technology Market -- Federal Government
The U.S. Government is the largest single buyer of IT. Federal
Sources, Inc. ("Federal Sources"), an independent market research firm
specializing in the federal market, estimates that U.S. Government IT spending
was $27.9 billion in the Government's fiscal year 1996 (which ended September
30, 1996) and will be $28.3 billion in fiscal year 1997, up 1.4%. Federal
Sources estimates that IT spending by civilian agencies will increase from $16.5
billion in fiscal year 1996 to $17.1 billion in fiscal year 1997, up 6.0%. IT
spending by the Department of Defense is expected to increase in the next few
years, although it is expected to decrease 1.8% from $11.4 billion in fiscal
year 1996 to $11.2 billion in fiscal year 1997. Federal Sources estimates that
total U.S. Government IT spending will increase at an average annual rate of
between 6% and 8% over the next few years.
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- Information Technology Market -- Commercial Sector
INPUT, an independent market research firm, estimated that the
total commercial IT services market in the United States would be $173 billion
in 1995. This market is expected to grow at a 14% average annual rate over the
next five years. The market growth is expected to be driven by a growing world
economy, increased competition and shorter technology cycles which are forcing
more companies to "outsource" their IT services. Over the last few years, the
increase in business process engineering projects has also resulted in companies
focusing on their core businesses and outsourcing more non-core functions.
The components of the market in which the Company participates
- -- professional services (including consulting, custom software development, and
training), systems integration, outsourcing and system software products -- are
all showing growth. INPUT estimated that the professional services segment was
$26 billion in 1995; the systems integration segment was $12 billion; the
outsourcing segment was $19 billion; and the systems software products segment
was $26 billion. IT spending in the markets that the Company is targeting, such
as healthcare, insurance, facility management, and state and local governments,
is expected to grow 10% to 20% annually over the next few years.
Business Strategy
The Company's business strategy consists of three key
elements: (i) maintain the Company's leadership in technology applications in
its current markets; (ii) apply the Company's technology base to create
solutions for new clients in chosen markets; and (iii) make strategic
acquisitions and form alliances to gain industry knowledge and thereby provide a
sound basis for expanding the business base of the Company.
Maintain Technology Leadership. The Company's substantial
expertise and capabilities in a wide range of technologies have been built over
a 21-year period of providing advanced development, scientific, and application
services to U.S. military programs, including air defense systems, strategic and
theater missile defense systems, and weapons development programs. The Company
believes that, because of its expertise and capabilities with such a wide range
of technologies, it has an advantage over its competitors in providing
information technology and other technical business services based on these
technologies. The Company will seek to maintain this advantage by keeping pace
with new developments in technology and by continuing to compete for contracts
which will require that the Company provide high-quality, sophisticated
technical solutions to clients based on the use of advanced technologies.
Apply Technology To Create Solutions For New Clients. The
Company believes that the creative use of its technology expertise and
capabilities to provide innovative, focused technical solutions for its clients
has been largely responsible for the Company's success. The Company intends to
use its base of technical expertise and capabilities in network design, systems
integration, software development, simulation technology, and Internet services
to create solutions for new clients in government, healthcare, insurance, and
other commercial markets.
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Make Strategic Acquisitions And Form Alliances. The Company's
acquisition program is a key component of its overall business strategy. The
Company will make strategic acquisitions and form alliances that will allow the
Company (i) to develop technical services which it does not currently provide,
(ii) to target markets that it does not currently serve and gain industry
knowledge in such markets, and (iii) to develop strategic relationships with
clients.
In order to better execute its business strategy, the Company
is organized into the following four strategic business units focused on four
broad markets served by the Company:
NICHOLS FEDERAL provides information services to U.S. defense
and intelligence agencies. For the year ended August 31, 1997, Nichols Federal
produced approximately 53% of the Company's revenues.
NICHOLS INFOFED provides information services and systems
integration to federal, state and local governmental agencies. For the year
ended August 31, 1997, Nichols InfoFed produced approximately 36 % of the
Company's revenues.
NICHOLS INFOTEC provides information technology solutions to
commercial customers and selected state government agencies. For the year ended
August 31, 1997, Nichols InfoTec produced approximately 7% of the Company's
revenues.
NICHOLS SELECT provides information services and systems
integration to healthcare and insurance industries. For the year ended August
31, 1997, Nichols SELECT produced approximately 4% of the Company's revenues.
Effective November 5, 1997, the name Nichols SELECT was changed to Nichols TXEN.
Acquisitions and Alliances
Since September 1, 1994, the Company has successfully
completed eight strategic acquisitions and alliances to expand its business into
other markets and gain industry knowledge. The key acquisitions and alliances
completed during this period are:
Communications & Systems Specialists, Inc. ("CSSi"). In
September 1994, the Company acquired CSSi, which provides information systems
development and services primarily in client-server systems development for
federal government agencies. This acquisition enhanced the Company's ability to
provide information development services.
Conway Computer Group ("CCG"). In May 1995, the Company
acquired CCG, which provides information technology products and services to a
variety of commercial customers. As a result of the CCG acquisition, the Company
expanded its business to include computerized workers' compensation claims,
administration and risk management services. CCG also provides IT services to a
variety of commercial customers, including software development and consulting
services. CCG provides support services to customers with IBM business computer
systems. Effective October 31, 1997, the name Conway Computer Group was changed
to Nichols InfoTec Corporation.
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Computer Services Corporation ("CSC"). In June 1995, the
Company acquired CSC, which provides transaction and practice management system
services, a computer-based medical management system, and a complete billing and
accounts receivable management service to physicians and other medical
providers. This acquisition expands the Company's commitment to IT services in
the healthcare industry by providing the Company with a core business base in
computerized transaction processing and related IT services. Effective September
23, 1996, CSC was merged into Nichols SELECT Corporation which was subsequently
renamed Nichols TXEN Corporation.
HealthGate Data Corporation ("HealthGate"). In October 1995,
the Company acquired a 20% interest in HealthGate, which is an Internet-based
provider of medical information, including on-line information retrieval, access
to medical information companies and on-line continuing education programs. The
Company has entered into a strategic alliance with HealthGate under which the
Company performs systems development work for HealthGate. As a result of this
investment and strategic alliance, the Company receives Internet advertising
exposure for its services.
Advanced Marine Enterprises, Inc. ("AME"). In May 1996,
the Company acquired AME, a leading naval architecture and marine technical
services firm. AME also develops simulation and virtual reality technology for
naval and marine applications and provides support in ship acquisition
management, production support, human systems integration and ship survivability
and protection. AME also sells ship simulators and virtual reality trainers to
the international commercial ship building industry. Approximately 80% of AME's
business is with the U.S. Navy. The acquisition substantially expanded the
Company's presence in the Washington, D.C. area and provides an opportunity for
the Company to expand its business relationship with the U.S. Navy.
Intertech Management Group, Inc. ("Intertech"). During
fiscal year 1997, the Company acquired approximately 36% of the capital stock of
Intertech. Intertech provides software and data processing services to the
telecommunications industry.
NCCIM L.L.C ("NCCIM"). In fiscal year 1997, NCCIM, a joint
venture equally owned by the Company and Colsa Corporation, was formed and
awarded a five year contract having a value with options of $193 million for
Information Mission Area Support Services for the U.S. Army Aviation and Missile
Command and other federal, state and local government agencies.
TXEN, Inc. ("TXEN"). In fiscal year 1995, the Company
purchased 19.9% of TXEN with an option to purchase the remaining 80.1%. In
August 1997, the Company exercised its option to purchase the remaining 80.1% of
the capital stock of TXEN. TXEN provides information technology products and
services to the managed healthcare industry, including computerized claims
processing and administration services. As a result of the acquisition of TXEN,
the Company has enhanced its knowledge of the healthcare industry and acquired a
business base in a rapidly expanding segment of the healthcare information
services industry. TXEN was merged into Nichols SELECT Corporation, which has
been named Nichols TXEN Corporation.
Nichols Federal
Nichols Federal provides technical services to U.S. defense
agencies. For the year ended August 31, 1997, Nichols Federal produced
approximately 53% of the Company's revenues.
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Nichols Federal provides systems engineering, systems
analysis, simulation development, and systems integration for the defense and
intelligence technical services market. The Company's capabilities include
optics; guidance and control; software engineering; virtual reality trainers and
simulations; naval architecture; and C4I. These technical services are rendered
primarily for the U.S. Army, U.S. Navy, U.S. Air Force, and national agencies.
Many of the Company's contracts are not project specific, but require that the
Company provide technical services to a variety of weapons development and other
projects.
The Company has provided technical services related to missile
defense since 1983 when the Strategic Defense Initiative Organization ("SDIO")
was formed. In 1993, SDIO changed its name to the Ballistic Missile Defense
Organization ("BMDO"). BMDO's mission continues to be Ballistic Missile Defense
("BMD") with emphasis on Theater Missile Defense ("TMD") and National Missile
Defense ("NMD"). The Company's contract revenues from BMD programs were
approximately $56.4 million in fiscal 1995, $63.0 million in fiscal 1996 and
$76.5 million in fiscal 1997. Approximately 20% of the Company's revenues in
fiscal 1997 were from contracts related to BMD, compared to 26% of revenues in
fiscal 1996, and 33% of revenues in fiscal 1995. Ballistic Missile Defense has
existed for more than 27 years as a mission of Department of Defense ("DOD")
through activities such as the BMD program. If a decision were made to reduce
substantially the scope of current BMD programs or to eliminate the BMDO,
management believes that many national and theater missile defense programs,
including some research and development areas that existed prior to the creation
of SDIO/BMDO, would continue to be funded by the U.S. Army and Air Force, and
other DOD agencies.
Missile and Air Defense
For NMD and TMD programs, the Company's services include
system architecture definition; system analysis; system and element definition
and performance estimates; system engineering; lethality and vulnerability
analysis; test and evaluation; model and simulation development; radar and
infrared sensor and seeker definition and technology assessments; risk
assessments; and program and system acquisition documentation. Under a five
year, $250 million contract awarded in fiscal year 1997 with the U.S. Army Space
and Missile Defense Command, the Company is providing systems engineering and
technical support through studies, concept definition, independent analyses,
simulations, technological assessments, and related tasks in support of
ballistic and theater missile defense systems, experiments and technology
demonstrations. Under a three year, $97 million contract awarded in fiscal year
1995 with the BMDO, the Company provides system engineering support for sensor
systems. Under a five year, $10 million contract awarded in fiscal year 1995
with the U.S. Navy, the Company operates and maintains the Innovative Science
and Technology Experimentation Facility at Kennedy Space Center, Florida, which
is engaged in scientific and technology experiments associated with BMD
programs.
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Space Surveillance and Avionics
The Company's space surveillance and avionics programs involve
satellite and other space applications. The Company performs contracts involving
the establishment of the architecture of future space surveillance and avionics
systems for the U.S. Air Force, the U.S. Navy and intelligence customers. These
contracts are based on the Company's experience in optical sensor and
geolocation technologies and its ability to develop sophisticated computer
simulations to evaluate the performance of candidate architectures. Under a
seven year, $85 million contract awarded in fiscal year 1993 with the U.S. Air
Force Space and Missile Systems Center, the Company provides engineering,
analysis, and design for satellite and missile development programs. Under
several contracts with the U.S. Air Force, the Company supports new materials
research, provides software quality assurance for testing and evaluation,
supports research for infrared and cryogenic technologies, provides sensor data
reduction analysis, and develops software for satellite tracking systems.
Army Tactical Systems and Technology
The Company provides development services for Army tactical
systems and technologies, which support Army project offices and research and
development centers. The Company develops high-fidelity simulations for weapon
systems, which are used for cost-effective missile concept definition, design,
and analysis. Under a three year, $103 million contract awarded in fiscal year
1997, the Company provides functional engineering support to the U.S. Army
Aviation and Missile Command's ("AMCOM") Research Development and Engineering
Center for missile guidance and control.
The Company used the knowledge and capabilities that it gained
from creating computer simulations, performing computer/network integrations and
developing high resolution scene generation capabilities to establish an
extensive business base in Distributive Interactive Simulation ("DIS") and
Virtual Prototype Simulation ("VPS"). DIS is a system that permits an
interactive exchange of information to facilitate multiple simulations across a
computer network. VPS is a virtual reality computer simulation that replicates
the sights, sounds, and functionality of a given system, simulating both the
operation of the weapon system and the environment surrounding the operator of
the system. VPS may be used to evaluate equipment designs, instruct users in the
operation of weapon systems, analyze the effectiveness of the system against
different threats, or test system effectiveness under various conditions. In
fiscal year 1996, the Company was awarded a three year $48 million contract by
the U.S. Army Aviation and Missile Command ("AMCOM")for continued support to the
System Simulation and Development Directorate. The Company has developed virtual
prototype simulators for several AMCOM systems, including Bradley Stinger
Fighting Vehicle ("BSFV"), Line-Of-Sight-Anti-Tank ("LOSAT") missile, Javelin,
Tube-Launched-Optically- Guided Weapon ("TOW"), Rapid Force Projection
Initiative, Avenger, and Advanced Chaparral.
Under a three year, $18.7 million contract awarded in fiscal
year 1996 with the U.S. Army, the Company is producing the Avenger Institutional
Conduct of Fire Trainer("ICOFT") and the Avenger Table Top Trainer. These two
real-time training devices are being delivered to air defense units of the U.S.
Army and U.S. Marine Corps, and to our allies under the Foreign Military Sales
Program.
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Special Programs
The Company provides technical services related to scientific
and technical intelligence analysis, threat simulator development, survivability
analysis, and sensor development for collection of data for various U.S.
intelligence programs. The Company has used its 16-year record of providing
systems engineering support to U.S. intelligence programs to expand its customer
base in the intelligence area. The Company now assists intelligence customers in
resolving new and existing information technologies issues related to missile
proliferation, technology transfers, and foreign digital communication systems.
Services provided by the Company include hardware systems
evaluation and integration, hardware-in-the-loop testing and evaluation, and
system signature analysis and prediction for ground missile and air defense
systems. Results of this work aid U.S. weapon system developers in producing
more effective products that give U.S. operational forces greater combat
leverage.
The Company also provides technical services for systems
engineering; in-flight survivability analysis; intelligence systems assessments;
threat simulator engineering; foreign material exploitation; infrared seeker
characterization; instrumentation development; detailed measurements of systems
and sensors; sensor data analysis; hardware-in-the-loop development and testing;
test planning; and configuration management.
Under a five year, $64 million contract awarded in fiscal year
1995 with the Defense Intelligence Agency's Missile and Space Intelligence
Center, the Company provides scientific and technical assistance to aid the
evaluation of foreign ground missile systems, subsystems, and technologies.
Under a five year, $85 million contract awarded in fiscal year 1997 for support
to the U.S. Army's Threat Simulation Management Office, the Company provides
technical and systems engineering support in the design and development of
threat simulators and supports performance assessment tests of developed threat
simulators.
Under a five year, $50 million contract awarded in fiscal year
1997, the Company also supports the Office of Secretary of Defense ("OSD") and
joint military services in the conduct of test planning, multi-service
coordination, and execution for Joint Test and Evaluations.
Advanced Tactical Systems
The Company performs basic research and provides engineering
services to the U.S. Air Force, U.S. Army, U.S. Navy, and Special Operations
Command. Under a four year, $7.8 million contract awarded in fiscal year 1996
with Eglin Air Force Base, the Company supports the U.S. Air Force in the
development of simulations and signal processing algorithms for the development
of advanced guidance concepts for conventional weapon systems. The IRMA
Multi-Sensor Signature Model, the Air Force standard air-to-surface
target-in-background simulation,is an example of one such code.Training concepts
and course development are provided to the U.S. Army STRICOM and the Aviation
Center.Other areas of engineering support include special operations technology,
mine detection algorithms, avionics countermeasures and formational positioning
systems, and special operations maritime electronics.
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Marine Engineering
In May 1996, the Company acquired AME, a leading naval
architecture and marine technical services firm. Approximately 80% of AME's
business is with the U.S. Navy. The acquisition of AME substantially expands the
Company's presence in the Washington, D.C. area and provides the Company an
opportunity to expand its business relationship with the U.S. Navy. As a
subsidiary of the Company, AME develops simulations, simulators, and virtual
reality programs for naval and marine applications. In addition to traditional
naval architecture and marine engineering services, AME provides support in ship
acquisition management, production support, human systems integration, and ship
survivability and protection. In 1995, AME was awarded a five-year $169 million
contract by the U.S. Naval Sea Systems Command for ship design and technical
support.
In fiscal year 1997, the Company was awarded another one year
training system contract by the Massachusetts Maritime Academy to deliver a
full-mission, ship-handling and navigation bridge simulator for training of
cadets, professional mariners, pilots, and docking masters.
As subcontractor under two five year contracts awarded in
fiscal year 1997, having an aggregate value of approximately $17.5 million, the
Company is providing systems engineering management and technical support
services to the U.S. Navy's Program Executive Officer for Surface
Combatants/AEGIS Program Technical Division.
Nichols Infofed
Nichols InfoFed provides information services and systems
integration to federal, state and local governmental agencies. For the year
ended August 31, 1997, Nichols InfoFed produced approximately 36% of the
Company's revenues.
The services offered by Nichols InfoFed include information
technology services, computer systems integration, staff augmentation,
consulting services, computer facility management and operations, Internet
services, and customized software system development for customers in the
federal and state information technology services market.
Computer Systems Integration
By building on its existing technical expertise and
capabilities, the Company has been awarded contracts in computer systems
integration, including large-scale projects. The Company's services include high
performance computing, enterprise networking, and office automation, including
high-end supercomputer architectures and applications; Internet services;
high-speed, networking technologies; advanced visualization systems; and
on-line, high-integrity data storage and archival systems. The Company is a
systems integrator for many manufacturers and suppliers of supercomputers,
workstations, personal computers, and networking equipment. The Company also
offers a wide range of training services utilizing innovative techniques and
tools, such as computer-based training aids to promote high productivity and
efficient use of installed systems. These training services include personal
computer applications as well as advanced supercomputing applications.
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Under two contracts awarded in fiscal year 1996 by the U.S.
Army Information Systems Selection and Acquisition Agency, having a current
combined three year base total value of $409 million, the Company is the lead
systems integrator for the DOD High Performance Computing Modernization Program.
Under these contracts, the Company supplies computer hardware and software,
provides maintenance and systems integration and provides Internet services to
DOD shared resource centers in Dayton, Ohio and Vicksburg, Mississippi. These
shared resource centers offer government scientists and engineers access to
state-of-the-art high performance computing and communications capabilities.
These awards established the Company as a leader in systems integration of high
performance computers. The U.S. Government has awarded a total of only four such
contracts under a program to modernize its shared computer resources. In fiscal
year 1997, the Company was awarded a one year, $4.6 million contract to provide
integration services and computer equipment under the DOD High Performance
Computing Modernization Program at the Redstone Technical Test Center in
Huntsville, Alabama.
Other major contracts of this business unit include an eight
year, $40.5 million contract awarded in fiscal year 1994 with the State of
Alabama to provide complete systems integration and facilities management
services for the statewide Alabama Research and Education Network and the
Alabama Supercomputer Center. The Company is providing Internet access to state
government, industry, college and secondary school clients within the State of
Alabama. Under two seven year contracts awarded in fiscal year 1992 and 1993
having an aggregate value of $33.6 million with the Defense Intelligence
Agency's Missile and Space Intelligence Center, the Company provides
acquisition, installation, Intranet and Internet services, and technical and
management services for a high performance scientific computer center.
Systems and Intelligence Programs
The Company provides services related to the design,
development, and support of turnkey information systems, distributed
client-server software systems, network security, object-oriented software
solutions, and software applications. The Company also provides information
system development services in the areas of network security, framework
solutions, enterprise solutions, and professional staff augmentation. The
Company also develops distributed client-server software systems for data and
communications processing, and provides turnkey, computer-based information
systems.
The Company's information technology services cover a broad
spectrum of multi-vendor platforms and operating environments, including
client-server and scientific computing. In support of these services, the
Company has entered into arrangements with selected vendors such as Sun
Microsystems, Digital Equipment Corporation, Novell Corporation, and Silicon
Graphics. In addition to being a systems integrator for Sun Integration
Services, Sybase, and other companies, the Company is a reseller of products for
Novell, Compaq Computer, Dell Computer, Apple Computer, and Hewlett-Packard.
Under contracts with a U.S. Government agency, the Company is
providing services for the development and processing of information and for the
development of a large client-server system to perform high capacity digital
communication functions.
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Information Systems Support
The Company provides operating and support services for
existing information systems and assists in the development of enhancements that
allow these existing systems to meet evolving technical challenges. The Company
provides a wide range of services such as workflow management to enhance
operations data, training to improve the client's abilities to use existing IT
capabilities, support of video teleconferences, document imaging to reduce
paperwork, support of desktop computers, network design and development, and
software support for new and legacy computer systems.
The Company supports federal and state government clients in
the use of their information systems to ensure maximum potential and to keep
such systems up-to-date with evolving hardware and software technology. The
Company is currently performing a five year, $35 million contract awarded in
fiscal year 1995 with the Centers for Disease Control and Prevention and the
Agency for Toxic Substances and Disease Registry to upgrade, maintain, and
manage their microcomputer local and wide area networks for a primary facility
in Atlanta, Georgia, as well as offices in all 50 states and a number of
locations around the world.
Under a seven year, $2.9 million subcontract awarded in fiscal
year 1993 to support the National Aeronautics and Space Administration ("NASA")
Marshall Space Flight Center, the Company is providing the software and services
to design, manage, verify, implement, and maintain NASA's Advanced X-Ray
Astro-Physics Facility Offline System.
In fiscal year 1997, the Company was awarded a four year $8.5
million Management Support Contract by the Ballistic Missile Defense
Organization to support an existing management system and provide system design,
development, and software integration for the next-generation management system.
Other customers for which the Company provides information
services include the State of Alabama Department of Human Resources and the
Office of National Drug Control Policy.
Military Systems and Simulation
The Company applies its expertise and capabilities in advanced
information technology to serve military and other customers. These services
include large-scale simulations development, custom software systems, prototype
hardware systems, and technical services. The Company designs, develops, and
supports large-scale simulations and high-fidelity models in a variety of
computer languages and hardware platforms. The Company is experienced in
developing user-friendly technologies and developing advanced virtual reality
simulations. The Company has significant software engineering resources and an
established software process improvement program with experience in all phases
of the software development cycle. The Company's work in the areas of data
compression, machine vision, neural networks, and fuzzy logic has allowed the
Company to become a leader in the areas of image processing and technology
integration programs. For example, under contracts having a total value of $1.2
million, the Company is developing imagery exploitation systems for the U.S. Air
Force to provide the war fighter real-time imagery information.
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Nichols Infotec
Nichols InfoTec provides information technology and services
to commercial customers in telecommunications, judicial and other commercial
markets, exclusive of healthcare and insurance. Services offered by Nichols
InfoTec include computer systems integration and engineering, application
software development and deployment, data warehousing and mining, security
systems, and SAP R/3 consulting and implementation. For the year ended August
31, 1997, Nichols InfoTec produced approximately 7% of the Company's revenues.
Consulting Services
The Company provides IT consulting services such as networking
and systems integration, custom business application software development,
contract programming and staff supplementation. The Company provides these IT
consulting services for clients with personal computer local area networks and
wide area networks and computer systems manufactured by vendors such as IBM,
Silicon Graphics, Sun Microsystems, and Digital Equipment Corporation.
Programming and design capabilities range from traditional software languages to
modern graphical user interface client-server development tools.
Telecommunications and transportation are the predominant industries served by
the Company's consulting business. The Company's clients include MTEL (Skytel),
MobileComm, Oreck and KLLM Transport Services and Federal Express.
Professional Services
Professional services provided by the Company include
client-server consulting, systems administration, programming, systems
engineering, network consulting, software process improvement consulting and
training. The Company's experience covers a broad spectrum of vendor platforms
and operating environments. The Company's professional services are marketed
primarily to Fortune 1000 companies.
SAP(TM) Licensing and Implementation
Nichols ENTEC Systems, L.L.C. ("ENTEC") is a joint venture
owned 60% by the Company and 40% by DSM Copolymer, Inc., formed to license and
implement SAP(TM) software. This software is used to manage accounting, human
resources, production planning, materials management, sales and distribution
functions. According to SAP publications, this software has been purchased by
more than 7,000 customers worldwide. ENTEC is a national Implementation Partner
with SAP America, specializing in the implementation of SAP R/3 enterprise-wide
business software. ENTEC was recently named a certified ASAP Partner with SAP
America in recognition of ENTEC's capability to implement rapidly SAP R/3
software. ENTEC is also a SAP(TM) Certified Business Solutions Partner serving
mid-size companies. ENTEC sells SAP R/3 software to companies under $200 million
in annual revenues. ENTEC provides a single point of contact for the customer
interested in purchasing software, hardware, and services to implement a
complete system. Clients include DSM Copolymer, Med Partners, DynMcDermott,
American Iron Reduction, and Unity Communications.
<PAGE>
Systems Development and Evaluation
The Company markets and sells its military sensor technologies
for commercial applications. For Crane MOVATS, the Company has developed a
universal data system to collect performance data in nuclear power plants. The
system combines sensor technology with advanced software technology to increase
the efficiency of the operators and minimize exposure to radioactive
environments.
The Company has developed and is manufacturing a fiber optics
calibration system known as FOCUS. FOCUS calibrates test equipment used to
identify the location of breaks in fiber optic cables without the expense of
excavation. The Company has two contracts to provide FOCUS to U.S. Government
customers.
Commercial Information Technology
The Company provides system integration services to customers
desiring a single source for their IT requirements.
The Company serves as a single source integrator for Federal
Express Corporation by providing Interactive Training workstations at 550
locations. The Company stages, configures, tests and deploys multimedia systems
that train over 55,000 Federal Express employees.
The Company also specializes in law firm information services
which include requirements definition, networking, document management, workflow
and routing, and complete testing and installation. Customers for these services
include Tanner and Guin in Tuscaloosa, Alabama.
The Company provides software development services, including
industry - standard Java programming, for a variety of clients. These clients
include Federal Express, Sun Microsystems, and Digital Equipment Corporation. In
addition, the Company sells a Software Process Improvement Product ("SPIP"),
which is used to assist companies in achieving Level 2 of the Software
Engineering Institute's Capability Maturity Model. Customers for SPIP include
Logicon and Concurrent Technologies.
The Company provides IT services to support existing
information systems such as workflow management, training to improve the
client's existing IT capabilities, support of video teleconferences, document
imaging, hardware and software support for desktop computers, facilities
operation and management, network design and development, and software support
for new and existing computer systems. The Company provides these services to
commercial clients to ensure maximum utilization of their information systems
and to keep their systems up-to-date with evolving technology. Clients include
Federal Express, Equifax, The Huntsville Times, and MCI.
Nichols Select
Nichols SELECT provides high-performance information
technology-based services for the administrative side of healthcare. For the
year ended August 31, 1997, Nichols SELECT produced approximately 4% of the
Company's revenues.
<PAGE>
The Company identified the healthcare market as an attractive
industry for application of its information technology, information services,
system integration and wide area network expertise and capabilities. Management
believed, however, that the Company needed specific industry knowledge to be
successful. Beginning in 1994, the Company began a series of strategic
acquisitions and alliances to acquire the necessary healthcare expertise and
business acumen. The Company has experienced significant growth providing
network-centric information, technology-based services to managed healthcare,
hospital-based physicians, physician networks, and workers' compensation
markets.
The Company has focused its healthcare activities in the areas
of practice management services, managed care services, and workers'
compensation services.
Practice Management Services
The Company provides practice management information
technology-based services, including appointment scheduling, billing, coding,
and collections. These services are offered and enabled through a large network
data center that allows physicians to be electronically interconnected to
payers, financial institutions, Medicare, and Medicaid. The Company has seen
substantial growth in providing services for the administrative side of
emergency departments for many of the hospitals in Alabama. The Company's
services extend to over 2,000 physicians. Clients include Mobile Infirmary,
Radiology Associates, Southern Medical Group, DCH Regional Medical Center, Eliza
Coffee Memorial Hospital, Columbia HCA, Baptist Health Network and Huntsville
Hospital.
Managed Care Services
In August 1997, the Company exercised its option to purchase
the remaining capital stock of TXEN, Inc. ("TXEN"). TXEN provides managed care
information technology-based services to healthcare administrators nationwide.
TXEN offers its managed care solutions following the same business model and
approach as the practice management group. TXEN offers a continuum of technical
and administrative services built around a large network data center.
Capabilities include risk, claim, membership, provider, utilization, and
financial management. TXEN has approximately 75 clients located across the
United States representing over two million lives. Clients range in size from
start-up organizations to health plans with over 250,000 members. Clients
include health maintenance organizations, such as Phoenix Healthcare and Harris
Methodist Health Plan; preferred provider organizations, such as Emerald Health
Network and Beech Street; physician hospital organizations, such as Texas
Children's Health Plan and Yale Preferred Health; and third party
administrators, such as Equifax Healthcare Administrators and Seabury and Smith.
Workers' Compensation Services
The Company develops and supports two major packaged software
products which are used for property/casualty and workers' compensation
insurance systems. One of the products provides rating, underwriting, policy
administration, and premium accounting for insurance companies. The other
<PAGE>
product provides full claims administration and risk management, as well as
electronic data transfer and managed care options, which may be used in
conjunction with the other products in an insurance company environment. The
Company also provides information technology consulting services, customized
software development, and packaged solutions for the property and casualty
insurance industry. Customers using the software include the State of Alaska,
The Kroger Company, Employers' Security Insurance Co., and American Federated
General Agency. The Company recently expanded its services by offering a
continuum of technology-based services built around a network data center,
following the lead of the managed care and practice management services units.
HealthGate
The Company owns approximately 17% of HealthGate. HealthGate
offers an Internet bio-medical and health information system which provides
access to databases, journals, textbooks, continuing education programs, and
other related information sources. Under a strategic alliance with HealthGate,
the Company performs system development services for HealthGate and sells
products and other services to HealthGate. HealthGate has enrolled approximately
450,000 clients since commencing operations in December 1995.
Competition
The Company competes against technical services companies in
the defense and aerospace industries, including BDM International, Inc., GRC
International, Inc., BTG, Inc., and CACI International, Inc. The information
services industry in which the Company operates is highly fragmented with no
single company or small group of companies in a dominant position. The Company's
competitors include large, diversified firms with substantially greater
financial resources and larger technical staffs than the Company. Some of the
larger competitors offer services in a number of markets which overlap many of
the same areas in which the Company offers services, while certain companies are
focused on only one or a few of these markets. The firms which compete with the
Company are consulting firms, computer services firms, applications software
companies and accounting firms, as well as the computer service arms of computer
manufacturing companies and defense and aerospace firms. The primary factors of
competition in the business in which the Company is engaged include technical,
management and marketing competence, price, and past performance. The federal
government market is highly competitive with no single dominating company.
Procurement reforms over the last year have increased the importance of a
contractor's past performance in deciding new bid awards. Past performance can
represent over half the criteria weighting on new awards. The Company emphasizes
client satisfaction, as evidenced by the Company's ability to maintain clients
for many years and winning all of its major contract re-competes during the last
five years. The Company believes that its low overhead and cost structure give
it an advantage in bidding on contracts.
<PAGE>
Marketing
For Nichols Federal and Nichols InfoFed, the Company's
marketing activities are generally directed by the strategic business unit
presidents. The strategic business unit presidents coordinate the marketing
activities of program development managers assigned to the executing business
units. The program development staff, as well as other Company managers,
engineers and scientists, attend new business briefings sponsored by government
agencies, review publications and learn of new business opportunities through
customer contacts. Potential new procurements are analyzed and evaluated within
the unit of the Company that would be principally responsible for performance of
the contract. The decision to submit a bid or proposal is made by the
responsible unit president through a formal bid review process.
For Nichols InfoTec and Nichols SELECT, the Company's
marketing services are directed by such unit's vice president of commercial
sales. The marketing and sales staff receive a salary plus incentive
compensation based on sales. After identifying prospective sales opportunities,
the sales and marketing staff coordinates with the technical staff responsible
for performing the services to develop each customer proposal which, if
accepted, results in a contract award.
The corporate marketing staff focuses on selected large
procurements and activities associated with major new clients. Resources from
across the Company are available to the corporate marketing staff to address
major marketing issues.
Government Contracts
A substantial portion of the Company's revenues are derived
from contracts and subcontracts with the DOD and other federal government
agencies. A majority of the Company's contracts are competitively bid and
awarded on the basis of technical merit, personnel qualifications, experience,
and price. The Company also receives some contract awards involving special
technical capabilities on a negotiated, noncompetitive basis due to the
Company's unique technical capabilities in special areas. Future revenues and
income of the Company could be materially affected by changes in procurement
policies, a reduction in expenditures for the services provided by the Company,
and other risks generally associated with federal government contracts.
The Company performs its services under federal government
contracts that usually require performance over a period of one to five years.
Long-term contracts may be conditioned upon continued availability of
Congressional appropriations. Variances between anticipated budget and
Congressional appropriations may result in delay, reduction or termination of
such contracts. Contractors often experience revenue uncertainties with respect
to available contract funding during the first quarter of the government's
fiscal year beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company's federal government contracts are performed under
cost-reimbursement contracts, time-and-materials contracts and fixed-price
contracts. Cost-reimbursement contracts provide for reimbursement of costs (to
the extent allowable under Federal Acquisition Regulations) and for payment of a
fee. The fee may be either fixed by the contract (cost-plus-fixed fee) or
variable, based upon cost, quality, delivery, and the customer's subjective
<PAGE>
evaluation of the work (cost-plus-award fee). Under time-and-materials
contracts, the Company receives a fixed amount by labor category for services
performed and is reimbursed (without fee) for the cost of materials purchased to
perform the contract. Under a fixed-price contract, the Company agrees to
perform certain work for a fixed price and, accordingly, realizes the benefit or
detriment to the extent that the actual cost of performing the work differs from
the contract price. Contract revenues for the year ended August 31, 1997 were
approximately 49% from cost-reimbursement contracts, approximately 16% from
time-and-materials contracts and 35% from fixed-price contracts.
The Company's allowable federal government contract costs and
fees are subject to audit by the Defense Contract Audit Agency ("DCAA"). Audits
may result in non-reimbursement of some contract costs and fees. To date, the
Company has experienced no material adjustments as a result of audits by the
DCAA. The DCAA has not completed audits of the Company's federal contracts for
fiscal years 1995, 1996, and 1997.
The Company's federal government contracts may be terminated,
in whole or in part, at the convenience of the government. If a termination for
convenience occurs, the government generally is obligated to pay the cost
incurred by the Company under the contract plus a pro rata fee based upon the
work completed. When the Company participates as a subcontractor, the Company is
at risk if the prime contractor does not perform its contract. Similarly, when
the Company as a prime contractor employs subcontractors, the Company is at risk
if a subcontractor does not perform its subcontract.
Some of the Company's federal government contracts contain
options which are exercisable at the discretion of the customer. An option may
extend the period of performance for one or more years for additional
consideration on terms and conditions similar to those contained in the original
contract. An option may also increase the level of effort and assign new tasks
to the Company. In the Company's experience, options are usually exercised.
The Company's eligibility to perform under its federal
government contracts requires the Company to maintain adequate security
measures. The Company has implemented security procedures necessary to satisfy
the requirements of its federal government contracts.
Backlog
The Company had a backlog of approximately $1.2 billion,
including options of $300.3 million, at August 31, 1997. The Company had a
backlog of $1.0 billion, including options of $501.8 million, at August 31,
1996, and a backlog of $505.7 million, including options of $217.8 million, at
August 31, 1995. Backlog represents the amount of revenues expected to be
realized from awarded contracts. Therefore, the amount in backlog is typically
less than the face amount of the contract. The amount includes estimates based
on the Company's experience with similar awards and customers and estimates of
revenues that would be recognized from the performance of options, under
existing contracts, that may be exercised by the customer. These estimates are
reviewed periodically and are adjusted based on the latest available
information. Historically, these adjustments have not been significant. Because
contracts in backlog are typically multi-year contracts, an increase in backlog
may not translate into proportional revenue growth in any future period.
Management believes that approximately 20% to 25% of the Company's backlog at
August 31, 1997, will result in revenues for the year ending August 31, 1998.
<PAGE>
The backlog amounts as presented are comprised of funded and
unfunded components. Funded backlog represents the sum of contract amounts for
which funds have been specifically obligated by customers to contracts. Unfunded
backlog represents future contract or option amounts that customers may obligate
over the specified contract performance periods. The Company's customers
allocate funds for expenditures on long-term contracts on a periodic basis. The
Company is committed to provide services under its contracts to the extent funds
are provided. The funded component of the Company's backlog at August 31, 1997
was approximately $162.2 million. The funded components of the Company's backlog
at August 31, 1996 and 1995, were $99.5 million and $56.0 million, respectively.
The ability of the Company to realize revenues from contracts in backlog is
dependent upon adequate funding for such contracts. Although funding of its
contracts is not within the Company's control, actual contract fundings have
been approximately equal to the aggregate amounts of the contracts.
Intellectual Property Rights
The Company's success has resulted, in part, from its
methodologies and other proprietary intellectual property rights. The Company
relies upon a combination of trade secret, nondisclosure and other contractual
arrangements and technical measures to protect its proprietary rights. The
Company generally enters into confidentiality and nonsolicitation agreements
with its clients and potential clients and limits access to and distribution of
its proprietary information. There can be no assurance that the steps taken by
the Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
The Company's business does not depend on patents, copyrights,
and trademarks. Management believes that the Company's success depends on the
innovative skills and technical competence of its personnel rather than on the
ownership of patents, copyrights or trademarks. Technology developed by the
Company under its federal contracts is owned by the U.S. Government.
Employees
At August 31, 1997 the Company had 2,109 full-time employees. Of the Company's
professional employees, approximately 83% hold undergraduate degrees and
approximately 58% hold advanced degrees. None of the Company's employees is
covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Business Environment
The Company is a leading provider of high-performance technology-based
solutions and services where information access, movement, and evaluation are
mission-critical to an organization's success. The Company provides these
services to a wide range of clients, including the Department of Defense (DOD),
other federal agencies, state and local governments, healthcare and insurance
organizations, and commercial enterprises. The Company was founded in 1976 to
develop specialized optical sensing capabilities for military weapons and
ballistic defense programs. Until fiscal year 1991, virtually all of the
Company's revenues were derived under contracts with the federal government
relating to high technology weapons systems, strategic missile defense and other
related aerospace technologies. Areas of particular strength have included
tactical technology, smart sensing systems, simulations, data processing,
systems engineering and systems integration (including software development,
networking, hardware acquisition and installation, user training and system
operation and maintenance). Beginning in fiscal year 1991, in response to
increasing budget pressure on military procurements, the Company strategically
began to develop applications for its technical capabilities outside its
traditional core military business. Although the Company's core military
business has continued to grow, the Company has successfully entered the markets
for other government information technology solutions, as well as information
technology solutions in the healthcare industry and other commercial markets.
The Company's business strategy consists of three key elements: (i) maintain the
Company's leadership in technology in its current markets; (ii) apply the
Company's technology to create solutions for new clients; and (iii) make
strategic acquisitions and form alliances to expand the business of the Company
and gain industry knowledge. The Company's business and financial performance
are subject to risks and uncertainties, including those discussed below.
In July 1996, the Company announced a formal organization definition for
its four strategic business units. The organizations reflect the particular
market focus of each line of business. Nichols Federal provides technical
services primarily to U.S. Government defense agencies. Nichols InfoFed provides
information and technology services to a variety of governmental agencies.
Nichols InfoTec provides information and technology services to various
commercial clients. Nichols SELECT provides information services to clients in
the healthcare and insurance industries. For the year ended August 31, 1997, the
percentage of total revenues attributable to the four business units was
approximately 53% for Nichols Federal, 36% for Nichols InfoFed, 7% for Nichols
InfoTec, and 4% for Nichols SELECT. The percentage of revenues represented by
Nichols SELECT for fiscal year 1998 is expected to increase as a result of
acquiring the remaining 80.1% of TXEN, Inc. on August 29, 1997 (see Note 9 of
Notes to Consolidated Financial Statements).
The acquired in-process technology consisted of ten software development
programs and systems to reduce the time and personnel needed to perform managed
care administrative functions and provde enhanced information reports. Projects
are expected to be completed in fiscal year 1999. To the extent the in-process
technology is not successfully developed, this could have a material adverse
impact on the Company's operating results and financial condition.
<PAGE>
Expansion through acquisitions is an important component of the Company's
overall business strategy. The Company has successfully completed eight
strategic acquisitions and alliances since September 1, 1994, most of which have
centered on information technology (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.
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.
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as the number, size, and scope of projects in which the
Company is engaged, the contractual terms and degree of completion of such
projects, expenditures required by the Company in connection with such projects,
any delays incurred in connection with such projects, employee utilization
rates, the adequacy of provisions for losses, the accuracy of estimates of
resources required to complete ongoing projects, and general economic
conditions. Under certain contracts, the Company is required to purchase and
resell to the customer large amounts of computer hardware and other equipment.
Revenues are accrued when this equipment is acquired for resale, and as a
result, quarterly revenues will be impacted by fluctuations related to equipment
purchases which occur on a periodic basis depending on contract terms.
Approximately 88%, 76%, and 81% of the Company's total revenues in fiscal
1997, fiscal 1996, and fiscal 1995 were derived from contracts or subcontracts
funded by the U.S. Government. These U.S. Government contracts include military
weapons systems contracts funded by DOD that accounted for approximately 53%,
57%, and 69% of the Company's total revenues in such years, respectively. The
Company believes that the success and development of its business will continue
to be dependent upon its ability to participate in U.S. Government contract
programs. Accordingly, the Company's financial performance may be directly
affected by changing U.S. Government procurement practices and policies. Other
factors that could materially and adversely affect the Company's government
contracting business and programs include budgetary constraints, changes in
fiscal policies or available funding, changes in government programs or
requirements (including proposals to abolish certain government agencies or
departments, curtailing the U.S. Government's use of technology services firms,
the adoption of new laws or regulations), technological developments and general
economic conditions. These factors could cause U.S. Government agencies to
exercise their rights to terminate existing contracts for convenience or not to
exercise options to renew such contracts.
<PAGE>
In addition, certain of the Company's contracts individually contribute a
significant percentage of the Company's revenues. For the year ended August 31,
1997, the Company's two largest contracts (by revenues) were high-performance
systems integration contracts, which generated approximately 30% of the
Company's total revenues for such period; these two contracts are expected to
represent less than 15% of fiscal year 1998 revenues. The Company's five largest
contracts (by revenues) generated approximately 50% of the Company's total
revenues for such period. The Company expects revenues to continue to be
concentrated in a relatively small number of large U.S. Government contracts.
Termination of such contracts, or the Company's inability to renew or replace
such contracts when they expire, could materially and adversely affect the
Company's revenues and income.
Historically, a majority of the Company's revenues (53% for the year ended
August 31, 1997) are related to U.S. military weapons systems. The U.S. military
weapons budget has been declining in real terms since the mid-1980s, resulting
in some cases in program delays, extensions, and cancellations. A further
significant decline in U.S. military expenditures for weapons systems, or a
reduction in the weapons systems portion of the defense budget, could materially
and adversely affect the Company. The loss or significant curtailment of the
Company's U.S. military contracts would materially and adversely affect the
Company's revenues and income.
Approximately 20% of the Company's revenues in fiscal 1997 were from
contracts related to Ballistic Missile Defense (BMD), compared to 26% of
revenues in fiscal 1996 and 33% of revenues in fiscal 1995 from such contracts.
Strategic defense has existed for more than 26 years as a mission of DOD through
activities such as the BMD program. If a decision were made to reduce
substantially the scope of current BMD programs, management believes that many
national and theater missile defense programs would continue to be funded by the
U.S. Army and Air Force, and other DOD agencies. While the Company has expanded
into other markets, a decision to reduce significantly or eliminate missile
defense funding would have an adverse effect on the Company's revenues and
income.
The Company performs its services under U.S. Government contracts that
usually require performance over a period of one to five years. Long-term
contracts may be conditioned upon continued availability of Congressional
appropriations. Variances between anticipated budgets and Congressional
appropriations may result in delay, reduction, or termination of such contracts.
Contractors can experience revenue uncertainties with respect to available
contract funding during the first quarter of the government's fiscal year
beginning October 1, until differences between budget requests and
appropriations are resolved.
The Company's contracts with the U.S. Government and its prime contractors
are subject to termination, in whole or in part, either upon default by the
Company or at the convenience of the government. The termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses, and profit on work completed prior to termination. Because the Company
contracts to supply goods and services to the U.S. Government, it is also
subject to other risks, including contract suspensions, audit adjustments,
protests by disappointed bidders of contract awards which can result in the
re-opening of the bidding process and changes in government policies or
regulations.
<PAGE>
The Company's services are provided primarily through three types of
contracts: fixed-price, time-and-materials and cost-reimbursement contracts.
Fixed-price contracts require the Company to perform services under a contract
at a stipulated price. Time-and-materials contracts reimburse the Company for
the number of labor hours expended at an established hourly rate negotiated in
the contract, plus the cost of materials incurred. Under cost-reimbursement
contracts, the Company is reimbursed for all actual costs incurred in performing
the contract to the extent that such costs are within the contract ceiling and
allowable under the terms of the contract, plus a fee or profit.
The Company assumes greater financial risk on fixed-price contracts than on
either time-and-materials or cost-reimbursement contracts. As the Company
increases its commercial business, it believes that an increasing percentage of
its contracts will be fixed-priced. Failure to anticipate technical problems,
estimate costs accurately, or control costs during performance of a fixed-price
contract, may reduce the Company's profit or cause a loss. In addition, greater
risks are involved under time-and-materials contracts than under
cost-reimbursement contracts because the Company assumes the responsibility for
the delivery of specified skills at a fixed hourly rate. Although management
believes that adequate provision for its fixed-price and time-and-materials
contracts is reflected in the Company's financial statements, no assurance can
be given that this provision is adequate or that losses on fixed-price and
time-and-materials contracts will not occur in the future.
To compete successfully for business, the Company must satisfy client
requirements at competitive rates. Although the Company continually attempts to
lower its costs, there are other information technology and technical services
companies that may provide the same or similar services at comparable or lower
rates than the Company. Additionally, certain of the Company's clients require
that their vendors reduce rates after services have commenced. The Company's
success will also depend upon its ability to attract, retain, train, and
motivate highly skilled employees, particularly in the areas of information
technology, where such employees are in great demand.
<PAGE>
Results of Operations
- -----------------------
The following table sets forth, for the periods indicated, the percentages
which certain items bear to consolidated revenues and the percentage change of
such items for the periods indicated. The amounts for fiscal year 1997 include
the impact of the $12 million write-off of purchased in-process research and
development associated with the acquisition of TXEN, Inc.:
<PAGE>
<TABLE>
<CAPTION>
Percentage of Revenues Percentage Increase (Decrease)
---------------------- ------------------------------
1997 1996 1995 1997-1996 1996-1995
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 56.7% 42.3%
Costs and expenses:
Direct and allocable costs ............. 88.3 84.9 86.6 62.9 39.4
General and administrative
expenses ............................. 6.8 9.1 7.6 17.3 71.5
Write-off of purchased
in-process research and
development ........................... 3.2 -- -- n/a n/a
Total costs and expenses ............... 98.3 94.0 94.2 63.7 42.0
Operating profit ........................... 1.7 6.0 5.8 (54.8) 46.1
Other income (expense), net ................ .3 .1 .8 183.6 (74.2)
Income before income taxes .................. 2.0 6.1 6.6 (48.6) 30.3
Income taxes ................................ 1.9 2.2 2.4 32.8 30.0
Net income .................................. 0.1% 3.9% 4.2% (95.0%) 30.4%
</TABLE>
The following table summarizes the percentage of revenue by
contract type for the periods indicated:
1997 1996 1995
---- ---- ----
Cost-reimbursement ........ 49% 51% 48%
Fixed-price ............... 35 22 16
Time-and-materials ........ 16 27 36
---- ---- ----
100% 100% 100%
<PAGE>
The table below presents contract award and backlog data for
the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Contract award amount ................. $ 679,174 $ 598,653 $174,049
Backlog (with options) ................ $1,228,362 $1,003,135 $505,744
Backlog (without options) ............. $ 300,337 $ 501,373 $287,977
Backlog percentage by contract type:
Cost-reimbursement ............... 45% 60% 64%
Fixed-price ...................... 30% 30% 18%
Time-and-materials ............... 25% 10% 18%
</TABLE>
COMPARISON OF OPERATING RESULTS FOR FISCAL 1997 WITH FISCAL 1996
REVENUES. Revenues increased $137.4 million (56.7%) in fiscal 1997.
Approximately 72% of the increase was attributable to revenues from two high
performance system integration contracts awarded in 1996. During fiscal year
1997, the two contracts generated 30% of the Company's total revenues. At August
31, 1997 a substantial portion of the two contract values have been realized and
it is expected that the contracts will generate less than 15% of the Company's
total revenues in fiscal year 1998. Approximately 21% of the increase in
revenues was attributable to acquisitions completed late in fiscal year 1996.
Approximately 7% of the increase in revenues was attributable to the existing
contract base.
OPERATING PROFIT. The Company expensed $12 million of costs in the fourth
quarter of fiscal 1997 for research and development activities in-process at the
time of the acquisition of the remaining 80.1% of TXEN, Inc. stock. Including
the $12 million write-off of purchased in-process research and development
associated with the acquisition of TXEN, Inc., operating profit decreased $7.9
million (54.8%) in fiscal 1997. Excluding the $12 million write-off of purchased
in-process research and development, operating profit increased $4.1 million
(28.8%) in fiscal 1997. Including the write-off of purchased in-process research
and development, costs and expenses were 98.3% of revenues compared to 94.0% for
fiscal 1996. The write-off of purchased in-process research and development
represents 3.2% of total costs and expenses. Excluding the purchase of
in-process research and development, costs and expenses were 95.1% of revenues
for fiscal 1997 as compared to 94.0% for fiscal 1996. Direct and allocable costs
increased 62.9% ($129.4 million) in fiscal 1997 as compared to fiscal 1996. The
increase is primarily the result of increased purchases of hardware, software
and subcontractor services in the performance of government contracts. Direct
and allocable costs as a percent of revenue increased to 88.3% in fiscal 1997 as
compared to 84.9% in fiscal 1996 as a result of lower margins typically realized
on the purchased hardware, software, and subcontractor services. General and
administrative expenses increased 17.3% ($3.8 million) in fiscal 1997 as
compared to fiscal 1996. The increase is primarily a result of investments in
marketing and infrastructure resources made in fiscal 1997 which are expected to
support future commercial revenues.
<PAGE>
OTHER INCOME (EXPENSE). Other income (expense) increased $200,000 in 1997
as compared to 1996. Other income includes equity in earnings of unconsolidated
affiliates and interest income; other expense includes interest expense and
minority interest. Equity in earnings of unconsolidated affiliates primarily
represents the Company's share of earnings of TXEN, Inc. As of August 29, 1997,
TXEN, Inc. became a wholly-owned subsidiary of the Company. Interest income is
from the investment of the Company's cash reserves. Substantially all available
cash is invested in interest-bearing accounts or fixed income instruments.
Minority interest primarily represents the minority partner's share of earnings
of Holland Technology Group and Holland Software Solutions joint ventures, 60%
of which are owned by the Company. The Company began consolidating these
entities at the beginning of fiscal year 1997.
Income Taxes. Income taxes as a percentage of income before taxes was 93.7%
in fiscal 1997 and 36.3% in fiscal 1996. The $12 million write-off of purchased
in-process research and development in the fourth quarter of fiscal 1997 is not
deductible for tax purposes.
NET INCOME. Including the $12 million write-off of purchased in-process
research and development, net income decreased $8.9 million (95.0%) for fiscal
1997 as compared to fiscal 1996. The decrease is the result of the impact of the
$12 million write-off of purchased in-process research and development.
EARNINGS PER SHARE. Earnings per share for fiscal 1997 were $0.04 as
compared to $0.92 for fiscal 1996, a decrease of 95.6%. Excluding the $12
million write-off of purchased in-process research and development, earnings per
share were $1.02 as compared to $0.92 for fiscal 1996, a 10.9% increase.
Excluding the $12 million write-off of purchased in-process research and
development, net income increased 32.8% ($3.1 million), while weighted average
shares outstanding increased 19.9% (2,035,672 shares) for fiscal 1997 as
compared to fiscal 1996.
Comparison of Operating Results for Fiscal 1996 with Fiscal 1995
REVENUES. Revenues increased $72.0 million (42.3%) in fiscal 1996.
Approximately 25% of the increase was attributable to revenues from the high
performance systems integration contracts. Approximately 35% of the increase was
attributable to acquisitions completed in fiscal year 1996 and late fiscal 1995.
Approximately 40% of the increase in revenues was attributable to the existing
contract base.
OPERATING PROFIT. Operating profit increased $4.5 million (46.1%) in fiscal
1996. Costs and expenses were 94.0% of revenues for fiscal 1996 as compared to
94.2% for fiscal 1995. The reduction in direct and allocable costs as a
percentage of revenues was offset by increases in general and administrative
expenses. The Company used contract cost reductions and increased margins to
fund increases in business development and marketing efforts, primarily with
commercial market opportunities.
OTHER INCOME (EXPENSE). Other income consists primarily of interest income.
Substantially all available cash is invested in interest-bearing accounts or
fixed income instruments. The decrease in other income (expense) for fiscal 1996
is the result of the use of cash to make strategic acquisitions and investments
and an increase in interest expense on borrowings used to make strategic
acquisitions.
<PAGE>
INCOME TAXES. Income taxes as a percentage of income before taxes was 36.3%
in fiscal 1996 as compared to 36.4% in fiscal 1995.
NET INCOME. Net income increased $2.2 million (30.4%) for fiscal 1996 as
compared to fiscal 1995. The increase is the result of the reasons discussed
above.
EARNINGS PER SHARE. Earnings per share for fiscal 1996 were $0.92 as
compared to $0.76 for fiscal 1995, an increase of 21.1%. Net income increased
30.4% ($2.2 million), while weighted average shares outstanding increased 8.7%
(820,035 shares) for fiscal 1996 as compared to fiscal 1995.
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 $66.6 million, $72.7 million, and $46.8 million at
August 31, 1997, 1996 and 1995, respectively. Operating activities provided cash
of $16.0 million for the year ended August 31, 1997, used cash of $5.0 million
for the year ended August 31, 1996 and provided cash of $6.8 million for the
year ended August 31, 1995. The Company realized proceeds from the sale of
common stock and reissuance of treasury stock of $4.6 million, $33.3 million,
and $2.3 million for the years ended August 31, 1997, 1996 and 1995,
respectively. The proceeds of $33.3 million in fiscal 1996 include net proceeds
of $30.7 million from the sale of its common stock pursuant to an effective
registration statement covering 1,678,050 shares of the Company's common stock
(as adjusted for a 3 for 2 stock split effective October 21, 1996). These
proceeds were used to repay $14.5 million of indebtedness under its existing
bank line of credit facility and fund working capital requirements.
The Company has a bank line of credit of $73.5 million which expires in
November 1997. The Company believes that this line of credit will be renewed or
replaced with a comparable facility at similar terms and conditions. The credit
agreement provides for interest at London Interbank Offered Rate plus 1.25% and
a commitment fee on the unused portion of the line of credit. Outstanding
borrowings are secured primarily by accounts receivable. In fiscal 1995, the
Company borrowed $2.2 million under an Alabama State Industrial Development Bond
program offering certain incentives which effectively reduced the cost of
borrowing. The proceeds were utilized to expand acquisitions of property and
equipment for information technology programs.
Purchases of property and equipment were $4.4 million, $5.1 million, and
$2.2 million for the years ended August 31, 1997, 1996 and 1995, respectively.
There are no material capital expenditure commitments at August 31, 1997.
The Company is regularly evaluating potential acquisition candidates. In
fiscal 1995, the Company acquired a 100% interest in three separate information
system development and technology companies. These companies provide services
primarily to commercial and healthcare clients. The aggregate cash consideration
for these transactions was approximately $11.4 million. In May 1996, the Company
acquired all of the outstanding capital stock of Advanced Marine Enterprises
(AME), Inc. for cash consideration of approximately $15.1 million and 108,066
shares of Company stock. These acquisitions were accounted for using the
purchase method of accounting, resulting in intangible assets with estimated
useful lives ranging from five to fifteen years. In fiscal year 1995, the
<PAGE>
Company purchased 19.9% of TXEN for approximately $1.5 million. In August 1997,
the Company exercised its option to acquire the remaining 80.1% interest of
TXEN, Inc. (TXEN) for aggregate consideration of approximately $43.8 million,
consisting of approximately $17.6 million in cash and $26.3 million in Company
stock. The total purchase price with respect to the TXEN acquisition has been
allocated to the TXEN assets and liabilities on a preliminary basis, subject to
a final allocation among intangible assets. The preliminary allocation of
intangible assets includes $12 million to in-process research and development,
expensed in the fourth quarter of fiscal 1997, and $29.9 million to goodwill.
The portion of such $29.9 million classified as goodwill will be amortized using
the straight-line method over an estimated useful life of twenty years. If all
or a part of such $29.9 million is allocated to intangible assets other than
goodwill, such assets would likely have an amortization period of less than
twenty years.
In fiscal 1996, the Company was awarded two contracts for information
system development and computer system integration activities, which required
the Company to acquire substantial amounts of computer hardware for resale or
lease to customers. The Company continues to actively pursue other contracts
that could require similar equipment acquisitions. The timing of payments to
suppliers and payments from customers under the Company's system integration
contracts could cause cash flows from operations to fluctuate from period to
period.
The Company believes that its existing capital resources, together with
available borrowing capacity, will be sufficient to fund operating needs,
finance acquisitions of property and equipment, and make strategic acquisitions,
if appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share. The overall objective of Statement No.
128 is to simplify the calculation of earnings per share (EPS) and achieve
comparability with recently issued international accounting standards. The
company will first report on the new EPS basis in the fourth quarter ending
August 31, 1998. Subsequent to the effective date, all prior period EPS amounts
(including information regarding EPS in interim financial statements, earnings
summaries, and selected financial data) are required to be restated 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.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The financial statements and other financial information of Nichols
Research Corporation set forth below and the Report of Independent Auditors
thereon are incorporated by reference from pages 24 through 35 of this Form 10-K
Annual Report:
Consolidated Balance Sheets at August 31, 1997, 1996, and 1995
Consolidated Statements of Income for the three years ended August 31,
1997
Consolidated Statements of Stockholder's Equity for the three years ended
August 31, 1997
Consolidated Statements of Cash Flows for the three years ended
August 31, 1997
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Selected Quarterly Financial Data
(2) All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
(3) Exhibits:
EXHIBIT NUMBER
AND METHOD OF
FILLING REFERENCE DESCRIPTION
2.1 L Stock Purchase Agreement dated May 31, 1996, between Registrant
and the shareholders of Advanced Marine Enterprises, Inc.
2.2 T Agreement of Merger dated August 27, 1997, between Registrant,
Nichols SELECT Corporation, TXEN, Inc., and the shareholders of
TXEN, Inc.
3.1 M Certificate of Incorporation and Amendments thereto.
3.2 K By-laws and Amendments thereto.
4.0 D Specimen Stock Certificate.
10.1 J Lease Agreement dated August 26, 1993, between Registrant, as
Lessee, and Parkway Properties I, as Lessor for office space on
Nichols Drive in Huntsville, Alabama.
10.2 B Performance Bonus Plan of Registrant dated July 1, 1986.*
<PAGE>
10.3 D&F Non-Employee Officer and Director Stock Option Plan of
Registrant.*
10.4 D&I 1988 Employees' Stock Purchase Plan of Registrant and Amendments
Number One and Two thereto.*
10.5 J Lease dated February 18, 1992, between Parkway Properties II, as
Lessor, and Registrant, as Lessee, for office space located at
4035 Chris Drive, Huntsville, Alabama, together with exhibits.
10.6 N Lease dated January 25, 1996, between High Tech Properties, as
Lessor, and Registrant, as Lessee, for office space located at
1900 Golf Road, Huntsville, Alabama, together with exhibits.
10.7 E&Q Nichols Research Corporation 1989 Incentive Stock Option Plan.*
10.8 J Credit Agreement dated February 9, 1994, between the Registrant
and SouthTrust Bank relating to a $22,000,000 revolving line of
credit and a $5,771,000 term loan.
10.9 G&R Nichols Research Corporation 1991 Stock Option Plan.*
10.10 H Amendments Three and Four to the 1988 Employees' Stock Purchase
Plan of Registrant.*
10.11 H Amendment to Non-Employee Officer and Director Stock Option Plan
of Registrant.*
10.12 H Amendment to 1989 Incentive Stock Option Plan of Registrant.*
10.13 J Amendment Number Five to the 1988 Employees' Stock Purchase Plan
of Registrant.*
10.14 J Amendment Number Two to the Non-Employee Officer and Director
Stock Option Plan of Registrant.*
10.15 J Amendment Number One to the 1991 Stock Option Plan of Registrant.*
10.16 K Amendments Two & Three to the 1991 Stock Option Plan of
Registrant.*
10.17 K Credit Agreement dated August 16, 1995, between the Registrant,
SouthTrust Bank of Alabama, NA, First Alabama Bank, and Corestates
Bank, NA.
10.18 K Lease dated July 31, 1995, between Parkway Properties, as
Lessor, and Registrant, as Lessee, for office space located at
1910 Nichols Drive, Huntsville, Alabama.
10.19 K Employment Agreement dated May 16, 1995, between Registrant and
John A. Conway, Jr.*
10.20 K Employment Agreement dated June 30, 1995, between Registrant and
Donald Y. Menendez.*
<PAGE>
10.21 K Employment Agreement dated August 24, 1995, and Amendment
thereto between Registrant and D. Bruce McIndoe.*
10.22 K Convertible Preferred Stock Purchase Agreement dated December
16, 1994, between Registrant and TXEN, Inc.
10.23 K Stock Purchase Option Agreement dated December 16, 1994, among
Registrant, TXEN, Inc. and shareholders of TXEN, Inc.
10.24 K Restricted Stock Purchase Agreement dated September 1, 1994
between Registrant and Michael J. Mruz.*
10.25 M Amendment Number One to Stock Purchase Option Agreement among
Registrant, TXEN, Inc. and the shareholders of TXEN, Inc. dated
July 16, 1996.
10.26 M Amendment Number One to Convertible Stock Purchase Agreement
between Registrant and TXEN, Inc. dated July 16, 1996.
10.27 L Employment Agreement dated May 31, 1996, between Advanced Marine
Enterprises, Inc., and John T. Drewry.*
10.28 L Employment Agreement dated May 31, 1996, between Advanced Marine
Enterprises, Inc., and Otto P. Jons.*
10.29 P Amendment Six to the Nichols Research Corporation 1988
Employee's Stock Purchase Plan.*
10.30 Q Amendment Three to the Nichols Research Corporation 1989
Incentive Stock Option Plan.*
10.31 R Amendment Five to the Nichols Research Corporation 1991 Stock
Option Plan.*
10.32 S Amendment Four to the Nichols Research Corporation Non-Employee
Officer and Director Stock Option Plan.*
10.33 U Amendment Two to Employment Agreement dated September 1, 1997
between Nichols Research Corporation and Michael J. Mruz.*
10.34 T Employment Agreement with Thomas L. Patterson, and Amendment to
such Employment Agreement.*
10.35 U Third Amendment to Credit Agreement dated August 16, 1995
between Registrants, SouthTrust Bank, N.A., Regions Bank, and
Corestates Bank, N.A.
11 A Computation of Earnings Per Share.
21 A Subsidiaries of Registrant.
23 U Consent of Ernst & Young LLP, Independent Auditors.
27 A Financial Data Schedule.
<PAGE>
99.1 A Consent of Thomas L. Patterson.
99.2 A Consent of Daniel W. McGlaughlin.
99.3 A Consent of David Friend.
- -------------------
A Previously filed.
B Incorporated by reference to exhibits filed on November 21, 1986 with the
Company's registration statement on Form S-1 under the Securities Act of
1933, File No. 33-10323.
D Incorporated by reference to exhibits filed on November 28, 1989 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1989, under the Securities Exchange Act of 1934.
E Incorporated by reference to exhibits filed on November 16, 1990 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1990, under the Securities Exchange Act of 1934.
F Incorporated by reference to exhibits filed on January 18, 1991 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 33-38568.
G Incorporated by reference to exhibits filed on November 20, 1992 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1992, under the Securities Exchange Act of 1934.
H Incorporated by reference to exhibits filed on November 26, 1993 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1993, under the Securities Exchange Act of 1934.
I Incorporated by reference to exhibits filed on February 7, 1989 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 33-13464.
J Incorporated by reference to exhibits filed on November 28, 1994 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1994, under the Securities Exchange Act of 1934.
K Incorporated by reference to exhibits filed on November 29, 1995 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1995, under the Securities Exchange Act of 1934.
L Incorporated by reference to exhibits filed on June 17, 1996 with the
Company's Current Report on Form 8-K dated May 31, 1996, as amended, under
the Securities Exchange Act of 1934.
M Incorporated by reference to exhibits filed July 25, 1996 with the
Company's registration statement on Form S-3 under the Securities Act of
1933, File No. 333-08787.
<PAGE>
N Incorporated by reference to exhibits filed on November 25, 1996 with the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
1996, under the Securities Act of 1934.
P Incorporated by reference to exhibits filed on June 13, 1997 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 333-07164.
Q Incorporated by reference to exhibits filed on December 10, 1991 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 33-44409, as amended by Form S-8 on June 13, 1997 (File No.
333-07160).
R Incorporated by reference to exhibits filed on December 7, 1992 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 33-55454, as amended by Form S-8 on June 13, 1997(File No.
333-07162).
S Incorporated by reference to exhibits filed on June 23, 1997 with the
Company's registration statement on Form S-8 under the Securities Act of
1933, File No. 333-29791.
T Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K, dated August 31, 1997, under the Securities Act of
1934.
U Filed herewith.
* Denotes management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report.
(b)Reports on Form 8-K. A Current Report on Form 8-K dated August 31,
1997,(i)reporting the Registrant's acquisition of TXEN,Inc.(TXEN) and
(ii)providing the audited financial statements of TXEN for the years ended
June 30, 1997 and 1996, was filed with the Commission September 11, 1997. An
amendment to that Form 8-K was filed with the Commission on November 10,
1997, to file the pro forma financial information of TXEN.
(c)Exhibits. The response to this portion of Item 14 is submitted as a separate
section of this report.
(d)Financial Statement Schedules. The response to this portion of Item 14 is
submitted as a separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the
registrant's Annual Report on Form 10-K to be signed by the undersigned,
thereunto duly authorized.
NICHOLS RESEARCH CORPORATION
By: Chris H. Horgen
------------------------
Chris H. Horgen
Chairman of the Board
(Principal Executive Officer)
Date: January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to the registrant's Annual Report on Form 10-K report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Chris H. Horgen Chairman of the Board January 13, 1999
--------------- (Principal Executive Officer)
Chris H. Horgen
Michael J. Mruz Chief Executive Officer and Director January 13, 1999
---------------
Michael J. Mruz
Patsy L. Hattox Corporate Vice President, Chief January 13, 1999
--------------- Administrative Officer, Secretary and Director
Patsy L. Hattox
Roy J. Nichols Senior Vice President and Director January 13, 1999
--------------
Roy J. Nichols
Roger P. Heinisch Director January 13, 1999
-----------------
Roger P. Heinisch
John R. Wynn Director January 13, 1999
------------
John R. Wynn
William E. Odom Director January 13, 1999
---------------
William E. Odom
<PAGE>
James R. Thompson, Jr. Director January 13, 1999
----------------------
James R. Thompson, Jr.
Phil E. Depoy Director January 13, 1999
-------------
Phil E. Depoy
Thomas L. Patterson Director January 13, 1999
-------------------
Thomas L. Patterson
Daniel W. McGlaughlin Director January 13, 1999
---------------------
Daniel W. McGlaughlin
Allen E. Dillard Corporate Vice President, Chief Financial Officer, January 13, 1999
---------------- and Corporate Treasurer(Principal Financial and
Allen E. Dillard Accounting Officer)
</TABLE>
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT DESCRIPTION
------- -----------
10.33 Amendment Two To Employment Agreement Between
Nichols Research Corporation and Michael J. Mruz
10.35 Third Amendment To Credit Agreement
23 Consent of Ernst & Young LLP, Independent Auditors.
EXHIBIT 10.33
AMENDMENT TWO TO EMPLOYMENT AGREEMENT
BETWEEN
NICHOLS RESEARCH CORPORATION
AND
MICHAEL J. MRUZ
THIS AMENDMENT TWO to that certain Employment Agreement dated June 6, 1994,
as amended on August 16, 1994, between NICHOLS RESEARCH CORPORATION (the
"Company") and MICHAEL J. MRUZ (the "Employee") is made and entered into by the
Company and the Employee on this the 21st day of August, 1997.
R E C I T A L S
The Company and the Employee entered into an employment agreement dated
June 6, 1994, as amended on August 16, 1994 (the "Employment Agreement"),
providing for the employment of the Employee as President of the Company
commencing August 16, 1994. The parties desire to provide that upon the
effective date of this Amendment the Employee shall assume the duties of Chief
Executive Officer of the Company, subject to the terms and provisions herein set
forth.
A G R E E M E N T
THEREFORE, in consideration of the premises, the parties hereby agree, as
follows:
1. Effective September 1, 1997, Section 1 of the Employment Agreement is
hereby amended by deleting all of Section 1 thereof and substituting in its
place the following:
The Employee shall be employed on a full-time basis as Chief Executive
Officer of the Company and shall perform such duties as the chief executive
officer of the Company would normally perform, subject to the direction of the
Chairman of the Board of Directors of the Company (the "Chairman"), provided the
Chairman is a full-time employee of the Company, and the Board of Directors.
Until such time as the Company employs a President, the Employee shall also
perform the duties of President of the Company, subject to the direction of the
Chairman, provided the Chairman is a full-time employee of the Company, and the
Board of Directors. The Employee understands that the position of President is
temporary until such time as the Board of Directors elects a President of the
Company. The Employee and the Chairman have on the date hereof executed a
memorandum of understanding which delineates the division of responsibilities
between the Employee and the Chairman.
2. Except as herein modified, the Employment Agreement shall remain in full
force and effect according to its original terms and conditions as amended by
Amendment One thereto.
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto executed this Amendment Two
on this the date and year first above written.
NICHOLS RESEARCH CORPORATION
By: Chris H. Horgen
-------------------------------
Chris H. Horgen,
Chairman of the Board
Michael J. Mruz
-------------------------------
Michael J. Mruz, Employee
NICHOLS RESEARCH CORPORATION
<PAGE>
EXHIBIT 10.35
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment") is made
and entered into effective as of the 29th day of September, 1997, by and between
NICHOLS RESEARCH CORPORATION, a Delaware corporation ("Borrower"), SOUTHTRUST
BANK, NATIONAL ASSOCIATION, a national banking association f/k/a SouthTrust Bank
of Alabama, National Association ("SouthTrust"), REGIONS BANK, an Alabama state
banking corporation f/k/a First Alabama Bank ("Regions"), and CORESTATES BANK,
N.A., a national banking association ("Corestates") (SouthTrust, Regions, and
Corestates being collectively referred to herein as the "Banks").
RECITALS:
A. Borrower and Banks are parties to that certain Credit Agreement dated
August 16, 1995, as amended by that certein First Amendment to Credit Agreement
dated March 31, 1997, and as further amended by that certain Second Amendment to
Credit Agreement dated June 24, 1997 (as amended, the "Credit Agreement")
pursuant to which Banks have made a $73,500,000 line of credit loan to the
Borrower. Capitalized terms used herein shall have the meanings ascribed to such
terms in the Credit Agreement.
B. Borrower has requested that the Commitment Termination Date be extended
to November 30, 1997, and as a condition to such extension, Banks have required
the execution of this Third Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Article I of the Credit Agreement is hereby amended by deleting the
definition of "Commitment Termination Date" in its entirety and by inserting in
lieu thereof the following definition:
"COMMITMENT TERMINATION DATE" means the first to occur of (1) November 30, 1997,
or such later date as Borrower and Banks may agree upon in writing pursuant to
Section 2.11 hereof, it being agreed that Banks shall have no obligation to
extend the commitment Termination Date, or (2) the date that Banks, by reason of
an Event of Default, suspend the making of further Advances.
<PAGE>
2. No right of Banks with respect to the Credit Agreement or any of the
other Loan Documents are or will be in any manner released, destroyed,
diminished, or otherwise adversely affected by this Third Amendment.
3. Except as hereby expressly modified and amended, the Credit Agreement
shall remain in full force and effect, and the Credit Agreement, as amended, is
hereby ratified and affirmed in all respects. Borrower confirms that it has no
defenses or setoffs with respect to its obligations pursuant to the Credit
Agreement as amended hereby.
<PAGE>
4. Borrower represents and warrants to Banks that all representations and
warranties contained in the Credit Agreement are true and correct as of the date
hereof, and no Event of Default or Potential Default has occurred or exists.
5. All references to the Credit Agreement in any of the other Loan
Documents shall be deemed to refer, from and after the date hereof, to the
Credit Agreement as amended hereby.
6. This Third Amendment shall inure to the benefit of and be binding upon
the parties hereto, and their respective successors and assignors.
7. This Third Amendment may be executed in counterparts, each of which
shall constitute an original, but all of which when taken together shall
constitute one and the same instrument.
8. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY WAIVES ANY
RIGHT TO TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR
CAUSE OF ACTION (I) ARISING OUT OF OR IN ANY WAY PERTAINING OR RELATING TO THIS
THIRD AMENDMENT, THE CREDIT AGREEMENT, OR THE OTHER LOAN DOCUMENTS, OR (II) IN
ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS
OF THE PARTIES HERETO WITH RESPECT TO THE FOREGOING OR IN CONNECTION WITH THE
TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY OR THE EXERCISE OF ANY
PARTY'S RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE FOREGOING CASES WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE, BORROWER AGREES THAT BANKS MAY FILE A COPY OF THIS SECTION WITH ANY
COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED AGREEMENT OF
BORROWER IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY, AND THAT, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER
BETWEEN BORROWER AND BANKS SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
properly executed and delivered by their duly authorized officers to be
effective as of the day and year first above written.
NICHOLS RESEARCH CORPORATION,
A DELAWARE CORPORATION
By: Allen E. Dillard
---------------------------------------
Its Chief Financial Officer
---------------------------------------
SOUTHTRUST BANK, NATIONAL
ASSOCIATION, A NATIONAL BANKING ASSOCIATION
By: Kevin Horton
---------------------------------------
Kevin Horton
Its Assistant Vice President
REGIONS BANK,
AN ALABAMA STATE BANKING CORPORATION F/K/A
FIRST ALABAMA BANK
<PAGE>
By: Kenneth D. Watson
---------------------------------------
Its Vice President
---------------------------------------
CORESTATES BANK, N.A.,
A NATIONAL BANKING ASSOCIATION
By: Karen Leaf
---------------------------------------
Its Vice President
---------------------------------------
EXHIBIT 23
Consent of Independent Auditors
We consent to the inclusion in this Annual Report (Form 10-K/A Amendment No. 1)
of Nichols Research Corporation of our report dated October 8, 1997, included in
the 1997 Annual Report to Shareholders of Nichols Research Corporation.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-13464) pertaining to the Nichols Research Corporation 1984 Incentive
Stock Option Plan and in the related Prospectus of our report dated October 8,
1997, with respect to the consolidated financial statements of Nichols Research
Corporation included in this Annual Report on Form 10-K/A Amendment No. 1 for
the year ended August 31, 1997.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-07164) pertaining to the Nichols Research Corporation 1988 Employees
Stock Purchase Plan and in the related Prospectus of our report dated October 8,
1997, with respect to the consolidated financial statements of Nichols Research
Corporation included in this Annual Report on Form 10-K/A Amendment No. 1 for
the year ended August 31, 1997.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-29791) pertaining to the Nichols Research Corporation Non Employees
Officer and Director Stock Option Plan and in the related Prospectus of our
report dated October 8, 1997, with respect to the consolidated financial
statements of Nichols Research Corporation included in this Annual Report on
Form 10-K/A Amendment No. 1 for the year ended August 31, 1997.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-07160) pertaining to the Nichols Research Corporation 1989 Incentive
Stock Option Plan and in the related Prospectus of our report dated October 8,
1997, with respect to the consolidated financial statements of Nichols Research
Corporation included in this Annual Report on Form 10-K/A Amendment No. 1 for
the year ended August 31, 1997.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-07162) pertaining to the Nichols Research Corporation 1991 Stock
Option Plan and in the related Prospectus of our report dated October 8, 1997,
with respect to the consolidated financial statements of Nichols Research
Corporation included in this Annual Report on Form 10-K/A Amendment No. 1 for
the year ended August 31, 1997.
Ernst & Young LLP
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Ernst & Young LLP
Birmingham, Alabama
January 13, 1999
